Manappuram General Finance and Leasing Ltd MAGFIL is a market leader in a segment that is just evolving. The business of organized gold loans is highly profitable and is still at a nascent stage of development in India. Thecompany boasts of very high NIM s, very low NPA s, strong growth rates and top notch PE investors. The company is at the right place at the right time. “Street Smart” - Mid Cap Multibagger for Dec 2009 HBJ Capital, India Web: www.hbjcapital.com Mail: Info@hbjcapital.com Call: +91 98867 36791
Best Buying Price… 3 Phase Buying Strategies Suggested [Always buy in SIP ways] 1st Phase : Buy at the current price range Rs600-620 [50% of investment] 2nd Phase : Add if the price falls down to Rs540-550 [25% of investment] 3rd Phase : Accumulate if the price falls down to Rs500 or below [25% of investment] >>>Expect at least 4-6 times returns in next 3 years time frame!!!
HBJ Cap is growing faster than ever. HBJ Capital can be your 50x in 3years investment. Ask how? Aim to become #1 - Equity Research Company in India by 2012, the same year we have planned to get it listed at BSE/NSE. What Next?HBJ Capital – “Specialists in discovering multibagger stocks” is launching more & more innovative products & services with single focus on long term wealth creation!!!
Table of Contents From the desk of CEO, HBJ Capital. Gold – Eternal meaning of Wealth – Page#7 Manappuram General Finance & Leasing Ltd – Page#13 Gold Loans Business – Page#16 Business Dynamics – Page#20 Business Statistics – Page#28 Key Growth Drivers – Page#35 Financial Statements – Page#41 Management Team – Page#47 Shareholding patterns – Page#50 Best Price to Buy – Page#53 Challenges / Risks involved - Page#56 Know more about Your - HBJ Capital.
From the desk of CEO, HBJ CapitalThe idea of Gold as Collateral Dear Investors,is fast catching up. There is nodearth in Gold holdings in our If I can bet whatever I have in predicting something each andcountry since we have 14% of everyone of you might possess, I would be wise to bet on GoldGold that was every mined. rather than on stocks, real estate, FD s or houses. Such is theLending against Gold has penetration of gold in each and every one of our household. Forbecome an attractive business.The business of Pawn broking us Gold is more than an investment option or a safe haven. Itsis becoming more organized sacred to us for various reasons from traditional, cultural andwith reasonable rates and is regional point of views.witnessing strong momentum. India is home to the largest private holdings in the world. We, Indians have more than 20,000 tons of Gold as private holdings compared to the official reserves of RBI at 600 tons and that of US at around 8000 tons. We Indians, have had this crave and addiction to this yellow metal for centuries and it seems to be a never ending love. Though we may derive pride from the largest private holdings in the world, we should also note that all of this Gold is lying as “unproductive”, thus locking huge wealth that can be transformed into economic activities. Though the RBI and Government of India have been trying to impart liquidity to our Gold holdings, they have repeatedly failed.
Contd…However, there is a new crop of companies that impart liquidity to our Gold holdings on a temporary basis, which getstransformed into economic activities. These are the companies that operate in an organized environment in the gold loanbusiness. Having selected our segment, we did not have any problems in zeroing on our pick for this month. In the businessof Gold loans (lending against Gold) in our country, there is no better entity to bet on, than our street smart pick for thismonth.We are proud to announce Manappuram General Finance and Leasing Ltd – MAGFIL, as the StreetSmart pick for the month of December 2009.MAGFIL is the market leader in the organized Gold loan business with a highly profitable and robust business model, stronggeographic penetration, strong growth rates and several decades of experience. The idea of Gold loan is fast catching up andMAGFIL is the right story at the right point of time.We expect the company to post 100 crore of net earnings for the financial year FY ’10. We also expect the company to growits earnings at a CAGR of around 60% (median estimate) for the next 3 financial years, leading up to a net earnings estimateof around 420 Crore to 450 Crore for FY ’13. The company is currently trading at 3 month forward valuation of around 10based on the FY ’10 expected earnings. Going forward, as the company becomes bigger and better, we expect markets topay premium valuations for the company.Even without considering the premium valuations and by applying the current valuations of 10, the companyshould command a market cap of around 4400 crore – 4 bagger from now in the next 3 years. Our medianestimate is that the company has bright chances of trading with a market cap of more than 6000 crore by lastquarter of CY 2012.Kumar Harendra, CEO, HBJ Capital,www.hbjcapital.com , www.multibaggerpennystocks.com & www.stoplosstrade.com5th Main, Girinagar, BSK 3rd Stage, Bangalore 85; Call : +91 98867 36791 or Mail : Info@hbjcapital.com
Private gold holdings in India is pegged at around 20,000 tons, higher than the official reserves of US. The sad part of the story is that this Gold is locked in an unproductive manner.Gold – Eternal meaning of Wealth
Gold = Eternal meaning of wealth From the time immemorial, if there is one thing that has withstood all aberrations in the history of mankind and still stands as the true meaning of wealth, power and value, that has to be Gold. Gold has been the highly sought after precious metal for coinage, jewelry and other arts since the beginning of recorded history. Gold also finds its usage in Medicine, Industrial applications, Electronics industry and for Chemical usages. It should also be noted that in the past several thousands of years of mankind, Gold has served as the vehicle of monetary exchange for most part of it. It was only in the last century with the occurrence two world wars that Gold standards had to be removed. It was not that Gold had lost its value but it was the other way. With the cash requirements to finance the World wars on the rise, the countries had hugely inflated their currencies for procurements, thus unbalancing the Gold standard equation. It was for the reason that the countries were not able to back up their currency with enough Gold that the Gold standards had to be let down. Switzerland was the last country to tie its currency to Gold. It backed 40% of its value until the Swiss joined the International monetary fund in 1999.
