CRISIL has assigned its 'CRISIL AA/Stable' rating to Rs.200 crore non-convertible debenture of Manappuram Finance Limited (MAFIL; part of the Manappuram group). The ratings on outstanding debt instruments and bank facilities has been reaffirmed at 'CRISIL AA/Stable/CRISIL A1+'.
 
The rating factors in MAFIL's healthy asset quality, steady growth in the gold loan business and growing diversity in other asset classes, and strong profitability and return on assets. MAFIL has maintained healthy asset quality over the years, as reflected in quarter-end gross non-performing assets (GNPAs) for the gold loan portfolio ranging between 0.5% and 1.2% over the last eight quarters. The GNPAs were around 0.77% at the consolidated level as of December 31, 2019. The healthy asset quality in the gold loan portfolio is backed by strong collection efficiency. The analysis of the monthly disbursement static pool shows that the cumulative 3-month collection efficiency (including prepayment) increased to an average of 85% from 70% two years ago. The proportion of auction collection reduced considerably to 0.3% during fiscal 2019 from 2.8% during fiscal 2017 due to lower delinquencies. The revised business model of shorter tenure gold loans of 3 months has also helped de-risk the portfolio from sharp movements in gold prices over a longer term. MAFIL has maintained steady asset quality even at the consolidated level while diversifying its business into other asset classes.
 
The non-gold loan portfolio (microfinance, vehicle finance, and housing finance) accounted for around 33% of the total portfolio as on December 31, 2019, against 19% as on March 31, 2017. Furthermore, all these businesses reported a profit for fiscal 2019 and the third quarter of December 2019, adding to the consolidated accretion of the group. The non-gold segments accounted for 15% of the reported profit in fiscal 2019 compared with 4% in fiscal 2017. The same stood at 22% in the third quarter of December 2019. The overall profitability has remained strong with consolidated return on managed assets (RoMA) of 4.7% during fiscal 2019 and 6.2% (annualised) for the third quarter of fiscal 2020.
 
The rating also factors in the steady growth in the gold loan business and growing diversity in other asset classes. MAFIL's gold loan business (67% of assets under management [AUM]) grew at a steady rate of 8-10% over the past 2 years which is expected to be sustained over the medium term. The shorter tenure gold loans of 3 months accounted for 85% of the portfolio as on December 31, 2019. The portfolio is characterized by increased customer base along with retention of old customers. The customer base has increased by 8.3% over the past two years while the re-pledged gold loan share increased to 78% in fiscal 2019 from 60% in fiscal 2017.
 
MAFIL's financial risk profile remains strong and it has displayed ability to raise funds through diversified sources post the liquidity challenges that non-banking financial companies (NBFCs) have faced since September 2018. Due to its legacy and highly secured asset class, MAFIL was able to roll over existing bank lines/commercial paper and continue to raise fresh funds from diversified sources during this period. During quarter ended December 2019, the company had raised Rs 800 crore through NCD private placements. The company has raised overall funds worth Rs 1015 crore through NCD/overseas bond issuances/ during Q2 and Q3 fiscal 2020
 
Within the non-gold finance portfolio, the microfinance business, with a portfolio of Rs 5,022 crore as on December 31, 2019, has been scaling up at a healthy pace. The vehicle finance segment, with an AUM of Rs 1,397 crore as on Dec 31, 2019, has been a key growth driver. The housing finance business, with a portfolio of Rs 601 crore as on December 31, 2019, achieved break-even in fiscal 2019 and is expected to increase the pace of growth in the coming fiscals. The continuous broad basing of non-gold asset classes beginning 2015 has reduced the risk of monoline business and associated growth challenges. The company is also expected to focus on increasing the share of non-gold secured asset classes over the medium term.
 
The ratings continue to reflect the company's established market position in the gold finance business which accounts for around 67% of the loan portfolio, and sound capitalisation, reflected in consolidated networth of Rs 5,413 crore and low gearing of 3.7 times as on December 31, 2019. Profitability remains strong driven by high gross spreads and low credit cost, while the funding profile is also expected to remain stable. These strengths are partially offset by high operating cost in the gold and microfinance businesses, geographical concentration of operations and the associated risks, and potential challenges associated with the non-gold product segments.

For arriving at the ratings, CRISIL 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.

