CLSA Downgrades Manappuram Finance to Hold, Citing Earnings Miss and Higher Credit Costs

Manappuram Finance Ltd. shares are under scrutiny following a downgrade by brokerage firm CLSA, which moved the stock to "hold" from "outperform" and reduced its price target by 6.5% to ₹290 per share. This action follows the company's September quarter earnings, which showed a standalone profit after tax (PAT) missing estimates by 12%, largely attributed to increased credit costs.

CLSA highlighted that the company's key subsidiary, Asirvad MFI, reported another quarterly loss due to shrinking pre-provision operating profit (PPOP) and elevated credit costs. In the gold loan segment, Manappuram Finance continues its strategy of reducing yields to stimulate growth, benefiting from operating leverage. The gold loan book grew 9% sequentially to ₹31,500 crore, but reported yields moderated by 80 basis points to 19.7%. This growth was primarily driven by higher gold prices, while tonnage and loan-to-value (LTV) ratios remained unchanged.

Jefferies maintained a "hold" rating with a price target of ₹285 per share. They observed that while asset under management (AUM) growth was in line with expectations, net interest margins (NIMs) declined sequentially. Manappuram General Finance and Leasing Ltd. also cut gold loan yields to boost growth. Although asset quality in the MFI business is stabilizing, auto gross non-performing assets (GNPA) saw a sharp increase year-on-year. The brokerage noted that lower NIMs and the unwinding of non-gold loans are expected to dampen earnings, despite reasonable valuations. The re-rating potential for Manappuram Finance hinges on the visibility of its new CEO, Deepak Reddy, turning around the franchise, with key priorities to be outlined in the fourth quarter.

Impact This news directly impacts investor sentiment towards Manappuram Finance Ltd. A downgrade by prominent brokerages can lead to selling pressure, potentially lowering the stock price. The concerns raised about credit costs, subsidiary performance, and declining margins highlight operational challenges that could affect future profitability. The stock's performance will likely be influenced by how effectively the new CEO addresses these issues and the overall economic environment for non-banking financial companies. Impact Rating: 7/10

Terms Explained: Profit After Tax (PAT): The profit a company has left after all expenses, taxes, and interest have been paid. Pre-Provision Operating Profit (PPOP): A measure of a bank or financial institution's profitability before accounting for provisions for loan losses and taxes. Basis Points: A unit of measure used in finance to describe the percentage change in a financial instrument. One basis point is equal to 0.01% (1/100th of a percent). Asset Under Management (AUM): The total market value of all the financial assets that a financial institution manages on behalf of its clients. Net Interest Margin (NIM): The difference between the interest income generated by a financial institution and the amount of interest it pays out to its lenders (as a percentage of its interest-earning assets). Gross Non-Performing Assets (GNPA): The value of loans on which the borrower has defaulted for a specified period (usually 90 days). Loan-to-Value (LTV): The ratio of a loan amount to the appraised value of the asset being financed.