Widely read:
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 | 8.6 | 11.5 | 11.2 |
| *Asirvad's FY22-23 NIMs taken from its DRHP | |||
Can Manappuram manage the impact?
Given that microfinance portfolio is a quarter of its loan book, the company's consolidated earnings are set to take a hit. Its net interest margins will likely see compression if Asirvad reprices its loans to mitigate RBI's concerns. However, Manappuram can gradually offset the impact by focusing on its other small verticals. Gold loans constitute 50 per cent of the book and the rest is spread in housing finance, vehicle finance, MSME and personal loans.
Gold loans have been growing a modest 4 per cent annually for five years, but the MSME and personal loan segment has seen explosive growth of 83 per cent every year over the same period. A sharper focus on these high-growth segments, which remain small on its loan books, can help it tide over the crisis.
Your takeaway
Regulatory hiccups are part and parcel of the financial services industry, but not necessarily a death sentence. In the past, players like IIFL Finance and JM Financial have demonstrated that course correction by addressing regulatory gaps can bring the operations back on track—something that Asirvad needs to pull off.
Besides, Manappuram Finance on its own is a fundamentally resilient business with a 10-year median return on equity of 18 per cent and return on assets of 4 per cent. The ban on Asirvad, while certainly negative for some quarters, has no bearing on Manappuram's long-term growth prospects. The other fast-growing loan verticals should help the lender maintain a healthy financial track record.
Manappuram available for a steal!
| Company | 5Y average ROA (%) | 5Y median P/B |
|---|---|---|
| Manappuram Finance | 5.2 | 1.5 |
| CreditAccess Grameen | 2.7 | 3.4 |
| Muthoot Finance | 5.1 | 2.8 |
| Shriram Finance | 2.3 | 1.5 |
| ROA is return on assets | ||
For value investors, the stock decline further provides a good opportunity. It is extremely cheap, trading at a P/B ratio of just 1—a 48 per cent discount to its five-year median P/B and 55 per cent to its peers' median P/B.
Disclaimer: This is not a stock recommendation. Investors should do their due diligence before making any investment decision.
Also read: Why D-Street optimism on Waaree Energies, Premier Energies needs a rethink
Disclaimer: This content is for information only and should not be considered investment advice or a recommendation.
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