Gold and IndiaA traveler in the late 1700 s noted that - “Every nation, that ever traded to the Indies, has constantly carriedbullion, and brought merchandises in return. They want, therefore, nothing but our bullion, to serve as the mediumof value, and for this they give us merchandises in return … that bullion was always carried to the Indies, and neverany brought from thence.”Much of this desire to acquire gold dates back to the Bronze Age Indus Valley civilization, in which people woregold jewelry almost 4,000 years ago.India has also seen the rise and fall of many dynasties, powerful kings and various invasions. Gold, being of highvalue, could easily be hidden during times of strife, enabling ordinary citizens to avoid being looted by maraudingarmies.The history of dowry in India is almost as old as the Hindu religion itself. Dowry, before the negative connotationsof today, was a gift from the brides family to a newly married couple. Although different commodities were usedto pay dowry, gold was the preferred option.
Gold reserves, private holdings and India A gold reserve is the gold held by a central bank or nation intended as a store of value and as a guarantee to redeem promises to pay depositors, note holders (e.g., paper money), or trading peers, or to secure a currency. US is the country with the largest official gold reserves in the world, followed by Germany and IMF. India ranks 11th in the list including the recent buying of around 200 metric tons of gold from the IMF. The Gold reserves of many of the emerging countries are expected to rise with the doubts over the US dollar, increasing day by day. China has a incredible low Gold allocation of just 1.9% to the total Forex reserves. India with the buying of 200 metric tons of Gold, still has only 6% of total Forex reserves in Gold. Even though India ranks 11th in the list of total Gold reserves, the country has the largest private holdings in the world. India’s private gold reserves are estimated to be between 22,000 tons and 25,000 tons of Gold – almost thrice the Gold reserves of America. The country is home to around 14% of the gold that were ever mined in the history of this world. The Private holdings in India alone is estimated to be around 22,000 tons and the total amount of Gold that has been unearthed so far is pegged at 160,000 tons of Gold.
Imparting Liquidity to the Private holdings The country needs to invest around 500 billion USD before the financial year ending March 2012 to ramp up the infrastructure conditions in the country. 100 billion dollars will be sufficient to ensure safe drinking water to all the citizens and another 50 billion dollars go a long way in improving sanitation facilities and health facilities. Another 50 billion dollars may be needed to provide reasonable shelter to all. While it desperately looks for foreign investments to fund its needs, the country’s private gold holdings at the current gold prices are pegged at more than 750 billion USD. In a sense, the shining yellow metal has become the “curse of the nation” by locking the liquidity and make the entire value “unproductive”. RBI and GOI have tried their best to impart liquidity into the gold reserves without any success. The Gold Control Order - In the wake of the Chinese war of Oct. 1962, the Gold Control Order 1962 was issued, banning the making and selling of jewelry above 14 carats, and making it compulsory for goldsmiths to be licensed. These measures met with lots of resistance and criticism, and coupled with political complexities this resulted in the failure of the Gold Control order.
