Rating Rationale
August 17, 2018 | Mumbai
Manappuram Finance Limited
Rating outlook revised to 'Positive', ratings reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.250 Crore
Long Term Rating CRISIL AA-/Positive (Outlook revised from 'Stable' and rating reaffirmed)
 
Rs.50.5 Crore Non Convertible Debentures  CRISIL AA-/Positive (Outlook revised from Stable and rating reaffirmed)
Non Convertible Debentures Aggregating Rs.2707 Crore CRISIL AA-/Positive (Outlook revised from Stable and rating reaffirmed)
Rs.3500 Crore Commercial Paper  CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has revised its rating outlook on the debt instruments and long-term bank facility of Manappuram Finance Limited (MAFIL) to 'Positive' from 'Stable', and reaffirmed the rating at 'CRISIL AA-'; rating on the commercial paper has been reaffirmed at 'CRISIL A1+'.

The outlook revision reflects robust stability in the business model that the company has achieved post-switching over to short tenure products in the gold finance segment. The outlook revision also factors in the growing diversity in asset classes.
 
MAFIL revised its business model in June 2014 by introducing short-term products with 3, 6, and 9 months' tenure and increasing focus on monthly interest collection. Short-tenure products (presently over 95% of disbursement comprises 3 months' tenure) reduce risk of interest reversals on delinquent loans. On maturity, a contract is now rolled over at fresh loan to value ratio if full interest is paid; otherwise the auction process is initiated. Since historically, the extent of decline in gold prices has been lower over a shorter period than a longer one, potential for recovery is higher if auctioned within 6 months than 14 months (earlier practice). For short-term products, net interest yields remain high, at around card rates, irrespective of whether interest is collected or gold is auctioned
 
Four years into operation of the model, several key parameters indicate stabilisation of the model and reduction in risks. First is the steady business growth (except for the two quarters post-demonetisation in November 2016) indicated by increase in gold holding to 64 tonne as on March 31, 2018, from 46 tonne as on March 31, 2014. Decline in the risk of interest rate reversal is reflected in reduction of interest accrued upon advances to 3% from 7%. In addition, gross non-performing assets have been low and moved in a narrow band of 0.7-1.2% since March 2016 (except for the two quarters after demonetisation). Furthermore, auction as a percentage of disbursements has also been low at around 2% since March 2016 (except for the quarters before and after demonetisation). The company will continue to maintain its improved business risk profile over the medium term.
 
The outlook revision also factors in the growing asset class diversity that the Manappuram group has achieved over the past few years. The share of gold loans reduced to 74% as of March 2018 from 88% as of March 2016. While the microfinance business is presently driving growth in the non-gold segments, vehicle finance business, now operational for close to four years, is likely to further accentuate growth. In addition, the proposed acquisition of Indian School Finance Company Ltd will add a new asset class in the product bouquet of the group. Housing finance business is expected to gain momentum over the medium term and corporate loan book will continue to grow at a moderate pace. As a result, continuous broad basing of product profile beginning 2015 has reduced the risk of monoline business and stabilised business risk profile.
 
The ratings will be upgraded if the group achieves further stability and profitability in each of the non-gold business segments, along with sustained growth. The key monitorable would be the share of contribution from each of the segments, not merely book size but also to earnings profile and in proportion to risks involved in the segment. The rating upgrade will also warrant the asset quality and earnings profile of the group continuing to be at present levels, or improve further.
 
The ratings continue to reflect the strong track record of promoters in financing against gold jewellery, which accounts for around 74% of overall loan portfolio. Capitalisation is adequate because of a consolidated networth of Rs 3,836 crore and healthy gearing of 3.3 times, as on March 31, 2018. Funding profile is also expected to remain stable. These strengths are partially offset by geographical concentration in revenue and challenges associated with the non-gold product segments.

Analytical Approach

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

Key Rating Drivers & Detailed Description
Strengths
* Strong track record of promoters
Key promoter, Mr V P Nandakumar, and his family have been in the gold-loan business for more than 60 years, during which they have 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 loan-to-value ratios are critical aspects in the assessment process. MAFIL has a strong brand value and reputation in South India (particularly Kerala and Tamil Nadu). Reputation and trust play a significant role in this financing segment as these give the customer an assurance of getting back their personal gold ornaments once the loan is repaid.
 
