Friday, April 29, 2011

Manappuram - What Results Reveal and the New Strategies Ahead

Surviving the headwinds facing the NBFC sector, and in line with the official guidance, Manappuram Group’s flagship and listed arm, Manappuram Finance (BSE: 531213, NSE: MANAPPURAM) has recorded an impressive performance in the fourth quarter, that successfully ends a remarkable year for the company. It was a year in which it stormed past the Rs. 1000 crore revenue mark, and got elevated as an A-Group scrip in BSE. Leveraging their expertise in lowering operational costs, Manappuram Finance has escaped unhurt from the impact of recent regulatory changes affecting gold loans. Going forward, the company is opening up several supplementary revenue streams in a unique fashion, without an all-out diversification from gold loans. The Group’s new ventures, the healthcare wing MAcare, and its jewellery retailing wing are taking larger-than-life steps during the coming quarters. Before taking the metro markets head-on, Manappuram is setting up Kerala’s largest and most advanced diagnostic centre at Kochi, and the state’s largest jewellery showroom in Thrissur. Breaking free from conventional business houses in these sectors, Manappuram is soon tying up with international PE funds, for the national foray. Seasonal Magazine spends a day with Chairman VP Nandakumar to find out what makes Manappuram Finance survive the headwinds, and how the group plans to leverage these strategies in their new ventures. On to the interview with Nandakumar:

The results are just in. Are you satisfied with the performance?
Yes, we could keep our guidance, despite some headwinds that started affecting the sector during this quarter. Whichever way you analyze the results, it speaks of outstanding growth. Both quarterly revenue and profits are growing on a sequential as well as year-on-year basis. Annually, while income has gone up by 147%, net profit has gone up by 136%. The Board has recommended for both bonus and dividend.

After this impressive quarterly and annual performance, focus is likely to be back on the impact of the missing priority sector status. What would be the impact and how is Manappuram tackling the issue, going forward? 

There is no doubt that the non-availability of priority sector loans will have an impact on all organized gold loan companies. But if you look at our just announced results, you can see that we have successfully contained the impact. Our primary tool has been aggressive cost-cutting, and even before this regulation came, we were quite good at systematically reducing our non-interest operating expenses, quarter-to-quarter. That culture will continue, but going forward, we will also focus on opening supplementary revenue streams to comfortably offset the impact.

What about the impact from the higher provisioning requirement?
That too has a direct impact, and if it were not there, we could have put up an even more impressive performance on the net profit front. Here also, cost-cutting is our primary tool to contain the impact, but here the advantage is that the impact has a diminishing nature, and you won’t feel the impact beyond a couple more quarters.

You recently had a postal ballot for the members that gave out the impression that Manappuram Finance is diversifying into many new fields. What is the actual picture? 

No, Manappuram Finance won’t diversify and will remain an exclusive gold loan company. This is a great line of business for all stakeholders including our customers, investors, and employees, and even more importantly, gold loans has been our core competence for more than half a century now. But as I told you earlier, we were exploring different supplementary streams of revenue to more than offset the impact of missing priority-sector loans, higher provisioning etc. That requires not an all-out diversification, but careful and considered utilization of several of our resources that weren’t tapped until now. However, when we went for the postal ballot seeking amendments to the relevant articles and clauses, we thought that for Board’s operational convenience, we wouldn’t limit ourselves and sought full approval for diversification into various fields like securities, travel services etc.

We are not sure that we understood you properly. Can you provide some examples of these unutilized resources? 

Well, there are many. To give you quick examples, consider our vast point of presence, across India. We have 2520 branches now, across 21 states. Or consider our vast customer database.

And how are you going to leverage these resources to generate supplementary revenue streams?
We won’t be doing it directly, but tying up with other financial service providers who can deliver their services using our resources. To illustrate this model, one of the first tie-ups we have finalized for the securities business, is with ICICI Securities. They have this huge core competence in the brokerage business, and they can leverage our branches and our database, for mutual benefit.

Agreed, but won’t such models be limited to one-off or small revenue models only?
Not at all. In fact, all such arrangements would have upfront fees as well as fees on an ongoing or transaction basis. Maybe this isn’t going to be huge like gold loans, but we have realistically chalked out substantial revenues from these new businesses. We are also finalising another big deal with a travel major to offer full travel-related services using our branches. This will also tap synergies possible with our existing foreign exchange and money transfer businesses. And the beauty is that, even with these diversifications, we are not losing our focus or sacrificing our core competence in gold loans, as other service providers will be doing these businesses using our resources.

Coming to Manappuram Group’s diversifications - outside of your listed company, Manappuram Finance - where do things stand now? 

As you might be aware, Manappuram Group has already diversified into jewellery retail and healthcare. In jewellery, we started off with our first brand, Manappuram Jewellery, which now has around a dozen shops in Kerala and Bangalore. These shops follow a small or medium format in gold retailing. Now, we are all set to launch our second retail jewellery brand, which will follow the large or mega format. In fact, our first showroom under this new brand will be the largest jewellery showroom in Kerala, at 20,000 sq ft. This is planned for Thrissur, and we have already tied up a prominent space in the city for it. Two more large format showrooms will follow in quick succession, one in Bangalore and the other in Chennai. A new distinct brand identity is being finalized for these showrooms, and it will reflect the aspirations of the upmarket jewellery buyers.