Imparting Liquidity (Contd) Gold Mobilization Schemes - The government and RBI then took several initiatives to tap the hoard of private gold in India, allowing commercial banks to pay interest on bonds issued in return for gold bullion bars, coins or jewelry. Fifteen-year Gold Bonds paying 6.5% annually were introduced in November 1962, but they could mobilize only 16.7 tonnes of gold. A second attempt to garner gold was made through the 7% Gold Bond 1980 Scheme, launched in March 1965. But it could mobilize only a further 6.1 tonnes. The third attempt was the National Defense Gold Bonds 1980 (again issued in 1965). They garnered 13.7 tonnes, while the Gold Bond Scheme 1993 garnered 41 tonnes of gold. The last Gold Deposit Scheme, launched in 1997, could mobilize only seven additional tonnes of gold within two years of its launch. In its 1999-2000 budget, the Indian government announced a new initiative to try and tap the hoard of private gold held in India, this time by permitting commercial banks to take gold deposits of bars, coins or jewelry against payment of interest. Each bank can set their own interest-rate levels, with deposit periods ranging between three and seven years. The State Bank of India was the first to accept deposits, but to date the amount of gold collected under this scheme is just 10 tons. However, our Street Smart recommendation for this month is actually achieving and has been successful in imparting Liquidity (though on a short term basis), where the RBI and Government of India has failed for around five decades.
Market Leader in a Niche Business which is highly profitable and scalable. It has all the characters to record strong growth rates for the years to come.Manappuram General Finance and Leasing Ltd
Manappuram General Finance and Leasing Ltd – Snapshot (Dec 24 2009)CMP – Rs. 615.70 (Though not exactly like a Oil Pledged shares – NILcompany which is dependent on Oil price, the stock price of Total # of shares – 1.72 crore sharesthis company is impacted to an extent by the Gold price. Liquidity – Low to MediumIncrease in gold price is seen as a major trigger by many togo for gold loans. Also, the asset quality of the company Face Value – Rs. 10increases by a large extent. ) Authorized Capital – Rs. 26 crore Issued Capital – Rs. 17.26 crore (Post merger, the issuedMCap – 1062.44 crore (With a medium valuation, we capital would stand at around 28.93 crore.)expect the company to command a market cap of morethan 6000 crore in the next 3 years time.) Expected Mcap by Dec 2012 – Around 6000 Cr (Median estimate)PE – 21.11 (On a net earnings basis, the company is Expected CAGR – 60% to 66% (for the next 3 financialcurrently quoting at a valuation of 21.11 on the TTM basis. years)On a 3 month forward looking basis, the company is Expected Net earnings (FY 13)– Around 440 Crorecurrently trading at a valuation of around 10. Website: http://www.manappuram.com/We believe that the results of amalgamation of MAFIT withMAGFIL has not been reflected in the current stock price andthe valuation to the complete extent.)EPS – Rs. 30.14 (based on the TTM basis)52 Week High / Low – 97 / 689Promoter’s holding –30.33% (With the merger that iscurrently in progress, the promoter holding in the companywould raise to 45%.)
Manappuram General Finance and Leasing Ltd - MAGFIL Manappuram General Finance and Leasing Limited (MAGFIL) was incorporated on July 15, 1992 in Thrissur, Kerala. The Company is a non banking financial company (NBFC), which provides a wide range of fund based and fee based services including gold loans, hypothecation loans, hire purchase loans, money exchange facilities etc. Though the company has various business activities, Gold loans contributed for about 90% of the revenues in the recent financial year FY 09. Gold loans will continue to the focus area of the company. From 90% at the end of FY 09, the contribution to revenues has increased to 96% at the end of H1 FY 10. Manappuram is India’s largest listed and highest credit rated Gold loan company. In fact, Manappuram has received the highest credit quality rating awarded by ICRA to short term debt instruments. The company has its presence in around 15 states with more than 500 branches and the company is rapidly expanding. At the end of financial year FY 09, the company had Assets under management worth 979 crores, up by 73%. The total disbursements for the financial year stood at 3506 crore, up by 83%. The company clocked revenues of around 166 crore, up by 108% and net earnings of around 33 crore, up by 44%. But the best for the company is yet to come. For FY10, the expected net earnings of the company is around 100 crore – a 3 fold rise from FY 09.
The company is operating in a highly profitable business with a safe collateral. It is evident from the highest NIM s and the negligible NPA sGold Loans –Highly Profitable and Highly Safe
Manappuram gold loans - FeaturesThe company offers gold loans up to 1 crore. The Gold ornaments or Jewelry is taken as the collateral and the loanis provided against it, after taking the margin money.The company disburses loans based on the net weight and the purity of the gold. The company offers variousschemes to the customers while availing the loans.The attractive features of the gold loans from the company are –Loan availed in 5 minutes.When disbursing Gold Loan, we only require any ONE of your recent ID: Voter ID, Ration Card, Driving License,Passport or PAN Card and no other documents are required from you that can be time consuming.Provides the highest amount per gram of Gold, that is being pledged. Diminishing interest rates startingfrom 0.96% per month. Pay interest only for the number of days your pledge is maintained with us.