* Adequate capitalisation
Consolidated networth was Rs 3,836 crore and gearing 3.3 times, as on March 31, 2018. Continued large accretion to networth and moderate growth in the gold loan business has resulted in a healthy standalone capital adequacy ratio of around 27%. Lower asset-side risk (security of gold, which is liquid and is in the lender's possession) also supports capitalisation. Assets under management (AUM) in the gold loan segment are expected to grow moderately over the medium term. Also, other segments (affordable housing finance, and commercial vehicle finance) have a relatively small scale. CRISIL also understands that the group has capped capital allocation to the microfinance segment at 10% due to its unsecured nature of business and, therefore, will look for external investors at the segment level. Hence, consolidated gearing is not expected to exceed 5 times over the medium term, though this will remain a key rating monitorable. 
 
* Stable funding profile
Close to 50% of consolidated borrowing is from banks (19 of them in the public and private sectors) and financial institutions, with which the group has established relationship; this source is stable and cost-competitive. The proportion of funds raised against commercial paper by MAFIL has increased significantly in recent times and was at 27% of consolidated borrowing as on March 31, 2018. Funds are also raised from long-term capital market instruments, such as non-convertible debentures and subordinated debt. In addition, microfinance and commercial vehicle portfolios are eligible for securitisation, further widening the funding sources. Consolidated cost of borrowing (quarterly average) was moderately low at 8.7% during the fourth quarter of fiscal 2018. The increasing interest rate scenario will likely increase the interest cost to some extent over the medium term. 
 
* Strong profitability
Profitability at group level has remained strong, with return on managed assets (RoMA) of 4.1% during fiscal 2018. Profitability declined in fiscal 2018 due to losses incurred in the microfinance segment following delinquencies after demonetisation; and socio-political issues. The microfinance business has reported profits in the first quarter of fiscal 2019, with a RoMA of over 4.5% (on an annualised basis). In the gold loan segment, profitability continues to remain be robust. The vehicle finance segment also had a healthy margin, while the profitability in housing finance is expected to improve in fiscal 2019 with stabilisation of business model. Ability to limit operating cost will be critical for stability in profitability. Capacity to restrict both operational and credit costs in the non-gold segments, as they grow, will remain a key rating monitorable.
  
Weakness
* Geographical concentration in revenue
Operations have significant regional concentration compared with large asset-financing non-banking financial companies (NBFCs). South India accounted for about 60% of total AUM as on March 31, 2018, though this has reduced from 82% as on March 31, 2012. Moreover, there is susceptibility to risks related to revenue concentration in a single asset class (gold-loan financing), which accounts for more than 85% of income. Though the company has ventured into the vehicle finance, affordable housing finance, and microfinance segments, these account for only 26% of the total portfolio and around 15% of revenue. Revenue is likely to remain concentrated both geographically and asset class-wise over the medium term.
 
* Challenges associated with non-gold loan segments
Growth, asset quality, and profitability in the non-gold loan businesses are yet to stabilise. Collection efficiency in the microfinance and housing finance portfolios was affected during fiscal 2018. Asirvad's profitability will be significantly affected on account of increased credit cost during fiscal 2018. Similarly, the housing finance portfolio is not well-seasoned. Delinquencies have inched up in the recent past and are likely to increase as the portfolio seasons further. Additionally, the commercial vehicles portfolio is growing at a fast pace and is not yet well-seasoned.
 
Gold loan companies do run the risk of applicability of Kerala Money Lenders Act, 1958, for NBFCs in Kerala. The applicability of the Act is contingent upon the decision of the Supreme Court wherein the case lies at present. If applied, lending rates could be impacted apart from increasing operational expenditure due to the requirement to register each branch with local authorities in Kerala. Around 7% of the gold loan portfolio and 15% of the company's branches are in Kerala; which too will remain key rating monitorables.
Outlook: Positive

The outlook reflects sustained stability in the business model that MAFIL has achieved post-switching over to short term products in the gold finance segment. In addition, the outlook revision factors in the growing diversity in asset classes. CRISIL believes the company will also continue to benefit from its adequate capitalisation and strong earnings profile. The rating may be upgraded if the group achieves further stability and profitability in each of the non-gold business segments, along with sustained business growth. The outlook may be revised back to 'Stable' in case of a steep decline in interest collection or asset quality, profitability, or capitalisation within the gold loan segment. The outlook may also be revised to 'Stable' if there is no material improvement in the performance within 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 3,330 branches across India as on March 31, 2018. 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 group has diversified into other fund-based businesses such as microfinance, vehicle finance, loans against property, and affordable housing finance. It has also entered into the insurance broking business.
 
The overall AUM of Rs 15,765 crore as on March 31, 2018, includes gold loan (74%), microfinance (15%), commercial vehicle finance (4%), housing (2%), and others (4%). The gold loan portfolio is diversified across 28 states and union territories, whereas the microfinance, commercial vehicle, and housing portfolios are diversified across 20, 19, and 6 states, respectively.
 
