Why excitement in Manappuram stock post lifting of microfinance ban faded
Source: Live Mint
Manappuram Finance Ltd stock rose 5.5% in early trade on Thursday after the Reserve Bank of India (RBI) lifted restrictions on its microfinance arm, Asirvad Micro Finance Ltd (AMFL), with immediate effect. However, the excitement fizzled out with the stock trading flat at ₹180. Removal of this ban is positive, but the share of this business in Manappuram’s overall earnings is relatively small, accounting for just 15% of consolidated profit before tax (PBT) and 24% of consolidated assets under management (AUM) in H1FY25. AMFL’s AUM growth was just 8% year-on-year in H1FY25 on a much lower base compared to 17% of other loans even before the RBI ban.
Manappuram management expected this ban to be temporary as RBI had lifted a similar ban on Navi Finserv, an NBFC, in December 2024. The ban was imposed in October 2024 for charging excess interest rates.
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Apart from inconsistencies in household income measurement and instances of non-compliance with fixed loan obligation to income ratio, RBI had observed that AMFL was charging excessive interest rate. Its weighted average lending rate and the interest spread charged over their cost of funds was not compliant with the regulations.
Interestingly, despite the higher interest rate charged to borrowers by AMFL, its PBT margin was much lower at 15% compared to 36% of other loans of Manappuram. Poor profitability could be due to high annualized credit cost for AMFL, which was around 6% based on H1FY25, more than twice of the other loans. According to Care Ratings, interest rate on MFI loans was 25% in FY24 and after the RBI action, the new lending rate of AMFL could be around 23%.
Asirvad is expected to witness a gradual improvement in new business volumes from hereon. But it remains to be seen how it tackles the asset-quality stress that MFI sector is facing due to rising indebtedness among borrowers. This could further pressure its already elevated credit costs.
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Meanwhile, Manappuram’s mainstay gold loan business, which forms more than 50% of AUM, is in good stead. Its loan-to-value ratio was at 58% at the end of the September quarter, indicating sufficient cushion and opportunity to lend more even to existing borrowers, mainly because the gold prices have risen.
Manappuram quotes at 1.1x of its book value for FY26, based on Motilal Oswal estimates, the P/BV valuation appears reasonable considering that its RoA and RoE are estimated at 4.3% and 16.3% for FY26. But the stock performance has been unimpressive. From its 52-week high of ₹230 in July 2024, the Manappuram stock is down around 22%.
Also Read: Gold prices may fall in the coming months. Here’s why that’s great news.
