Manappuram, Muthoot Finance: Growth concerns weigh on near-term outlook

Analysts have cut earnings growth forecast but see the stocks giving up to 34.4 per cent (Muthoot) and 58.7 per cent (Manappuram) returns on attractive valuation

The October-December quarter of fiscal year 2021-22 (Q3FY22) showed weak quarterly results by Manappuram Finance and Muthoot Finance. As a result, the shares of the two gold financiers have cracked 17.6 per cent and 5.7 per cent, respectively, since the announcement of their earnings on February 14 and February 12. The benchmark indices, meanwhile, have slipped about 0.3 per cent during the period.

Analysts say Q3FY22 was a disappointing quarter for both gold financiers as competitive pressure on yields and tepid growth in asset under management (AUM) weighed on respective companies’ financials.

Muthoot Finance reported a 1 per cent decline in AUM growth while yield on AUM was unchanged QoQ, at 20.7 per cent (annualized). Flat yields coupled with lower cost of funding during the quarter led to increase in net interest margins to 13.7 per cent (annualised) from 13.5 per cent in Q2FY22.

Kotak Institutional Equities attributed Muthoot's weak Q3 performance to low business growth as a consequence of large auctions.

The company conducted auctions of Rs 2,800 crore (5 per cent of opening loan book). After adding-back the auctioned loan book, Muthoot's loan growth would have been 4 per cent QoQ.

Notably, Muthoot reported 0.8 per cent QoQ decline in the gold loan book even as gold prices were up 5 per cent sequentially, while average gold price for the quarter was up 1.3 per cent QoQ. Effectively, loan-to-value (LTV) declined by 400bp QoQ to 69 per cent.

"Muthoot's gross stage-3 loans were up 3.8 per cent from 1.85 per cent in Q2FY22 and 1.3 per cent in Q3FY21. Consequently, provisions at Rs 88.9 crore were up 52 per cent year-on-year. The sharp increase likely reflects slippages from softer buckets as the repayment capability of select customer cohorts was weak, as per management," the brokerage said.

As regards Manappuram Finance, the company's net profit declined 27 per cent QoQ to Rs 260 crore. This was on the back of a decrease in yield on AUM, which came in at 20.3 per cent (annualised) relative to 24 per cent in Q2FY22. While cost of funding decreased during the quarter, higher decline in yields led to decrease in NIMs to 13.8 per cent (annualised) in Q3FY22 from 17 per cent in Q2FY22.

Pre-provision operating profit margin and return on asset (RoA) also fell to historical lows of 6.2 per cent and 3.1 per cent, respectively.

According to Motilal Oswal Financial Services, Manappuram Finance has traded off margin/spreads for gold loan growth in the last two quarters. This new business strategy helped it cover a lot of lost ground in terms of market share, with a cumulative gold loan growth of 24 per cent over Q2 and Q3FY22.

"However, this new strategy also meant elevated advertising/promotion costs and incentives for employees translating into higher operating expenses, and compression in spreads to 11.5 per cent vs 14.5-15 per cent under its earlier high yielding business model. At this juncture, it can neither afford such high operating expenses, nor can it cut yields further to match the competition. The natural outcome of this will be a near-term moderation in gold loan growth," it said.

Going ahead, analysts have cut earnings growth forecasts but see the stocks giving up to 34.4 per cent (Muthoot) and 58.7 per cent (Manappuram) returns on attractive valuation.

Nirmal Bang has cut Muthoot's earnings estimates by 3.3-5.1 per cent for FY22-24E, driven by a cut in FY22E loan growth. ICICI Securities, meanwhile, have trimmed gold AUM growth estimates to 10 per cent/13 per cent/13 per cent in FY22/FY23/FY24 from 20 per cent/17 per cent/15 per cent earlier.

As regards Manappuram, YES Securities has cut estimates for FY22-24 earnings by 15-16 per cent, while MOFSL has trimmed EPS estimates by 18-19 per cent for the same period.