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 loan-to-value ratios are critical aspects in the assessment process. The company 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. After shifting towards shorter tenure gold loans of 3 months since 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. The company has also seen an increase in the re-pledging of gold by existing customers, indicating higher customer retention. Delinquencies have also reduced leading to fewer auctions. 

* Sound capitalisation
The consolidated networth was Rs 5,413 crore and gearing was 3.7 times as on December 31, 2019. Large accretion to networth and moderation in gold loan growth in the past two fiscals resulted in a healthy standalone capital adequacy ratio of 23.4% as on December 31, 2019. 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 over the medium term. Also, other segments (microfinance, housing finance, and vehicle finance) have a relatively small scale. CRISIL understands that the group intends to cap its 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. Therefore, despite continuation of rapid growth in the microfinance segment, the consolidated gearing is not expected to exceed 5 times over the medium term, though this will remain a key rating monitorable.
 
* Strong profitability driven by high gross spreads and low credit cost
Profitability has remained strong with a consolidated RoMA of 4.7% during fiscal 2019 and 5.3% (annualised) for the third quarter of fiscal 2020. The profitability was supported by the high profit generated by the gold loan and MFI businesses. The gold loan segment reported profit of Rs 790 crore in fiscal 2019, up from Rs 700 crore in fiscal 2018. The profits were Rs 890.5 crore for nine months ended December 2019. The profitability has been sustained due to reduction in auction losses and increased focus on collection. The microfinance segment reported a profit of Rs 133 crore during fiscal 2019 against a loss of Rs 10 crore in fiscal 2018. The home finance segment, in its fourth year of operations, achieved breakeven in fiscal 2019 with a profit of Rs 3 crore. For nine months ended December 2019, the gold loan segment had a profit of Rs 890.5 crore, the microfinance segment Rs 175 crore, and the housing finance segment Rs 10.3 crore.
 
The consolidated yield increased to 23.4% in fiscal 2019 from 21.7% in fiscal 2018 aided by the microfinance and home loan portfolio. The yield was at 16.1% for the nine months period ended December 2019. Operating cost reduced due to the benefits of operating leverage in fiscal 2019 with a year-on-year portfolio growth of 23% in fiscal 2019 as against 15% a year earlier. The portfolio grew at 48% for nine month ended December 2019. With steady improvement in GNPA, the credit cost declined to 0.2% in fiscal 2019 from 1.4% a year earlier with most of the demonetisation delinquencies provided for in the earlier fiscals. However, the incremental borrowing cost increased slightly post the liquidity challenges which NBFCs have faced since September 2018. Ability to maintain yields and limit operating cost will be critical for stability in profitability. Ability to restrict both operating and credit costs in the non-gold finance segments, as they grow, will remain a key rating monitorable.
 
* Stable funding profile
As on December 31, 2019, around 67% of the consolidated borrowing (including off balance sheet funding through securitisation) was from 32 banks (public and private) and financial institutions, with which the company has established relationships. The funds raised through CP stood at 20% of consolidated borrowing as on December 31, 2019. Investors (particularly mutual funds) chose to be cautious in terms of roll-overs and fresh investments post the sectoral liquidity challenges since September 2018. However, because of its legacy and highly secured asset class, MAFIL was able to roll over existing bank lines/commercial paper and continue to raise fresh funds from diversified sources during this period. The company raised around Rs 2,700 crore through term loans/cash credit/working capital demand loans, Rs 400 crore through public issue of NCDs and Rs 600 crore from commercial paper between September 2018 and July 2019. During quarter ended December 2019, the company had raised Rs 800 crore through NCD private placements. The company has raised overall funds worth Rs 1015 crore through NCD/overseas bond issuances/ during Q2 and Q3 fiscal 2020.The standalone cost of borrowing (yearly average) was 8.9% during nine months ended December 2019 (8.8% during fiscal 2019). The consolidated cost of borrowing (yearly average) increased to 9.9% during nine months ended December 2019 from 9.5% in fiscal 2019. This is because the incremental cost of borrowings saw a marginal increase on account of the market conditions post September 2018.

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 4,380 branches, 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 4.6 crore per branch during nine months ended December 2019, it has increased from Rs 3.8 crore per branch in fiscal 2019. The company is also taking steps to shift customers towards online gold loans to reduce the staff cost at branches. The online gold loan proportion increased to 39% of the gold loan AUM in fiscal 2019 from 12% in fiscal 2017; 44% as of December 31, 2019.
 
