Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA/CRISIL PPMLD AA r/Stable/CRISIL A1+’ ratings on the bank facilities and outstanding debt instruments of Manappuram Finance Limited (MAFIL; part of the Manappuram group).

 

CRISIL Ratings has also withdrawn its rating on Non-Convertible Debentures of Rs.1410 crore (See Annexure 'Details of Rating Withdrawn' for details) in line with its withdrawal policy. CRISIL Ratings has received independent confirmation that these instruments are fully redeemed.

 

The ratings continue to factor in MAFIL’s established market position in the gold finance business while maintaining strong financial risk profile. These strengths are partially offset by high operating costs, geographical concentration in operations and the associated risks, and potential challenges associated with the non-gold product segments.

 

Between June 2020 and March 2021, the gold loan assets under management (AUM) have grown by 7.6% despite increasing competition from banks and having a regulatory Loan to Value (LTV) disadvantage during this period. The gold loan AUM stood at Rs 19,077 crore as on March 31, 2021, registering a 3 year CAGR of 17.7%. For nine months ended December 31,2021 the company witnessed growth of 7.2% in gold loan segment and the AUM stood at Rs 20,452 crore on account of increase in gold collateral and competitive interest rate offered to high ticket portfolio to support growth. With revival in demand and uptick in gold prices, CRISIL Ratings expects company’s growth to further increase over the medium term. However, in the long term, ability to maintain this growth momentum alongside increasing competition from banks, will be a monitorable.

 

Asset quality for gold loans, as better measured by credit costs, has also been sound, except for fiscal 2021 when non-performing asset (NPA) levels marginally increased to 1.9% as compared to 0.9% in previous fiscal on account of pandemic. However, the NPA position has improved and stood at 1.4% as of December 31, 2021 – on account of improvement in repayment capacity of certain borrowers. The ultimate credit costs for 9M fiscal 2022 remain low at 0.3%, supported by the highly liquid nature of the collateral. In fiscal 2021, cumulative auctions done by the company were Rs 412 crore however, in 9M 2022 – the cumulative auctions done increased to Rs 2,695 crore. Nonetheless, the overall auction proceeds have been higher than the principal component of the collateral against which the loan was extended.

 

The non-gold loan portfolio (microfinance, vehicle finance and housing finance) that accounted for around 33% of the total portfolio as on December 31,2021 have faced asset quality challenges in the aftermath of the pandemic. The gross NPAs (GNPAs) have increased significantly over the last few quarters, and this has had an impact on the respective earnings profile of subsidiaries. From growth perspective, the micro finance, housing and vehicle finance reported growth of 15%, 23%, and 43% for the nine months ended December 31, 2021. CRISIL Ratings believes that the gold loan AUM will continue to account for around two-third of the consolidated AUM and over 80% of consolidated profit over the medium term. Consequently, the consolidated credit profile has the ability to absorb asset quality and earnings risks in the microfinance, vehicle or housing finance businesses in the near term.

Analytical Approach

For arriving at the ratings, CRISIL Ratings has combined the business and financial risk profiles of MAFIL and its subsidiaries, Asirvad Microfinance Ltd (Asirvad), Manappuram Home Finance Ltd (MAHOFIN) and Manappuram Insurance Brokers Pvt Ltd. This is because all the companies, collectively referred to as the Manappuram group, have significant financial, managerial, and operational linkages.

 

Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

• Established market position in the gold finance business

The family of the promoter, Mr. V P Nandakumar, has been in the gold-loan business for more than 60 years. Based on this industry experience, the company has designed an appropriate assessment and underwriting methodology. Assessing the purity of gold, fixing the sum that can be lent against a gram of gold, and determining appropriate LTV ratios are critical aspects in the assessment process. The company has a strong brand and reputation in south India (particularly Kerala and Tamil Nadu). Reputation and trust play a significant role in this segment as these give the customer an assurance of getting back personal gold ornaments once the loan is repaid. After shifting towards shorter tenure gold loans of three months in 2015 to de-risk the portfolio from sharp fluctuations in gold prices, the company has witnessed stability in business with an increase in customer base and gold holdings. Despite moderate volume growth and increased competition from banks due to LTV relaxation benefit extended to them until March 31, 2021, the company’s gold loan AUM grew by 12.4% over fiscal 2021 to reach Rs 19,077 crore on March 31, 2021. This was a factor of appreciation in gold prices, new disbursals made at marginally higher than average LTV and, expansion of active customer base. Following the second pandemic wave and the liquidity constraints within certain borrower segments thereafter, nine monthly growth in gold loan portfolio was arrested at 7.2%. Further, the company is now focusing on six month product and lower yield on the high-ticket size loans, to combat competition.