Gold loans - Key positives Unlike a Personal loan or a business loan or a vehicle loan, there are a lot of positives attached to the gold loans, which ultimately benefits the lender. Safe Collateral – The gold jewelry that the lender takes as collateral could be the safest collateral that any lender can get. Since the lender already takes a margin amount on the loan, any default on the loan does not really hurt him. On a contrary note, if the gold prices move up, the lender will be immensely benefited. No recovery issues - Unlike a vehicle loan or the home loan, the mortgaged element (gold) is held by the lender and not the borrower. The lender returns the gold to the borrower, only when the loan is paid in full. This provides ease to the lender in disposing / selling the collateral on default of loans, without any unnecessary recovery issues. No non performing assets – When somebody goes for a gold loan, there is a true urge behind the borrowers’ mind to get back the family jewelry at the earliest. This is not the case say in case of Vehicle loan. This is one of the key reasons that the NPA of Manappuram is just .25%. Literally speaking there are almost no Non Performing Assets in this business.
Gold loans from MAGFIL - Key positives Smaller loan tickets size – Similar to a Microfinance institution, the ticket size on the gold loans taken are very small. In case of Manappuram, the average loan amount’s size is around Rs. 20,000. Hence the chances of any bad loans impacting the company is very remote. Small duration loans – Though the company signs a contract with the customer for a 1 year period when the loan is sanctioned, most of these loans are closed in a premature manner. The average duration of gold loans in MAGFIL is just 3 months. Less impact by negative gold sentiments – While the company makes profits on defaults when the gold prices are firm or are moving up, the impact is very less when the gold prices are moving down. •There are very few defaults and the NPA is just .25%. •Gold prices are not that volatile that they go down heavily in a short span of time. If such a thing happens, the company would call for a margin amount from the customer. •The company is shielded by the smaller loan ticket size. •The smaller loan amount size coupled with the average loan duration of 3 months, gives plenty of room for the company to act.
There is no doubt that the business it highly profitable. However, the growth rates in the business will depend on the growth in new fund flows. Manappuram is best placed in tapping new funds.Business Dynamics
Business DynamicsThe company functions more like a bank where it sources funds at lower interestrates and lends them at higher interest rates, there by recognizing the revenues fromthe differential interest rates.Loan amount and Margin money – The company usually takes 15% to 20% ofthe value of the collateral as the margin money and lends the remaining 80% to85% to the customer. Depending on the net weight and purity of the gold, themargin money may vary.The company offers Gold loans up to 1 crore. However, the average ticket loan sizefor the company is around Rs. 20,000.Collateral – The company takes the Gold jewelry from the customer as thecollateral for the loan. The collateral is returned when the customer pays back theloan in full.Cost of funds – The company sources funds from various entities including Shortterm loans from banks, Working capital loans from banks, Private equity capitalinfusion, Secured Non convertible debentures, bonds and commercial papers.Per the FY 09 balance sheet, the banks contributed to more than 60% of the sourceof funds, while Reserves and Surplus contributed for around 25%.The cost of funds which was around 10% to 12% has reduced in the recent times tosingle digits, due to the highest credit rating to short term loans.
Business Dynamics (Contd) Interest rates – The company charges interest rates between 18% PA and 21% PA on the loans offered. The interest rates vary depending up on the purity and the number of grams being loaned. The pawn brokers charge any where between 5% to as high as 12% per month. An interest rate of 10% per month is not unusual with the pawn brokers. Banks usually charge between 9.5% PA to 12% PA. Many of the smaller competitors like Muthoot finance charge interest rates between 17% and 21%. NIM – The company enjoys very high Net interest margins of around 10%. This is one of the highest in any organized lending business. Some of India’s largest banks have NIM of around 2.5%. Even the more aggressive and smaller banks have NIM of around 3% only. NBFC s that are involved in other operations like transport finance enjoy NIM of less than 2.5%. The second largest MFI in the world – SKS Microfinance enjoys NIM of around 3% only. Undoubtedly, the business of Manappuram is highly profitable and attractive. NPA – There is almost no NPA in gold loan business. The company recently reported a NPA of around .25%
Source of FundsSource of Funds – For a NBFC like Manappuram, the ability to raise increased funds and the ability to raise themat a lower cost will determine how profitable the company can be and how fast the company can grow.For Ex, the total source of funds at the end of FY 08 was 267.5 crore and at the end of FY 09 was 618.9 crore. Aslong as this tap is open and the money is flowing through, the company will not have any problems in recordingstrong growth rates.Hence it becomes imperative to see the various options through which Manappuram can raise funds. Manappuram,has so far been using the following four options for fund raising.Deposits – The company in its initial stages of expansion has been accepting deposits to fuel its business growth.However, as the company started growing at faster rates and when the disbursements were doubling into 1000s ofcrore, the deposits as source of funds was not attractive.The cost of deposits were higher and they lacked size. Hence, the company has decided in 2007 to phase out thepublic deposits held by the company. Since then, the company has not been accepting any new deposits. Nor it hasextended the existing deposits. Hence, Deposits as a source of fund is not an option going forward.
