Manappuram Finance Shares Gain As BofA Initiates Coverage With A ‘Buy’

Shares of Manappuram Finance Ltd. jumped the most in nearly four months after BofA Global Research initiated coverage on the stock with a ‘buy’ rating.

The non-bank lender's existing valuation “grossly undervalues its gold loans business” and a rerating would be on the cards once its microfinance institution credit costs improve, BofA said in a note. "We look past the near-term stress in its MFI (micro finance) share, which is 22% of its portfolio," it said, adding that the business is well-placed to deliver 20% earnings-per-share growth and a 24% return on equity through FY24.

BofA expects the impact of the second Covid-19 wave to wear down by second quarter of FY22 and gold loans to resume their “steady state growth of 12-15% per annum” as branches reopen. “A renewed focus on adding customers, the latest loan-to-value ratio at 63% and scope for a sustained increase in ticket size allows for a positive surprise on asset growth."

In the long-term, BofA said, Manappuram’s microlending arm Asirvad can deliver a cross-cycle return on equity in “high-teens”, with strict caps on state and district exposures acting as prudent risk mitigation strategy.

It listed hikes in gold price, lower-than-expected credit costs and value-unlocking from its potential Asirvad spin-off as upside catalysts, while a significant decline in gold price, a third Covid wave and asset quality cycles in Asirvad are downside risks.

BofA has a target price of Rs 225 on the stock. Shares of Manappuram Finance gained as much as 5.19%, the most since March 5 this year, to Rs 171.2 apiece on Wednesday.

Of the 16 analysts tracking the stock, 13 have a ‘buy’ rating, three suggest a ‘hold’ and none recommend a ‘sell’, according to Bloomberg data. The average of 12-month consensus price targets implies an upside of 24.2%.

The stock has gained 2.35% so far this year compared with the S&P BSE Sensex’s 10.16% advance.