 

Historically, the company’s operating efficiency – indicated by average gold loan AUM per branch – has been improving over the past few years. As at the end of December 31, 2021, the average AUM per branch stood at Rs 5.75 crore, almost double of that for fiscal 2016.

 

MAFIL’s extensive branch network and client base, which is relatively more diverse in terms of geographies and is gradually improving further, should support the further strengthening of its competitive position over the medium term. While the company had started to diversify into non-gold segments, its primary focus would remain on gold loans over the medium term in light of the challenges being faced by other asset classes after the pandemic,

 

• Sound capitalisation

The company has maintained strong capital position while ramping up operations over the years. The consolidated networth and gearing were Rs 8160 crore and 3.0 times, respectively, as on December 31, 2021. Large accretion to networth in the past several years has resulted in a healthy capital adequacy ratio of 30% as on December 31, 2021. Lower asset-side risk (security of gold, which is liquid and is in the lender's possession) also supports capitalisation. AUM in the gold loan segment is expected to grow at a steady rate and will remain the major asset class over the medium term even while other segments (microfinance, housing finance and vehicle finance) continue to grow. CRISIL Ratings understands that the group intends to cap its capital allocation to the microfinance segment at 10% over the medium term due to the unsecured nature of the business, and therefore, will look for external investors for the segment in the medium term. Over the past six fiscals, gearing (consolidated and standalone) remained below 4 times whereas standalone tier I capital adequacy ratio remained above 20%. CRISIL Ratings believes that strong internal cash generation from the gold finance business will strengthen MAFIL’s standalone capital position and, allow the company to prudently capitalise its subsidiaries and provide timely need-based financial support.

 

• Profitability expected to remain strong

Profitability has remained strong with a consolidated RoMA of 7.2% during fiscal 2021 (5.6% during fiscal 2020), driven by the large profit generated by the gold loan segment—net profit increased to Rs 1,698 crore in fiscal 2021 from Rs 1,230 crore in fiscal 2020. The microfinance segment reported a profit of Rs 16 crore during fiscal 2021 against Rs 235 crore in fiscal 2020. The home finance segment reported net profit of Rs 10 crore in fiscal 2021 against Rs 11 crore in fiscal 2020. For the nine months ended December 31, 2021, gold loan segment reported a net profit of Rs 1,039 crore, while that of microfinance reported net profit of Rs 21 crore and home finance segment reported net profit of Rs 6.8 crore.

 
The consolidated net profit for the company stood at Rs 1,725 crore in fiscal 2021 as against Rs 1,480 crore in fiscal 2020. During nine months ended December 31,2021 the company report net profit of Rs 1,068 crore as against Rs 1,257 crore in corresponding year of previous fiscal. The RoMA for the company during nine months ended December declined to 4.3% on account of increase in operating expenses relating to marketing strategy that included advertisements and employee benefits etc. and lower yields provided to high ticket customers to support growth. The ability of the company to maintain its yields and limit operating cost will be critical for stability in profitability. Besides, given its diversification into other segments, asset quality and profitability of the non-gold businesses will also remain monitorable.

 

• Stable funding profile

As on December 31, 2021, the company’s consolidated borrowings (including off balance sheet funding through securitisation and external commercial borrowings - ECBs) from banks (public and private) and financial institutions stood at around 63%; higher than the 49% as on March 31, 2021. For the same period, the share of commercial paper (CP) marginally increased to 6% from 5%. Because of its legacy and highly secured asset class, MAFIL is able to roll over existing bank lines/ CP and continue to raise fresh funds from diversified sources. Between April 1,2021 and January 31,2022, the company raised fresh borrowings around Rs 12,760 crore through term loans and WCDL. The standalone cost of borrowing was 7.9% during nine months ended December 2021 as compared to 9.7% in fiscal 2021. The consolidated cost of borrowing during nine months ended December 2021 declined to 8.6% as compared to during 10% in fiscal 2021.