Source of Funds (Contd) Debentures – The company has been issuing secured redeemable convertible debentures of Rs. 1000 each on private placement basis. These debentures are issued on a private placement basis and are secured by a floating charge created on the receivables and other current assets of the company. The total outstanding balance of debentures including interest accrued and due as on Mar 31, 2009 amounts to Rs. 73 crore. The company has been making extensive use of this instrument. The interest rates on the debentures vary between 9% and 14.5%. Though the interest rates are relatively higher, these debentures can provide voluminous capital to the company and the size of these funds are huge. Unsecured Bonds – The company issues unsecured Subordinated Bonds in the nature of Promissory Notes on private placement basis. These Bonds will be treated as Tier II Capital as per RBI norms. The outstanding figure of these bonds as on 31-03-2009 amounted to Rs. 64 Crores. Bank Loans – This continues to be the primary and the largest source of funds for the company. Manappuram avails Working Capital loans and Short term loans from the banks. The loans are availed by hypothecation of receivables.
Source of Funds (Contd) At the end of FY 09, the loans from the banks amounts to 295 crore. At the end of H1 FY 10, the loans from banks amounts to 764 crore – a 2.5 fold rise in just 6 months. The banks are mandated to lend 40% of credit to “priority funding sector” and they account for the loans that they provide to Manappuram in this obligation to RBI. Hence Manappuram remains to be in a comfortable position. Bank Loans will continue to the largest tap through which the funds will flow to Manappuram. Given the Priority lending obligation of the banks and the trend that we see in H1, Manappuram can continue to be in a comfortable position. Also, as the receivables of the company keeps growing every day in size, the banks will also be interested. Private Equity funding – Manappuram has had two rounds of funding from Private equity players in the last 2 financial years. In both of the private equity funding, the PE players had infused capital into both Manappuram General Finance and Leasing Ltd – MAGFIL and Manappuram Finance Tamilnadu Ltd – MAFIT. MAFIT is engaged in the same Gold loan business, but in the state of Tamilnadu alone. In the first round of funding, PE players infused 46 Crore in to MAGFIL and 23 Crore in to MAFIT. In the second round of funding, MAGFIL and MAFIT were infused with 49 Crore and 21 Crore.
Source of Funds (Contd) In the financial year FY 07, Manappuram had allotted 46.8 lac CCPS (Compulsorily Convertible Preferential Shares) to Hudson Equity Holdings and Sequoia Capital. These 46.8 lac CCPS were converted into 32.8 lac equity shares on 21-06-2008. In the second round of funding, the company had allotted 49.5 CCPS to Hudson Equity holding, Sequoia Capital, AA Development capital and GHIOF. These CCPS were converted into 29.7 lac Equity shares on 16-03-2009. There are two key advantages in accepting PE funding – The interest rates on the funds are almost negligible (.05%). Also, the funding from top class PE players like Sequoia and Hudson gives quality to the Capital structure of the company. We believe that the recent up gradation of ratings by ICRA will open a more sources for funds for the company at better rates. Also, the company does not seem to be having any kind of problems in increasing its loans from the banks. Banks on their part have been fulfilling their Obligations to RBI by providing advances to Manappuram. So, it’s a Win–Win situation for both Manappuram and banks. Also, the company with its growth rates and impressive business dynamics is best placed to demand higher valuations from any new PE players.
Manappuram Vs BanksA reality check of the gold loan business space reveals that NBFC s like Manappuram have a clear edge over theBanks who offer Gold loans. We do not expect any kind of threat from banks in this business space, even thoughbanks charge interest rates that are lesser by 6% to 7%.Minimal Documentation – Manappuram looks for only one identity proof along with the collateral in Gold forgranting loans. However the banks will have to comply with Know Your customer norms and hence requiresvarious documentations. Almost all the banks offer gold loans to only their customers.Lower Processing time – NBFC s like Manappuram are known to disburse loans in few minutes due to theminimal information required. However, the banks take few days to approve the loans.Loan amount per gram – As a compliance effort to RBI, at the current gold price, Banks can loan only Rs. 950per gram. However, the NBFC s like Manappuram do not have such obligations and they loan around Rs. 1500 pergram. This is the key differentiating factor that will work in favor of NBFCs.It should be noted that gold loan seeker in need of funds will look for the highest amount that he can avail for hisgold.