On a standalone basis, the operating cost has reduced to 6.3% during nine months ended December 2019 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. As a result, the consolidated operating cost reduced to 5.9% during nine months ended December 2019 from 7.0% in fiscal 2019. In the microfinance business, the AUM per branch, though low at Rs 4 crore as on March 31, 2019, 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 with large asset-financing NBFCs. South India accounted for about 58% of total AUM as on December 31, 2019, though this has reduced from 65% as on March 31, 2017. Moreover, there is susceptibility to regulatory risks related to revenue concentration in a single asset class (gold-loan financing), which accounts for 81% of revenue. Though the company has ventured into the vehicle finance, affordable housing finance, and microfinance segments, these accounted for only 33% of the total portfolio and around 26% of revenue as on December 31, 2019. In view of the large size of the gold loan book (66% of the total portfolio) compared with other segments, and the predominant presence of the gold loan business 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, 2019. While the company has managed to grow these businesses and increase the segmental share over the last two years, potential challenges linked to seasoning of the loan book and asset quality remain. The profitability of the microfinance segment was significantly affected by increased credit cost during fiscal 2018 in the aftermath of demonetisation. Also, the housing finance portfolio is not well seasoned. A portion of the vehicle finance portfolio has witnessed full seasoning cycle and has seen some stability. However, given that the vehicle finance segment has entered new asset classes such as two-wheeler finance, asset quality as the portfolio scales up will remain a key monitorable. The collection efficiency in the microfinance and housing finance portfolios corrected in fiscal 2019. Nevertheless, managing the asset quality and credit cost over the long run will be critical.
 
Gold loan companies run the risk of applicability of Kerala Money Lenders Act, 1958, for NBFCs in Kerala. The applicability of the Act is contingent on the decision of the Supreme Court wherein the case lies at present. If applied, lending rates could be impacted, and operating expenditure will increase due to the requirement to register each branch with local authorities in Kerala. As about 7% of the gold loan portfolio and 15% of the company's branches are in Kerala, this remains a key rating monitorable.

Liquidity is strong, reflected in an inherently well-matched ALM profile. MAFIL did not witness any substantial impact on its ability to raise resources during the last twelve months. Disbursements in the third and fourth quarters of fiscal 2019 (that is, during the period when NBFCs faced challenges) were higher than that in the corresponding period of the previous fiscal. The standalone ALM profile is well matched with no negative mismatches across all buckets as on December 31, 2019. CPs were at Rs 2475 crore (around 24% of standalone borrowings) as on December 31, 2019. The CPs are generally staggered such that not more than Rs 1,500 crore is due for repayment in a particular month. Additionally, about 20% of the portfolio does not get repledged and these collections will also aid liquidity.
 
On standalone basis, it has long term debt repayments of Rs 307 crore and commercial paper repayments of Rs 2350 crore from March 15, 2020, to June 30, 2020. Against the same, the collection is about Rs 14640 crore during the same period; of which about 80% gets repledged. Additionally, the company has cash and bank balances of Rs 1610 crore and unutilized bank lines of Rs 1688 crore as on February 28, 2020. For the period of nine months ended December 2019, 12 month average monthly disbursement was around Rs 12013 crore and collection was around Rs 11689 crore during this period.

CRISIL 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
* Diversification into non-gold secured asset classes and increase in their AUM share to over 40% without impairing asset quality
* Demonstrated ability to profitably scale up the housing and vehicle finance businesses significantly on standalone basis while maintaining asset quality
 
Downward factors
* Increase in consolidated gearing to over 5 times
* Steep decline in interest collection in the gold loan business or deterioration of asset quality or profitability in the non-gold loan segments.

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 4,380 branches across India as on March 31, 2019. 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 24,100 crore as on December 31, 2019, includes gold loan (67%), microfinance (21%), commercial vehicle finance (6%), housing (3%), and lending to other NBFCs (4%).The gold loan portfolio is diversified across 28 states and Union Territories, while the microfinance, commercial vehicle, and housing portfolios are diversified across 23, 22, and 9 states, respectively.
 
For fiscal 2019, consolidated profit after tax (PAT) was Rs 927 crore on total income of Rs 4,179 crore, against a PAT of Rs 676 crore on total income of Rs 3,423 crore for fiscal 2018. For nine months ended December 2019, PAT was Rs 664.3 crore on total income of Rs 3,031.4 crore.

Any other information: Not applicable