Manappuram Finance slumps after RBI bars subsidiary

On Thursday, the RBI announced that it has prohibited four non-banking financial companies (NBFCs), including Asirvad Micro Finance, from sanctioning or disbursing loans, effective from October 21, 2024.

The action was taken due to concerns about the NBFCs' pricing policies, which were found to be excessive and not in adherence with RBI regulations. These concerns included excessive Weighted Average Lending Rates (WALR) and interest spreads, non-adherence to assessment of household income and repayment obligations, deviations in Income Recognition & Asset Classification (IR&AC) norms, and non-compliance with mandated disclosure requirements.

In addition to the business restrictions, Asirvad Micro Finance, along with Arohan Financial Services, DMI Finance, and Navi Finserv were also found to be in non-adherence with regulatory guidelines on gold loan portfolios, outsourcing of core financial services, and other areas.

The business restrictions will be reviewed upon receipt of confirmation from the NBFCs that they have taken suitable remedial action to adhere to the regulatory guidelines.

In response to the feedback received from RBI, Manappuram Finance has taken immediate action to address the identified improvement areas. The matter has been brought to the attention of the board, which has convened an urgent meeting to discuss and implement corrective measures. A detailed plan outlining the corrective actions will be submitted to the RBI within the stipulated timelines.

Two foreign brokerage firms have downgraded Manappuram Finance following the RBI action. The first broker downgraded Manappuram Finance stock to Equal Weight (EW) and reduced the target price to Rs 170. The firm believes that the RBI's prohibition on new business activities by Asirvad Micro Finance will significantly impact the company's profits in both the short and long term. As a result, the broker has cut consolidated earnings forecasts by 20% for FY25 and 30% for FY26-27. While the standalone valuation remains attractive, the broker added that it may take some time for investor interest to rebound.

The second broker downgraded Manappuram Finance stock to 'Hold', and lowered its target price to Rs 167. The broker noted that the RBI's ban on loan disbursements from Asirvad, which represents 27% of consolidated assets under management (AUM), poses significant challenges for the company's growth. As a result, the broker has revised its earnings per share (EPS) estimates downwards by 11-19% for FY25-27. Despite the potential for share price pressure, the broker believes that the downside is expected to be limited, given the current valuation of 0.9x FY26E book value.

Kerala-based Manappuram Finance is a non-banking finance company (NBFC), which provides a wide range of fund based and fee based services including gold loans, money exchange facilities, etc.

The company's board will consider Q2 results on 5 November 2024. Its net profit rose 11.84% to Rs 554.62 crore on 22.11% increase in total income to Rs 2,511.93 crore in Q1 June 2024 over Q1 June 2023.

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