These stats provide finer details into the operations of the company, there by helping us in better estimating the future.Business Statistics
Loan ticket stats (Contd)Latest Average Loan ticket size – Rs. 20,000Latest Average Loan ticket duration – Around 3 monthsLTV (Loan to Value) = LTV is the actual amount that is being loaned to the customer in comparison to the totalvalue of the collateral. If the mortgaged jewelry is appraised at 1 lac and if 80,000 is loaned, LTV is 80%
Branch wise Stats – (Contd)It should be noted that the average loan outstanding per branch has increased over the years and in the recentquarters, in spite of the aggressive expansion in its network.This indicates that the demand for gold loans is very robust in both existing and new branches.
The business environment itself warrants strong growth rates for the gold loan business. Manappuram is in the right place at the right time.Key growth drivers
Scale of OpportunityThe total private holdings of Gold in the country is estimated to be between 20,000 tons and 25,000 tons.The total pledged gold in the country is estimated to be around 1500 tons, while the total holdings withManappuram is around 16 tons of Gold. Currently Manappuram is catering to only 1% of the realized market sizeand .08% of the unrealized market size.It should be noted that all of these holdings are on the rise even on a daily basis. Also, the acceptability of Goldloans has been gaining traction with the masses. Manappuram has set out with a goal to impart liquidity to at least10% of the total privately held holdings in the country, which is around 2000 tons of Gold.Clearly, the head room for the company is ample. Being the market leader in this niche segment and being an earlyentrant will only help them to march towards their goal.
Network ExpansionIt is very evident from the above stats that the company in the recent years has set out on aggressive expansionspree to increase its scale and visibility. It’s branch network has increased from 291 from March 2007 to 765 at theend of September 2009.From the latest communication, the company’s total branches stand at 890 spread across 15 states. The companyhas added around 130 branches in the last 3 months alone.It should be noted that more than 90% of the branches are present in the 4 states of Tamilnadu, Kerala, AndhraPradesh and Karnataka. This is due to the fact that there are very high gold holdings concentrated in these statesand there is a very high level of acceptability for Gold loans.The company has plans to move from South Indian states and to have 1600 branches by FY 13. This expansion willdrive the growth in assets under management and the loan disbursals.
Amalgamation = MAGFIL + MAFITThe Board of Directors of the Company at their meeting held on March 16, 2009 has approved a Scheme ofAmalgamation of the Company and MAFIT with retrospective effect from April 1, 2008 based on an exchangeratio of 2.1:1 (2.1 shares in MAGFIL for every share in MAFIT).MAFIT is a non deposit taking NBFC engaged in the Gold loan business with a strong presence in Tamilnadu.Approvals for the merger has been obtained from the Stock Exchange and the Market regulator. Approval fromHonorable High Courts of Madras and Kerala are pending.However, the management recently commented that the merger is in the advanced stage and will be complete inthe financial year FY 10.The merger would strengthen the position of the company in the Gold loan business space. Also, the merged entitywill have a stronger balance sheet and distribution network.
Amalgamation = Impact on Business dynamics Increased Presence – Post merger the company will have a increased presence in the Gold loan space. Tamilnadu is one of the strong markets in the gold loan business space and the merger will tap into these opportunities. It will add around 150 branches present in Tamilnadu to the existing company (615 branches). Equity Capital – With the merger of MAFIT, the equity capital will increase by around 67% from the existing 17.26 crore to around 28.93 crore. Promoter holding – Post merger, the promoter holding in the company will increase from the current 33.7% to 44.8% Capital funds – The merger will see MAFIT bringing 195 Crore of High Quality and low cost funds to the company. The low cost of the funds is evident from the fact that for the financial year FY 09, the interest expense to Sales ratio is just 11% compared to 23% for MAGFIL. Also, the net margins of MAFIT was around 33.5% compared to just 18% for MAGFIL. The high quality nature of the funds can be attributed to the fact that more than 40% of the capital comes from Paid up capital and Reserves and Surplus which are interest free.
Increase in AUM, Balance sheet size and improved ratingsIn the recent ratings update by ICRA, the ratings were improved on most of the source of funds that the companytaps into. The ratings were upgraded on Cash credit from banks, Short term loans from banks and commercialpapers. The company currently has top most ratings from ICRA for Short term loans and commercial papers, thetwo most important source of funds.With the increase in ratings of these instruments, the cost of funds are bound to come down, thereby directlyimpacting the bottom-line in a positive manner. The company had recently increased the capacity of its commercialpapers from 100 Crore to 200 Crore and had retained the same A1+ ratings on the instrument.Low level of leverage, Liquid collateral, Strong Asset quality, shorter loan durations are some of the basic factorsbehind the improved ratings.Also, as the company grows, the size of the balance sheet and the assets under management also increases in size.With the increase in AUM and Balance sheet size, the company will be able to tap more sources of funds. With theimprovement in AUM, the loan size from banks will improve since they are secured by hypothecation ofreceivables.
