Manappuram stock tanks 20% on profit warning

Management expects to book a net loss of Rs 50 cr in the March quarter

Leading gold financier Manappuram Finance’s stock fell 20 per cent on Tuesday to close at Rs 27.70, as the management issued a profit warning for the March quarter in an investor call.

The management expects to report a net loss (its first ever quarterly net loss) of Rs 50 crore in the March quarter as it is likely to reverse interest of around Rs 250 crore, about five times the amount indicated by the management in February. Notably, gold prices have fallen by five per cent over the past two months. Any further deterioration in the same will be a key risk for the company.

“While the company was expected to book some interest income reversal, the quantum was significantly higher. Any further fall in gold prices will hit Manappuram further,” says Amit Jain, an analyst at Sunidhi Institutional Research.

Early last year, the Reserve Bank of India restricted the loan to value (LTV) cap for gold lenders to 60 per cent. This had an effect on profits of gold financing companies, such as Manappuram, curtailing their high-growth and profits.

The company auctioned about two tonnes of gold jewellery in the December quarter. Some part of this portfolio had higher LTV of 90 per cent. On this delinquent portfolio, the company had booked an interest income of about Rs 500 crore.

However, given the falling gold prices, Manappuram is unlikely to recover the principal and accrued interest on this portfolio (resulting in a shortfall of Rs 250 crore) from the auction. In the December quarter as well, the company had reversed interest income of Rs 39 crore towards this portfolio, thus, shrinking its net profit by 48 per cent year-on-year to Rs 84 crore.

Following Tuesday’s call, most brokerages are likely to revise downward their earnings estimates for Manappuram. Analysts are not ruling out a further fall in the stock. Siddharth Teli, co-head, India Research, Religare Capital Markets, says: “Post today’s call, we will trim our estimates and the target price for Manappuram. Even after Tuesday’s fall, a further 10-15 per cent correction cannot be ruled out.” He has a ‘Hold’ rating on the stock.

The stock is trading at inexpensive valuations of 0.81 times its FY14 estimated book value. The management indicated in the call that they do not expect further significant reversals in FY14.

An email inquiry sent to the management remained unanswered.