A mid-cap stock that thrives on both value & growth

Growth at reasonable price strategy puts equal emphasis on both growth and value investing. Popularised by legendary investor Peter Lynch, the strategy strikes a subtle balance between the earnings growth of a company and its stock trading below the intrinsic value.

In this article, we have tried to filter out mid-cap companies that have delivered high earnings growth in the past five years and are available at a PE of less than 15. Surprisingly, we have come across just one company clearing all our filters.

Filters used
Market Cap: Mid-cap companies
Earnings per share (last quarter) Y-o-Y growth more than 20 per cent
Earnings per share (one year) growth more than 20 per cent
Earnings per share growth of more than 20 per cent in the last five years
Price-to-earnings ratio of less than 15

Manappuram Finance
Incorporated in 1992 and promoted by Mr. V P Nandakumar, it is one of the India's leading gold loan NBFCs. Primarily involved in the gold loan business (67 per cent of revenues in FY19), the company has also ventured into new business areas, including vehicle and housing finance (5.7 per cent and 2.5 per cent, respectively, to Fy19 revenues) and SME lending (five per cent). Following the acquisition of Asirvad Microfinance in 2015, the company marked its entry into the microfinance segment (20 per cent) as well.

In 2015, Manappuram became the first player to launch online gold loan (OGL), thus enabling customers to opt for gold loans anytime from anywhere in the world. An important aspect of the business, this OGL portfolio accounted for 40 per cent of the total gold loan book in FY19.

The company faced several challenges after the RBI capped the loan-to-value (LTV) ratio to a maximum of 60 per cent. This was done primarily because of volatility in gold prices and the dependence of gold loan companies solely on gold. Thereafter, the company took corrective measures by moving from long-term loans to short-term gold loans. This move enabled the company to manage volatility in gold prices effectively and reduce default risks. Later, RBI also increased the LTV ratio to 75 per cent. NPAs have also improved for the company from an earlier level of 0.7 per cent in FY16 to 0.3 per cent in FY19. As of June 2019, the company had a total of 4,380 branches and assets under management of more than Rs 202 billion.

Consumers tend to prefer gold loan NBFCs over banks and other moneylenders owing to their high penetration in rural and semi-urban areas, low processing fees, prompt disbursement and faster turnaround time.

After temporary hiccups caused by demonetisation and GST implementation, the gold loan business is back on the growth track and the company's assets under management grew at a rate of more than 14 per cent in the four years. The stock performance has also been very good, with one-year returns at 86 per cent and 37 per cent compounded annually in the last five years. Currently, the stock trades at a PE of 11.88x.