The company is low on leverage which provides safety and also gives an opportunity to push up the growth rates. Also, the profitability ratios are one of the highs in the industryFinancial statements
P and L statement - Annual The company has witnessed a strong traction in growth over the last few years, especially with the capital infusion from the PE players. The company has reported robust OPM of around 52% in FY 09. However, it has come down from around 60% in FY 07. This is due to the rapid geographic expansion that the company is in. However, as the expansion starts yielding results, the OPM can go up. The interest expense to Total revenues ratio has been on a constant decline. From 41% in FY 05 to around 23% in FY 09. However it has increased from 18% in FY 08 and also to around 30% in H1 FY 10. The cost of funds will depend on type of the new fund source that comes in. However, as the company grows bigger and better, it should be able to access funds at a cheaper cost. The net margins of the company has come down to 18% in FY 09 from around 26% in FY 08 to 18% in FY09. This is again a dependant on the quality and the cost of the funds.
P and L statement - Interim The strong traction in the business for Manappuram not only continued into FY 10 but has got only strong. The company has already reported profits in H1 that were equal to the net profits of the previous financial year. As we had mentioned in the previous slide, the geographic expansion of the company has been yielding results since the last few quarters. That coupled with lower interest rates have pushed up the net profits of the company. As we have been mentioning before, the company is in a niche and attractive business with very high profitability. The company will continue to grow at very healthy rates until the money tap is open. We are confident that the fund flow will continue to come into the company at healthy rates and volumes. We expect the company to grow at a CAGR of around 60% in the next 3 years. We also expect the net margins to range between 18% to 24%. Any rise in interest cost from the banks will be softened by the increase in credit ratings of the company.
P and L statement – Merged entityThe net earnings of the merged entity (MAGFIL + MAFIT) for the H1 of FY 10 stands at around 44 crore comparedwith the 33 crore from MAGFIL..The management has guided net earnings of around 100 crore for the financial year FY 10, more than thrice as thatof FY 09. Even on a standalone basis, MAGFIL on an annualized earnings of around 66 crore will still reportdouble the net earnings of FY 09. Looking at the current rate of disbursals and the size of the funds that thecompany has in its balance sheet, it is very likely that the merged entity with achieve it.With the merger with MAFIT, the equity capital will increase by around 67% to 28.93 Crore. Taking a cue from theH1 of FY 10, the merger will increase the earnings by 35%.From the looks of H1 FY 10, though the EPS may get affected in a negative manner, it may be justifiable with thetype and quality of funds that MAFIT has. At the end of FY 09, MAFIT had 195.7 crore of high quality and lowcost funds with it.The Interest expense to Sales ratio was just 11% for MAFIT compared to 23% for MAGFIL. Also, the net marginswere 33.5% for MAFIT compared to 18% for MAGFIL
Balance Sheet Equity share capital has been on the rise for 3 times in the last 4 years. Now, with the merger of MAFIT the Equity share capital will increase to more than 28 crore. The reserves and surplus of the company has grown multi fold thanks to high net interest income. Looking at the growth in total debt for the company, it is evident that it has not been facing much problems in shoring up its funds so far. However, going forward, shoring up the funds in the balance sheet will remain to be the single largest challenge for the company, mainly on the back of increasing requirements and strong growth rates. Provisions have been applied per the norms stated under NBFC prudential norms directions.
Financial ratiosThe company commands one of the highest profitability ratios in the NBFC industry. The impact on these marginsthe last few years could be attributed to the rapid expansion in branches. However, these margins will bounce backas and when the expansion starts yielding results.We expect the net margins for the company to be range bound between 18% and 24% with a positive bias. Theexpansion has already started yielding results, as evident from the H1 results of FY 10.Also, with the increasing balance sheet size, the company will have access to more sources of funds and will be ableto access them at lesser costs.The interest cover of 2.39 is one of the highest in the industry, with other leading NBFC s in other sectorcommanding around 1.5.
There is a strong management behind the company with several decades of experience. Also, the board has representation for the PE players, a good sign for corporate governance.Management team
The Board – Key personnelMr. V.P. Nandakumar is the Chairman of the company and is a post graduate in science withadditional qualifications in Banking & Foreign Trade. Immediately after completion of his education,he joined the erstwhile Nedungadi Bank Limited. In 1986, after 10 years of service as an officer ofthe Nedungadi Bank, he resigned from the Bank to look after family business.Mr. I. Unnikrishnan is a Chartered Accountant from Thrissur. He is a renowned expert in financialservices Industry especially in Non Banking Financial Sector and Advisor to several NBFCs.Mr. A.R. Sankaranarayanan is an IRS (Retired). He is a person with excellent academic andprofessional records. He has adorned several important positions in and outside the Govt such asMD, SAIL International Ltd, Director of Prime Minister`s Secretariate and former Director of FederalBank Ltd.Mr. Manomohanan is an eminent Central Banker with a professional qualification in Banking. He hasgot over 38 years of experience in Banking including Directorships in the South Indian Bank Ltd andthe Federal Bank Ltd. He retired as the General Manager, Reserve Bank of India, Department ofBanking Supervision, Trivandrum.