 

In terms of standalone funding, while a larger proportion of the borrowings comprised funding lines from banks and financial institutions (47%), the company’s resource profile was diversified across avenues such as non-convertible debentures (NCDs) and subordinated debt (31%), commercial paper (CP; 8%), and external commercial borrowings (15%) as on December 31, 2021.

 

Weaknesses:

• High operating cost in the gold and microfinance businesses

The nature of the gold loan business results in high operating cost. With a large network of ~4,600 branches as on December 31, 2021, the company incurs substantial branch operating cost as proximity to the customer plays a key role in gold loan financing. Additionally, the company incurs high security cost to ensure the safety of the gold ornaments. To reduce cost per branch, the company is taking steps to increase the gold AUM per branch, which has improved consistently over the years. Though still low at Rs 5.7 crore per branch in the third quarter of fiscal 2022, it has increased from Rs 3.8 crore per branch in fiscal 2019. The company has taken several steps to reduce the staff cost at branches. While online gold loan is one of the ways, its share decreased to 41% of the gold AUM in the third quarter of fiscal 2022 from 54% in fiscal 2021. The decline in online gold loan portfolio is on account of rebate option being made available to offline customers, earlier it was exclusive for online gold customers.

 
On a standalone basis, the operating cost of the company decreased to 4.8% in fiscal 2021 from 7.2% in fiscal 2019. The company has been taking steps to cross-sell other asset segments and use the existing branch network to reduce operating cost. In the microfinance business, the AUM per branch, though low at around Rs 5.6 crore as on March 31, 2021, has increased from Rs 2.6 crore as on March 31, 2017. The operating cost is expected to benefit from operating leverage as the portfolio scales up.

 

• Geographical concentration in operations and the associated risks

Operations have significant regional concentration compared to large asset-financing non-banking finance companies (NBFCs); South India accounted for 63% of total AUM as on December 31, 2021. Moreover, there is susceptibility to regulatory risks related to revenue concentration in a single asset class (gold-loan financing), which accounts for 76% of revenue. The non gold loan segments like vehicle finance, affordable housing finance and microfinance segments, these accounted for 33% of the total portfolio and around 24% of revenue as on December 31, 2021. In view of the large gold loan book (67% of the total portfolio) and the presence of the gold loan business mainly in South India, revenue is likely to remain concentrated geographically and in terms of asset class over the medium term.

 

•  Potential challenges associated with non-gold loan segments

The non-gold segments accounted for 33% of the overall portfolio as on December 31, 2021 (33% as on March 31, 2020). While the company has managed to grow these businesses and increase the segmental share over the past two years, potential challenges linked to seasoning of the loan book and asset quality remain. Within the housing finance segment, MAHOFIN operates in the affordable housing finance segment, catering to self-employed customers engaged in small business activities and thus, have a relatively weak credit risk profile because of the volatile nature of their income and employment in un-organised segments. Similarly, microfinance loans (under Asirvad Microfinance), through which the company intends to cater to weaker sections of the society, are unsecured in nature and are rendered to borrowers with a weak credit risk profile. This segment also exhibits high subjectivity to local socio-political issues. The vehicle finance business (under MAFIL) deals with lending against commercial vehicles and equipment – majority of which are used/pre-owned vehicles.

 

With respect to impact of covid-19, the non-gold businesses have faced asset quality challenges in the aftermath of the pandemic. While collections across most of these segments, after dropping drastically in Q1 2021, had started to revive in the second half of the fiscal, the second wave has prolonged the improvement and impacted the asset quality metrics in first half of current fiscal. Consequently, the GNPAs have increased significantly. As on December 31, 2020, the GNPA for the microfinance business (Asirvad) was 2.8%, for housing loans (MAHOFIN) was 6.2% and in vehicle finance segment was 5.2%.%. In light of prevailing asset quality challenges including that of the restructured book done especially in microfinance segment, the standalone earnings profile of non-gold businesses is expected to remain weak over the next few quarters. From a longer term perspective, as the growth within these segments as well, the ramp-up in businesses while managing asset quality and profitability will be a key monitorable. 