But one thing that strikes an observer is that gold retailing is not your core competence. In one way it can even be argued that you are following what more experienced players in this sector are doing like Joyalukkas, Josco, or Malabar Gold. If we are missing something here, can you mention what it is, your USP in this line? 

We may be new to retailing, but gold is definitely our core competence. There are very few business houses in India, who understands this precious metal’s dynamics as much as us. And believe me, a lot of gold retailing has most to do with gold’s dynamics, and not designs or other retail-specific aspects. That is why we are boldly opening the largest gold showroom in Kerala. But at the same time, we aren’t taking any chances and have entrusted the best designers who can produce unique jewellery worth design-patents. But our USPs in this line are going to be something else altogether. It is about unchallenged purity standards and the decision to sell only BIS Hallmarked Gold. And it is about how we intend to grow this business exponentially. Manappuram is all set to be the first jewellery group in the country to have attracted overseas PE funds.

That is quite surprising. In one way, we can say that you are using your core competence in raising international private equity… 

Absolutely. But it is not about competence in raising money, but competence in creating a fully transparent business with high return on equity. Big fund houses trust us absolutely on that front. They have experienced the kind of returns we have provided in the past, with total transparency.

But apart from your immense fund requirement, are you inducting them as strategic investors?
Not really, as they are pure PE funds. But apart from the fund requirement, there is another reason that we chose to go with such high-profile PE funds. With such players onboard, we and our entire team would be inspired to meet showroom targets, revenue milestones, and ultimately the IPO milestone, all in time. It would be good for us, it would be good for all the stakeholders.  

What about your healthcare foray? Where does it stand now?
The healthcare division has already been branded as MACare, and our flagship diagnostic centre is coming up at Kaloor, Kochi. Following our larger-than-life philosophy in all ventures, this 20,000 sq ft facility will be Kerala’s largest and most modern diagnostic facility with 164-slice CT, 3-Tesla MRI, and digital X-rays. This single centre is being set up on an investment of Rs. 40 crore. Our second facility is coming up at Vyttila, Kochi, and soon to follow is our dental clinics.

But do you think Kochi justifies such a large-investment project in diagnostics?
What you told is correct, Kochi is not really up to the mark as a market for such a big centre, and we have planned all our similar centres at the country’s metro cities. But one advantage with Kochi and Kerala is that, none of the super-speciality hospitals here have comparable equipment. So patients will come to us, as the accuracy, speed, and convenience offered by our diagnostic equipments will be far superior. For example, the time spent by a patient in our 3-Tesla MRI will be much shorter, alleviating the discomfort associated with such procedures.

In gold retailing you pointed out the USP of PE funds. Here, in MAcare, what would be the USP, may be attracting equipment manufacturers as equity participants? 

No, we are aware of that model, but we won’t resort to it as we want better deals from the equipment manufacturers like GE, Siemens, Philips, or Wipro, as we have many centres. Also, we don’t have any problem in attracting PE funds for this project also, and discussions with funds are now at an advanced stage.

What would be the time-frame you are looking at for taking these new businesses public?
We are planning for their IPOs by 2014 or nearer. As they are professionally and transparently managed from day one, we don’t expect any hitches to that.

Coming back to the listed Manappuram Finance, do you have plans to pursue a banking license in the near future? 

Not really, even though we may be eligible for it. The main reason is that, at Manappuram Finance, we don’t believe in losing focus on our core competence of gold loans. But having said that, I think that the new regulatory framework being planned by RBI, especially by the Usha Thorat Committee, is that the bigger NBFCs should be under a narrower, tighter framework. At our present size we don’t qualify for such stricter regulation, but eventually if things come to that stage for us, we will take a fresh call on the license. In the present circumstances, we believe that a few larger sized NBFCs may be walking into a tighter regime.

What would be Manappuram Finance’s profit guidance for FY’12? What would be the kind of branch expansion during the year? 

We are working on doubling our bottomline to around Rs. 600 crore, from this year’s Rs. 285 crore. We will go slower than last year on branches, with an estimated 500 new branches in FY’12, as we have more room for significantly more utilization at many of our existing 2250 branches.

How do you see the business environment for NBFCs and the economy in general?
Liquidity has certainly improved, and we could recently raise substantial debt at attractive rates. I think that after new governments arrive in various states, and the scam-related noises subside, Indian economy is in for a high growth curve, despite the inflation that may remain high.

To what do you attribute Manappuram Finance’s success till now? And how will the new businesses benefit from these success secrets? 

Our buzzwords are transparency, equitable growth, and cost-cutting. Everything is accounted for, every kind of tax is paid, and there are no under-the-table dealings with any stakeholders, be it big investors, employees, or associates. Secondly, Manappuram is all about equitable growth. We want all our stakeholders to benefit equally. The just announced 1:1 bonus recommendation is our third 1:1 bonus within the last five years. We have paid reasonable dividends to our investors for the past six years. Our employees enjoy one of the best salary structures among all NBFCs, as well as additional benefits like ESOPs. And above all, our entire 13,000 strong team strives day in and day out to deliver the best deal to our customers - be it our decision to stay open on all Sundays, or our highest loan-to-value, or our decision to stay competitive by cutting costs and opening up new revenue streams, instead of passing on all cost-rises to customers.

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