The Board – Key personnelMr. Ashvin Chadha is a Vice president of IEP Advisers Private Limited, was previously an associate atGeneral Atlantic LLC ("GA"), a world wide private equity firm. He was based in the New York Cityand greenwitch offices. He was an observer on the Board of Directors at Dice and Webloyalty. Hewas previously an investment banker with Morgan Stanley in New York. He received his BA inEconomics from Wesleyan University.Dr. Mehta is a Mechanical Engineer from IIT Mumbai. He is the President of Granite Hill CapitalVentures and the former Chairman and CEO of Providian Financial Corporation. He was thepresident and COO of Capital Holding and also served on the Board of many companies in theUS. He holds PhD in Operations Research and Human Letters and also MS in Operations Research.Mr. Gautam Saigal is the Managing Director of AA Indian Development Capital Advisors PrivateLimited (AAIA), Mumbai. Prior to joining AAIA, Shri Gautam was the Vice President at AIG GlobalInvestment Group Mumbai handling AIGGIG managed private equity investments in India . He hadalso worked for SSKI corporate finance. He is a Chartered Accountant.Mr. K.P. Balaraj is the co-founder and Managing Director of Sequoia Capital in India. Formerly hewas part of the Private equity team at Goldman Sachs in Asia. He holds MBA degree from HarvardBusiness School, USA.
With the proposed merger of MAFIT with MAGFIL, the promoter holdings will increase from 30% to around 45%.Shareholding Patterns
Latest Shareholding patterns The share holdings of the promoters stand at around 30% and it has remained the same since Mar 2008. With the proposed merger of MAFIT with MAGFIL, the promoter holdings will increase to around 45%. There are two FII s and 4 Mutual funds holding this company. FII s with holdings are Citigroup and Swiss Finance corporation respectively. Retail investors hold around 21% stake in the company.
Shareholdings : Promoters & PublicThe bulk of the holdings in the company rests with the PE players. The total PE holdings at 36.25% is greater thanthe current Promoter holdings.Sequoia Capital, one of the most renowned player in the Private Equity space has holdings of around 25% stake inthe company and stands to be the largest non promoter entity in the company. All the current PE players investedinto this company have a board representation.Currently, there have been unconfirmed reports that two of the PE players – Advent International and New Silkroute are the top contenders for the next round of fund raising by the company. However, the valuations are notknown yet.
With a strong momentum in place, one can start investing 50% of their allocation at the current levels.Best Price to Buy?
Chart Since Jan 2008 Unlike the broader indices or even some of the blue chips, the stock price did not crack in the 2008 meltdown. From the highs of around 180 levels in Jan 2008, it went on to make lows of around 105 levels. This indicates the strong business fundamentals of the company. Also, there has been a strong and steady consolidation between the levels of 100 and 150 levels.
Buying Strategy As evident from the chart pattern, huge consolidation took place at two levels – one around 500 levels and the other around 400 levels. Although the upsurge for the last 8 months, the stock has been showing strong and continuous momentum. Limited downside below Rs6, current price is around Rs11 (May 22nd), it can fall down to Rs5 level,but should With a strong momentum in place, one can start investing 50% of their allocation at the current not go below it as there’s a strong support at 5 levels. One can add with 25% allocation at around 540 to 550 levels. If the stock reaches 500 Buyingits an accumulate call. levels, strategies for next 3 month need to be followed after taking initial exposure at Rs11-12.The stock can be bought at this level and on every dip more shares need to be accumulated.
Any investment for capital appreciation carries an associated risk with it. What are the risks that could derail the growth prospects for this company?Challenges / Risks involved
Challenges / Risks involved The following are some of the risks involved in this investment and these risks could derail the growth story for the company. Widespread disaster – Any widespread disaster in the country like a all out War situation or a natural calamity might result in the damage or the severe loss of the Gold that the company secures as collateral. A huge of loss of collateral might severely affect the company’s operations. Gold price crashing – A crash in international Gold prices where it falls by 50% or 60% in no time can result in a large setback for the company. The company may be able to call for more margin money from the customers. However, such a crash will result in normal operations of the company getting severely affected. Unable to raise funds – The growth of the company may be severely hampered if the company is unable to raise additional funds for disbursals and hence growth at competitive rates. Such a scenario may result in the company’s growth getting stagnant.
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