Liquidity: Strong

The company’s liquidity remains strong, with liquid balance of Rs 7,076 crore as on January 31, 2022 (including cash and liquid investments of Rs 890 crore and unutilized CC/WCDL limit of Rs 6,186 crore). Liquidity cover for debt obligations arising over February and March 2022, without factoring in any roll over or incremental collections continues to remain adequate at over 1 time. However, the company has also been able to roll over existing working capital lines and also raise incremental funds at competitive rates over the last few quarters.

Outlook: Stable

CRISIL Ratings believes MAFIL's capitalisation and asset quality will remain strong supported by its gold loan business. The strong earnings will also provide support as the company diversifies into other asset classes and scales up its non-gold business.

Rating Sensitivity factors

Upward factors

• Continued strong market position in the gold finance business with increasing diversity in AUM into non- gold business without impairing asset quality

• Sustenance of profitability with RoMA above 5% on a steady state basis, while improving asset quality

 
Downward factors

• Increase in consolidated gearing to over 5 times
• Steep decline in interest collection in the gold loan business or deterioration in asset quality or profitability in the non-gold loan segments

About the Company

Incorporated in July 1992 and promoted by Mr. V P Nandakumar, MAFIL is the flagship company of the Manappuram group. It is a non-deposit-taking NBFC that provides finance against personal gold ornaments. It had ~4,600 branches across India as on December 31, 2021. The company went public in August 1995, with shares listed on the stock exchanges of Chennai, Kochi and Mumbai (Bombay Stock Exchange and National Stock Exchange). Over the past three years, the Manappuram group has diversified into other businesses such as microfinance, vehicle finance, loans against property and affordable housing finance. It also entered the insurance broking business.

 
The overall AUM of Rs 30,407 crore as on December 31, 2021, includes gold loan (67%), microfinance (23%), commercial vehicle finance (5%), housing (3%) and lending to other NBFCs (2%). The gold loan portfolio is diversified across 28 states and Union Territories, while the microfinance, commercial vehicle and housing finance portfolios are diversified across 24, 22 and 9 states, respectively.

 
For fiscal 2021, consolidated profit after tax (PAT) was Rs 1,725 crore on total income of Rs 6,375 crore, against Rs 1,480 crore and Rs 5,551 crore, respectively, for fiscal 2020. For the nine months of fiscal 2022, consolidated PAT was Rs 1,068 crore on total income of Rs 4,635 crore.

Key Financial Indicators of MFL - Consolidated

As on/ for the period ended		Dec-2021	March-2021	March-2020
Total managed assets #	Rs crore	34,227	32,054	30,470
Total income	Rs crore	4,635	6,375	5,551
Profit after tax	Rs crore	1,068	1,725	1,480
Gross NPA @	%	1.4	1.9	0.9
Adjusted gearing #	Times	3.0	3.2	3.9
Return on managed assets #	%	4.3	7.4	5.6

