Manappuram Finance Ltd Q1 FY2023 Concall Summary

Key Takeaways

• Yield recovery is the quarter's story, not volume: Gold loan yield jumped to 19.4% in Q1 and 21.7% in July, driven by repricing and the runoff of low-yield teaser loans. Portfolio growth was a muted 1.5% QoQ because demand from lower-income segments remains weak.
• Asset quality improved sharply: Consolidated GNPA halved to 1.43% from 2.95% QoQ, with standalone provisions dropping to ₹8.8 crore. The microfinance book took a Stage 3 spike to 7.7% as restructured accounts matured, but management expects credit costs to halve for the full year for the MFI business.
• Microfinance is pivoting to secured lending: Asirvad is using the RBI's relaxed NIM cap and 25% non-MFI allowance to build a gold loan book (₹421 crore) and improve incremental NIM to ~15%. The core MFI portfolio is flat as pre-COVID stress clears.
• Profitability is now the explicit priority over growth: Management will not reintroduce uneconomical teaser schemes and wants gold loan yield to stay above 20–21%. Branch expansion is on hold pending RBI approval, and the 6.9% teaser portfolio is expected to run off by December.
• What to watch next quarter: Whether gold loan demand picks up with the September sowing season, the pace of MFI Stage 3 normalization, and whether RBI grants branch-opening permission after the inspection action points are closed.

Gold Loan Business: Yield Recovery vs. Volume Stagnation

• Yield trajectory: Gold loan yield improved from 18.8% in Q4 FY22 to 19.4% in Q1 and 21.7% in July, aided by repricing and reduced drag from the 6.9% teaser portfolio, which is running off through natural liquidation over its 100–150 day average life.
• Teaser runoff mechanics: The 6.9% teaser-rate portfolio, roughly 10% of the gold loan book, is reducing through natural liquidation rather than takeovers by other NBFCs. Management expects it to run off completely by December this year.
• Volume weakness: Portfolio grew only 1.5% QoQ because demand from lower-middle-class and small-ticket borrowers has not returned to pre-COVID levels. Some demand emerged from the school re-opening season, but overall spending power in lower segments remains constrained.
• Gold holding decline explained: Sequential decline in gold tonnage occurred because rising gold prices increase the absolute LTV amount per gram, so the same loan value requires less gold. Borrowers redeem based on cash flow and affordability, not interest rates.
• Auction impact on yield: Q4 FY22 yield was depressed to 18.8% partly due to auction losses and partly due to low-yield products. Q1 FY22 had larger auctions (₹1,550 crore) but yield was 25–26% at that time, so the proportional impact was smaller. Management did not provide the specific auction loss figure for the ₹618 crore March 2022 auction and said it would come back with details.
• Spread outlook: The increase in yield is outpacing the rise in cost of borrowing, so management expects spread improvement. Only 25–30 bps of additional borrowing cost increase is expected during the quarter.
• Customs duty hike: The government raised the customs duty on gold from 7.5% to 12.5% effective 1 July 2022. Management does not foresee a negative impact on gold prices or the gold loan business.

Nandakumar: "So I hope it will be settled around to 21% to 21.5%."

