Gold loan lender Manappuram Finance is facing rating downgrades from a number of brokerages as the Reserve Bank of India’s (RBI) latest restrictions on its subsidiary, Asirvad Microfinance, are expected to lead to a 20-30% decline in earnings, along with increased needs for provisioning and capital infusion.
On Thursday, the RBI imposed business restrictions on four NBFCs — Asirvad Microfinance, Arohan Financial Services, DMI Finance and Navi Finserv. These NBFCs have been directed to cease and desist from sanctioning and disbursing loans, effective October 21, for being involved in unfair and usurious practices, violating regulatory guidelines on household income assessment and repayment obligations for microfinance loans.
Shares of Manappuram Finance plummeted 18% intra-day, their sharpest decline since March 2020. The stock closed ₹154.30, 13% lower than the previous day.
Brokerage firm CLSA maintained its “outperform” rating on Manappuram, but revised the price target from ₹240 to ₹200. Morgan Stanley downgraded the stock to ‘equal weight’, lowering its price target to ₹170.
“We expect a direct impact on Manappuram’s financials as Asirvad accounts for over 25% of the parent’s total portfolio,” said Shweta Daptardar, vice president – lead analyst for diversified financials at Elara Capital.
She reduced the company’s earnings per share (EPS) estimate by 20% citing margin, growth and elevated provisioning pressure. “Growth is off the table, as the company won’t be able to disburse 25% of its portfolio for at least the next four quarters.”
An analyst following the company said microfinance loans typically have short maturities of 12-15 months. “If incremental disbursements are halted, Asirvad’s portfolio will start running down,” the analyst said, adding that depletion of a 25% portfolio for 6-8 months could significantly erode Manappuram’s overall portfolio.
Experts also pointed out that the delay in fresh loan disbursements will likely lead to an increase in payment defaults in the microfinance segment, which is already grappling with high delinquency rates. “Microfinance borrowers often take fresh loans to repay existing ones. Without new loans, delinquencies will rise, necessitating higher provisioning,” the analyst added.
Higher provisioning at Asirvad is expected to weigh on Manappuram’s profitability, prompting brokerages to lower their earnings and growth forecasts for the gold loan NBFC.
Additionally, the RBI’s action has indefinitely delayed Manappuram’s plans to list Asirvad Microfinance. The NBFC had filed draft papers for a ₹1,500-crore IPO in October 2023, which Sebi put on hold in January due to certain observations. Although, the IPO received the regulatory nod in April, listing plans are now in jeopardy.
“Their IPO ambitions are essentially dead, at least for the foreseeable future,” said another analyst tracking the company. “NBFCs under RBI scrutiny usually take 8 months to a year to comply with norms and get regulatory pressure off their backs,” the analyst added.
Elara Capital’s Daptardar noted that Asirvad, being a highly-leveraged entity, will face increased pressure. With the IPO on hold for the next few months, Manappuram will need to inject more capital into its subsidiary till the issue gets resolved.