# including off balance sheet assets, @ standalone

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon Rate (%)	Maturity Date	Issue size (Rs crore)	Complexity Level	Rating
INE522D07BZ1	Non-Convertible Debentures	28-Jan-22	6.93%	28-Feb-24	400	Simple	CRISIL AA/Stable
INE522D07CA2	Non-Convertible Debentures	28-Jan-22	6.93%	28-Jan-24	400	Simple	CRISIL AA/Stable
INE522D07BX6	Non-Convertible Debentures	28-Jan-21	8.57%	28-Jan-28	300	Simple	CRISIL AA/Stable
INE522D07BX6	Non-Convertible Debentures	28-Jan-21	8.57%	28-Jan-27	150	Simple	CRISIL AA/Stable
INE522D07BX6	Non-Convertible Debentures	28-Jan-21	8.57%	28-Jan-26	150	Simple	CRISIL AA/Stable
INE522D07BW8	Non-Convertible Debentures	22-Dec-20	7.45%	22-Dec-23	400	Simple	CRISIL AA/Stable
INE522D07BV0	Non-convertible debentures	30-Sep-20	7.35%	30-Mar-22	50	Simple	CRISIL AA/Stable
INE522D07BU2	Long term principal protected market linked debentures	07-Sep-20	8.10%	07-Mar-23	100	Highly complex	CRISIL PP-MLD AAr/Stable
INE522D07BT4	Long term principal protected market linked debentures	20-Aug-20	8.45%	06-Feb-23	150	Highly complex	CRISIL PP-MLD AAr/Stable
INE522D07BP2	Non-convertible debentures	21-Jul-20	8.50%	21-Jul-22	250	Simple	CRISIL AA/Stable
NA	Long term principal protected market linked debentures^	NA	NA	NA	2	Highly complex	CRISIL PP-MLD AAr/Stable
INE522D07BO5	Long term principal protected market linked debentures	16-Jul-20	9.00%	24-Jun-22	70	Highly complex	CRISIL PP-MLD AAr/Stable
INE522D07BO5	Long term principal protected market linked debentures	10-Jul-20	9.00%	24-Jun-22	178	Highly complex	CRISIL PP-MLD AAr/Stable
INE522D07BH9	Non-convertible debentures	27-Mar-20	9.25%	27-Mar-23	200	Simple	CRISIL AA/Stable
INE522D07BN7	Non-convertible debentures	09-Jul-20	9.50%	09-Jul-30	125	Simple	CRISIL AA/Stable
INE522D07BB2	Non-convertible debentures	27-Sep-19	10.50%	27-Sep-22	215	Simple	CRISIL AA/Stable
INE522D07BC0	Non-convertible debentures	07-Nov-19	9.75%	07-Nov-22	250	Simple	CRISIL AA/Stable
INE522D07BD8	Non-convertible debentures	18-Nov-19	9.75%	18-Nov-22	200	Simple	CRISIL AA/Stable
NA	Commercial paper	NA	NA	7-365 days	4000	Simple	CRISIL A1+
NA	Proposed long term bank loan facility	NA	NA	NA	666.25	NA	CRISIL AA/Stable
NA	Term loan	NA	NA	28-Jun-21	50	NA	CRISIL AA/Stable
NA	Term loan	NA	NA	08-Jul-21	87.5	NA	CRISIL AA/Stable
NA	Term loan	NA	NA	30-Sep-22	400	NA	CRISIL AA/Stable
NA	Term loan	NA	NA	22-Mar-22	225	NA	CRISIL AA/Stable
NA	Term loan	NA	NA	28-Jan-22	56.25	NA	CRISIL AA/Stable
NA	Working capital demand loan	NA	NA	NA	2835	NA	CRISIL AA/Stable
NA	Cash credit/ overdraft facility	NA	NA	NA	660	NA	CRISIL AA/Stable
NA	Bank guarantee	NA	NA	NA	20	NA	CRISIL A1+

^Yet to be issued

 

Annexure - Details of Rating withdrawn

ISIN	Name of instrument	Date of allotment	Coupon Rate (%)	Maturity Date	Issue size (Rs.crore)	Complexity Level
INE522D07BS6	Non-convertible debentures	19-Aug-20	8.35%	18-Feb-22	100	Simple
INE522D07BQ0	Non-convertible debentures	31-Jul-20	8.35%	31-Jan-22	335	Simple
INE522D07BM9	Non-convertible debentures	9-Jul-20	8.75%	9-Jan-22	225	Simple
INE522D07BL1	Non-convertible debentures	23-Jun-20	8.75%	23-Dec-21	150	Simple
INE522D07BE6	Non-convertible debentures	31-Dec-19	9.75%	31-Dec-21	350	Simple
INE522D07AF5	Non-convertible debentures	31-Jul-18	9.50%	31-Jul-21	50.5	Simple
INE522D07AE8	Non-convertible debentures	29-Jun-18	9.50%	29-Jun-21	199.5	Simple

 

Annexure – List of entities consolidated

Names of Entities Consolidated	Extent of Consolidation	Rationale for Consolidation
Asirvad Microfinance Ltd	Full	Subsidiary
Manappuram Home Finance Ltd	Full	Subsidiary
Manappuram Insurance Brokers Pvt Ltd	Full	Subsidiary