The shares of Manappuram Finance ltd are down more than 26% from around 25th of September. Many people must have noticed the RBI action against Asirvad and think that this was the reason for the correction. But that's not true! How!! 🤔❓️ The stock was falling even before the RBI ban on Asirvad. So to understand the reason, for this we should first study the 'micro finance industry ' in India and the short term challenges it is facing.
What is Micro Finance?
Micro Finance is basically a type of financial service provided to low income groups, who generally don't have access to the formal financial and banking services. Micro Finance Institutions [MFI] usually focus on lending small loans to people without a steady income, collateral, or a credit history. The other services provided by MFIs include insurance, payment systems, and savings accounts.
Mostly the purpose of micro finance lending will be for the for providing small loans to those entrepreneurs who planning to start or expand a small or micro enterprise. But even for those poor, who donot have anything to provide as collateral or having poor credit score or with an irregular income, may approach MFIs to finance their children's education, repairing their home, for any expenses connected with their agricultural activities, or to face any medical expenses.
It is said that many under privileged people have benifited by micro finance lending across the world. In India, states like Bihar, and Tamil Nadu are the main beneficiaries of micro finance lending.
But the main problem comes over here is interest rates charged by these MFIs. As they are providing loans without keeping a collateral these institutions tend to charge a higher rate of interests. So the RBI has issued strict guidelines in order to protect the interests of such borrowers.
Challenges faced by MFIs as reported by The New Indian Express:
These MFIs in India are facing an issue this year. From a news report of ' The New Indian Express', we could understand that micro finance sector is facing some challenges. The article was published on 27th of August. It says that the borrowers are missing out their installments. This situation has led to fall of 24% in new loan disbursements in the first quarter of the current year.
This year, factors like heat waves, heavy rainfall, general election, and field level attrition contributed to the issues faced by MFIs. Heat waves and heavy rainfall were the reason for rise in retail inflation. This inflation makes the low income group to spend more on necessary items like vegetables, rice, food products, etc. Since their expenditures are increased, they have very less cash balance which makes them to default installments.
The field level attrition refers to the reduction in the employee count because of employees leaving the organization and are not replaced. In simple terms, it refers to decline in the staff due to various reasons like elimination, resignation, etc, and the vacancies caused are not replaced immediately.
Other companies in micro finance lending:
So whatever the trouble for economy, ultimately it is the poor and middle class people are affected.
This is the reason why we could witness shares of many small finance banks like Equitas, Ujjivan, and Utkarsh were in a declining face. Even companies like Spandana Sphoorty finance and Muthoot Micro Finance were declining and flat for past days.
Now the quarterly results of companies like Nestle,HUL, Ultratech Cement shows that there is a trouble with companies dealing in consumer goods.
Relationship between micro finance industry and Manappuram:
So now the question which should naturally come is, what is the relationship between micro finance industry and Manappuram Finance ltd.
Manappuram has a subsidiary called Asirvad Micro Finance. Out of the company's total revenue, 27% alone constitute only micro finance loan. So, any issue with its subsidiary Asirvad will impact the revenue of Manappuram. Hence, we could see Manappuram's shares corrected by around 23% in the past six months whereas its competitor Muthoot's shares rose by 17.9%. The shares of Manappuram was in pressure for these six months and the RBI action on Asirvad was like adding fuel to fire.
The company is fundamentally strong only. Even without Asirvad, I believe that, Manappuram can survive. One point that we should note is that, the ban is only for fresh disbursement of loans. There are financial institutions who faced the similar kind of bans.
Fundamentals of Manappuram:
The company's revenue has gradually grown in the past 10 years, with a stable financing margin. The company's return on assets [ROA] stands at 5.09%. The company's standalone book value is Rs. 122 and the consolidated figure is Rs 137. Further the company is into gold loan business. So whenever the gold price rise, they can lend further to their existing borrowers, and also their gold loan portfolio could also grow as the gold price rise. When the gold prices rise, more people tend to pledge their gold. Moreover, we should remember that the interest rate charged on gold loans are a bit higher than the other forms of loans. So, with the increase in gold loan portfolio the profitability of the gold financiers also increases.
Even if we look at the revenue split of Manappuram, 27% of the total revenue constitutes micro finance lending, as I already mentioned. The remainder 73% is fully secured lending.
Further, if the RBI remove the ban on Asirvad then it is great for Manappuram. Now with good monsoon, experts are expecting the food inflation to decline due to better agricultural produce.
Conclusion:
In my view, the long term picture is positive. But even if the situation is worse, and Asirvad is forced to be wound, Manappuram alone can survive by itself. However, if that is the case then Manappuram will suffer only for a short term. But I don't think that will happen. Probably, the RBI might impose a penalty and would warn the company to not to repeat the mistake again. At the current market price I feel the company to be attractive.
[Do consider subscribing to my periodic newsletter.]
Disclaimer:
I'm not recommending this company to my readers. I request the readers to do their own research or consult a SEBI registered advisor before investing in any stocks.
Post a Comment