Microfinance: Clearing Pre-COVID Stress While Building a Secured Book

• Stage 3 spike mechanics: MFI Stage 3 jumped from 1.7% to 7.7% because resolution plans kept accounts standard last year, but as those restructured loans matured and borrowers had not paid for 3–4 months, they flipped to Stage 3 this quarter.
• Collection split: The post-COVID portfolio, which is 88% of the book, has ~99% collection efficiency. The pre-COVID portfolio, at 12%, has lower but improving collection. Collection efficiency on restructured accounts is ~33% and improving month-on-month toward 40%+.
• Pre-COVID book maturing: The March 2020 vintage book is maturing now with an average duration of 24 months. Resolution plans kept bureau records clean, but as loans mature and slip to NPA, customers are showing more interest to close loans so they can continue as standard borrowers.
• Gold loan pivot within Asirvad: Using the RBI's relaxed NIM cap and the allowance for up to 25% non-MFI portfolio, Asirvad has built a ₹421 crore secured gold loan book and opened 320 gold-loan-dedicated branches. No prior RBI approval was needed because Asirvad is not defined as a gold loan company and the 25% cap is not breached.
• NIM improvement: Incremental MFI NIM has increased to ~15% from 10% using the relaxed NIM cap regulation. Asirvad's cost of borrowing declined almost 30 bps QoQ because, with the cap removed, management negotiated with lenders to reduce borrowing costs, and surplus liquidity allowed repayment of high-cost borrowings.
• Branch reclassification: Asirvad now reports 1,062 dedicated MFI branches, down from 1,500+ previously, because gold loan branches are no longer included in the MFI branch count.
• Capital flexibility: Asirvad's capital adequacy is high at 19.8% with leverage at 2.8x. Management is open to raising capital from the market if the environment and values are good, and will ensure growth is not constrained.

Nandakumar: "...I expect, we are able to clear to the pre-COVID portfolio, which is not very significant now. So this will happen in the next two quarters, hopefully, then it will come back to model of around 5% ROA."

Other Businesses: Vehicle Finance Leads, Home Loans Turn Profitable

• Vehicle finance: AUM grew 68% YoY with 100% collection efficiency. GNPA improved from 6.7% to 4%.
• Home loans: The segment turned profitable with ₹5.2 crore PAT during the quarter. GNPA was stable at 5.9%. Incremental portfolio yield improved to ~16% from ~14%+ because of a focus on high-yielding, small-ticket loans, with average ticket size reduced from ₹10 lakh to ₹6.5 lakh.
• Home loan yield mix: Purchase of ready property yields ~14%, home construction ~16%, and LAP ~18%. The overall rated average is 16.09%. An analyst noted a discrepancy between the reported portfolio yield of 14% and management's claim of yield improvement; management said it would come back on that.
• Growth outlook: Commercial vehicle, MSME, and MFI segments are expected to achieve growth much more than 20%. Home loan average ticket size is expected to move back to around ₹10 lakh in another quarter on an incremental basis.

Asset Quality & Provisions: Clean-Up in Progress

• Consolidated GNPA: Halved to 1.43% from 2.95% QoQ, reflecting improved asset quality across businesses.
• Standalone provisions: Dropped to ₹8.8 crore from ₹23.6 crore in Q4 FY22.
• MFI credit cost trajectory: Substantial reduction expected in coming quarters, with some improvement from September and much better performance in H2. Management expects 1–1.5% ROA for the MFI business this year.
• Stage 3 outlook: Not much addition expected beyond current levels. Stage 1 stands at 87%, with Stage 2 and 3 combined at 13%. ₹462 crore of provisions are held against Stage 2 and 3 assets.
• Full-year provision guidance: Total provisions expected to be half of last year, roughly ₹250 crore vs. ₹490 crore in FY22. Q1 already took ₹120 crore in MFI provisions. A possible increase is expected in Q2, then normalization in H2. No significant provisions are expected in other businesses due to stability.

Regulatory & Structural Developments

• RBI MFI regulation changes: The removal of the 10% spread cap and the allowance for up to 25% non-MFI portfolio are enabling Asirvad's pivot into secured gold loans and improving NIM. New RBI guidelines on household income calculation for MFI have been implemented: software changed, field staff trained, household income captured, and EMI capped at 50%. This applies only to the incremental portfolio, with no impact on outstanding loans.
• Branch opening permission: RBI conducted an inspection and there are action points to be completed during this quarter. Management hopes to receive branch opening permission once these are completed.
• Teaser loan stance: Management will prioritize yield stability above 20–21% and will not reintroduce uneconomical teaser schemes that hurt profitability.

Nandakumar: "...we should always have an eye on the profitability. So with an eye on profitability, we want to give importance to the yield now. So we want to see a stable yield in the sense that it will not go down below 20% to 21%."

Guidance & Commitments

Key Metrics