Manappuram Finance's valuation is at historic lows. Is it a value buy or trap?

If the Reserve Bank of India (RBI) punishes an entity, be sure that the market will follow. Manappuram Finance is the latest example. RBI crackdown on its unlisted subsidiary Asirvad Micro Finance set off a stampede in the stock, which crashed 22 per cent in three days following the regulatory action on October 17, 2024. The RBI barred Asirvad from disbursing new loans, citing steep lending rates and excessive interest spreads. What this means is that one-fourth of Manapurram's loan book and 28 per cent of its net profit, which Asirvad accounts for, is now at risk. Hence, the Street's severe reaction. Why the RBI action The regulator noted an unusual spike in Asirvad's net interest margins (NIMs) for FY24, which peaked at 17 per cent, a level considered too high for a microfinancier and, hence, suggestive of egregious lending practices. By comparison, its peers had been maintaining average NIMs of around 12 per cent. NIM comparison of microfinance peers In % Company FY22 FY23 FY24 Asirvad Micro Finance* 9.6 10.7 17.0 CreditAccess Grameen 9.7 11.5 13.0 IIFL Samasta Finance 10.9 12.4 11.5 Fusion Micro Finance