For fiscal 2018, consolidated profit after tax (PAT) was Rs 671 crore on total income of Rs 3,476 crore, against a PAT of Rs 755 crore on total income of Rs 3,407 crore for fiscal 2017. For the first quarter of fiscal 2019, consolidated PAT was Rs 199 crore on total income of Rs 947 crore, against a PAT of Rs 167 crore on total income of Rs 856 crore during the corresponding quarter of the previous fiscal.

Key Financial Indicators - MFL - Consolidated
As on/ for the period ended March 31   2018 2017
Total managed assets # Rs crore 17,584 15,226
Total income Rs crore 3,476 3,407
Profit after tax Rs crore 671 755
Gross NPA @ % 0.7 2.0
Gearing # Times 3.3 3.3
Return on managed assets # % 4.1 5.4
#Including off balance sheet assets
@Standalone

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
ISIN Name of instrument Date of allotment Coupon rate (%) Maturity
date
Issue size (Rs crore) Rating assigned
with outlook
INE522D07560 Non Convertible Debentures# 28-Jan-14 Zero Coupon 4-Mar-15 45.6 CRISIL AA-/Positive
INE522D07578 Non Convertible Debentures# 28-Jan-14 12% 28-Jan-16 14.3 CRISIL AA-/Positive
INE522D07586 Non Convertible Debentures# 28-Jan-14 12% 28-Jan-16 7.4 CRISIL AA-/Positive
INE522D07594 Non Convertible Debentures# 28-Jan-14 Zero Coupon 28-Jan-16 28.9 CRISIL AA-/Positive
INE522D07602 Non Convertible Debentures# 28-Jan-14 12% 28-Jan-17 53.9 CRISIL AA-/Positive
INE522D07610 Non Convertible Debentures# 28-Jan-14 13% 28-Jan-17 9.6 CRISIL AA-/Positive
INE522D07628 Non Convertible Debentures# 28-Jan-14 Zero Coupon 28-Jan-17 21.2 CRISIL AA-/Positive
INE522D07636 Non Convertible Debentures 28-Jan-14 12% 28-Jan-19 0.5 CRISIL AA-/Positive
INE522D07644 Non Convertible Debentures 28-Jan-14 12% 28-Jan-19 0.9 CRISIL AA-/Positive
INE522D07651 Non Convertible Debentures 28-Jan-14 Zero Coupon 28-Jan-19 0.2 CRISIL AA-/Positive
INE522D07669 Non Convertible Debentures 28-Jan-14 Zero Coupon 28-Nov-19 17.5 CRISIL AA-/Positive
INE522D07792 Non Convertible Debentures# 18-Oct-14 Zero Coupon 22-Nov-15 49.2 CRISIL AA-/Positive
INE522D07842 Non Convertible Debentures# 18-Oct-14 11% 18-Oct-16 16.6 CRISIL AA-/Positive
INE522D07859 Non Convertible Debentures# 18-Oct-14 11% 18-Oct-16 3.9 CRISIL AA-/Positive
INE522D07800 Non Convertible Debentures# 18-Oct-14 Zero Coupon 18-Oct-16 9.6 CRISIL AA-/Positive
INE522D07867 Non Convertible Debentures# 18-Oct-14 12% 18-Oct-17 113.8 CRISIL AA-/Positive
INE522D07875 Non Convertible Debentures# 18-Oct-14 12% 18-Oct-17 32.8 CRISIL AA-/Positive
INE522D07818 Non Convertible Debentures# 18-Oct-14 Zero Coupon 18-Oct-17 34.1 CRISIL AA-/Positive
INE522D07883 Non Convertible Debentures 18-Oct-14 11% 18-Oct-19 2.2 CRISIL AA-/Positive
INE522D07891 Non Convertible Debentures 18-Oct-14 12% 18-Oct-19 1.1 CRISIL AA-/Positive
INE522D07826 Non Convertible Debentures 18-Oct-14 Zero Coupon 18-Oct-19 0.2 CRISIL AA-/Positive
INE522D07834 Non Convertible Debentures 18-Oct-14 Zero Coupon 18-Jan-21 15.1 CRISIL AA-/Positive
NA Non Convertible Debentures@ NA NA NA 21.4 CRISIL AA-/Positive
INE522D07974 Non Convertible Debentures 23-Aug-16 10% 22-Mar-19 75 CRISIL AA-/Positive
INE522D07982 Non Convertible Debentures 26-Aug-16 10% 26-Aug-19 50 CRISIL AA-/Positive
INE522D07990 Non Convertible Debentures 31-Aug-16 10% 20-Dec-18 200 CRISIL AA-/Positive
INE522D07AA6 Non Convertible Debentures 15-Sep-16 10% 15-Sep-19 200 CRISIL AA-/Positive
INE522D07AB4 Non Convertible Debentures 27-Sep-16 10% 20-Mar-19 100 CRISIL AA-/Positive
INE522D07AB4 Non Convertible Debentures 27-Sep-16 10% 20-Mar-19 50 CRISIL AA-/Positive
NA Non Convertible Debentures* NA NA NA 80.5 CRISIL AA-/Positive
INE522D07677 Non Convertible Debentures# NA NA 4-May-15 10 CRISIL AA-/Positive
NA Non Convertible Debentures* NA NA NA 238 CRISIL AA-/Positive
NA Non Convertible Debentures* NA NA NA 4 CRISIL AA-/Positive
NA Non Convertible Debentures* NA NA NA 700 CRISIL AA-/Positive
NA Non Convertible Debentures@ NA NA NA 100 CRISIL AA-/Positive
NA Non Convertible Debentures^ NA NA NA 200 CRISIL AA-/Positive
NA Non Convertible Debentures^ NA NA NA 199.5 CRISIL AA-/Positive
NA Non Convertible Debentures^ NA NA NA 50.5 CRISIL AA-/Positive
NA Term Loan# 23-Feb-15 9.35% 20-Nov-17 25 CRISIL AA-/Positive
NA Term Loan# 23-Feb-15 9.35% 28-Feb-18 25 CRISIL AA-/Positive
NA Term Loan@ NA NA NA 200 CRISIL AA-/Positive
NA Commercial Paper NA NA 7-365 days 3500 CRISIL A1+
*Rated but unutilised
#CRISIL is awaiting independent confirmation of redemption before withdrawing rating on the instruments
@Details awaited
^Yet to be issued
Annexure - Rating History for last 3 Years
  Current 2018 (History) 2017  2016  2015  Start of 2015
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  3500.00  CRISIL A1+  20-07-18  CRISIL A1+  08-12-17  CRISIL A1+    --    --  -- 
        06-07-18  CRISIL A1+               
        28-06-18  CRISIL A1+               
Non Convertible Debentures  LT  2757.50
15-08-18 
CRISIL AA-/Positive  20-07-18  CRISIL AA-/Stable  08-12-17  CRISIL AA-/Stable  02-12-16  CRISIL AA-/Stable  16-12-15  CRISIL A+/Stable  CRISIL A+/Stable 
        06-07-18  CRISIL AA-/Stable  25-10-17  CRISIL AA-/Stable  22-09-16  CRISIL AA-/Stable  23-02-15  CRISIL A+/Stable   
        28-06-18  CRISIL AA-/Stable  04-10-17  CRISIL AA-/Stable  09-09-16  CRISIL AA-/Stable       
                30-08-16  CRISIL AA-/Stable       
                19-08-16  CRISIL AA-/Stable       
                01-07-16  CRISIL AA-/Stable       
                18-02-16  CRISIL A+/Stable       
Short Term Debt  ST          25-10-17  CRISIL A1+  02-12-16  CRISIL A1+  16-12-15  CRISIL A1+  CRISIL A1+ 
            04-10-17  CRISIL A1+  22-09-16  CRISIL A1+  23-02-15  CRISIL A1+   
                09-09-16  CRISIL A1+       
                30-08-16  CRISIL A1+       
                19-08-16  CRISIL A1+       
                01-07-16  CRISIL A1+       
                18-02-16  CRISIL A1+       
Fund-based Bank Facilities  LT/ST  250.00  CRISIL AA-/Positive  20-07-18  CRISIL AA-/Stable  08-12-17  CRISIL AA-/Stable  02-12-16  CRISIL AA-/Stable  16-12-15  CRISIL A+/Stable  CRISIL A+/Stable 
        06-07-18  CRISIL AA-/Stable  25-10-17  CRISIL AA-/Stable  22-09-16  CRISIL AA-/Stable  23-02-15  CRISIL A+/Stable   
        28-06-18  CRISIL AA-/Stable  04-10-17  CRISIL AA-/Stable  09-09-16  CRISIL AA-/Stable       
                30-08-16  CRISIL AA-/Stable       
                19-08-16  CRISIL AA-/Stable       
                01-07-16  CRISIL AA-/Stable       
                18-02-16  CRISIL A+/Stable       
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Term Loan 250 CRISIL AA-/Positive Term Loan 250 CRISIL AA-/Stable
Total 250 -- Total 250 --
Links to related criteria
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating Criteria for Finance Companies
CRISILs Criteria for rating short term debt
Understanding CRISILs Ratings and Rating Scales

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