Manappuram Q3 Results Show Potential of the Stock

 With Q3 results out, Manappuram General Finance & Leasing Ltd (BSE: 531213, NSE: MANAPPURAM) has proved its sceptics wrong. While the performance in June 2010 quarter was a bit troubling due to the sequential dip, by the September quarter Manappuram Finance had rebounded, and now with a good Q3 behind it, even sceptics will be forced to take a re-look at the company.

Whichever way one looks at Manappuram Q3, there has been outperformance. This is especially important, as in this quarter, the business environment was not exactly conducive for NBFCs, especially for those like Manappuram that focus on smaller ticket loans to individuals and MSMEs.

Manappuram even voluntarily reduced its interest rates from 24% to 21%, shrinking its margins. Gold prices also started looking down after a dream run.

But the strength of the company is so much so that despite all these negatives, it grew its business by 150%, and profits by 113%, YoY. Even on a sequential basis, there was no signs of growth decelerating. Income was up by almost 36% and profits by 24%, QoQ.

And what this kind of consistent growth means is that the market is now ready to believe Manappuram’s guidance even beyond FY’12. Already, it has given a guidance for FY’12 that hints at doubling its assets under management (AUM). Considering the AUM / Market Cap connection for NBFCs, the FY’12 and FY’13 valuations thus look quite attractive.

Seasonal Magazine interviews Manappuram Finance Chairman, VP Nandakumar, on their strategies to grow amidst the current adverse environment - both in the financial sector and the capital markets:

You have mentioned in Q3 reviews that Manappuram’s networth has surged from Rs. 321 crore to Rs. 1880 crore, which is nearly a 500% increase YoY. After the dilution, what would be the effect of this networth surge on book-value of the share, by percentage.? And what is Manappuram’s book-value as of December 2010?

The book value has gone up from Rs.37.24 (adjusted for bonus issue and stock split) as on December 31, 2009 to Rs.45.13 as on December 31, 2010, representing a 21 percent increase.

You have also mentioned that you have reduced your interest rates by 3%. What warranted this - was it due to increased competition, or as a pre-emptive step considering the kind of regulations hitting the microfinance sector?

To begin with, let’s be clear about this, the gold loan sector stands apart from the microfinance sector because we lend to a different segment altogether. We lend to people who have assets (gold), unlike the microfinance sector. The reduction in interest rates has a combination of factors at work. Thanks to the record growth of our gold loans portfolio this year, we have managed to steadily bring down our non-interest operating expenses as a percentage of total income, and so today we are in a position to pass on these efficiency gains. Of course, I am not ruling out competition, but more important is the fact that we are also very keen to expand our volumes. This certainly requires us to be competitive in our offerings, but then, this is a choice we are consciously making and not as a compulsion thrust on us. As for the regulations in the microfinance sector, they don’t really affect us because we deal with an entirely different class of people, and I see no reason for us to be pre-emptive in any sense.

Though you have repeatedly clarified that gold prices falling won’t have an effect on Manappuram’s performance, the stock’s price-performance over the past few weeks suggest that at least a section of the market thinks otherwise. How do you plan to correct this perception?

I don’t think the recent performance of our stock has anything to do with a perception about falling gold prices. More relevant is the performance of the financial services sector in general which is sensitive to hardening interest rates. Here, you will notice that the share prices across the sector have fallen and Manappuram has been no exception. And in this context, I think I should also point out that while higher borrowing costs are certainly unwelcome, we do have a greater capacity (should the need arise) to pass on the increases to our customers. This is because our typical loans are small ticket loans (average ticket size, Rs.30,000) taken for short periods, say, three months. In such cases, unlike as in the big ticket loans, a marginal increase in interest rates is less likely to antagonize borrowers.

Your recent QIP price of around Rs. 168 was widely perceived as a firm support, but since the stock is now trading much below this level due to the general hit taken by financial stocks, do you expect this level to pose as a major resistance in the short-term? Especially of interest to investors would be to know what percentage of your recent QIP participants are long-only funds?

I am actually a little hesitant to talk about how the stock market will behave. The fact is, I believe in delivering on the performance front, and leaving the rest to the market. Anyone who’s been in the market long enough would know that when the overall situation is adverse, even good performance can go unrecognized. So, if you ask me questions about our performance or our future prospects, I’ll be only happy to oblige. But when it comes to questions that would have me speculate on likely share price movements, I would have to say a polite no. As for the QIP, I would say at least 75 percent of the participants are long-only funds.

Suzlon - The Power Stock to Bet On in 2011?

Suzlon Energy Ltd (BSE: 532667, NSE: SUZLON) continues to generate confusing signals for traders, with recent positive developments like the Gamesa stake-sale buzz, creation of JV with Affinity Wind for US expansion, re-rating to 'Overweight' by JP Morgan etc on one side, and the troubling debt levels that continue to haunt the wind power major on the other side.

Meanwhile, new orders continue to pour in for the company like the recent orders from Sterling Agro, Vedanta Group, & the 1000 MW project with Gujarat Government. At the same time, none of these long-term orders are enough to take the company beyond the threshold sales needed to overtake the debt burden, at least in the short-term.

However, from an investing viewpoint, this Nifty constituent is definitely a major stock to watch-out for, not only due to its current beaten-down status, but due to its immense potential if it can really turn around things  in the quarters to come. 

This potential is evident from its not-so-long-back history, before the global slowdown hit it.    

It is doubtful whether any other first-generation Indian company had more wind in their sails during 1995-2008, than Suzlon. Without any family background in power business or big business, what Tulsi Tanti did was nothing less than miraculous. Within a short period of 15 years, Tanti transformed what was a small scale industrial unit - with 20 employees - doing a then not-much-understood wind power turbine manufacturing in Pune, into the world’s third largest wind power company, with 16,000 employees across 25 countries.

The scale at which Suzlon was growing would have made even Reliance Industries Ltd (BSE: 500325, NSE: RELIANCE) nervous. 

For example, in FY’08, Suzlon grew its income by 73%, and not only that, it was a quality growth as it expanded its wings across the world, conquering each advanced market with seeming ease - both organically and through acquisitions. The profit growth was also decent at around 20%, considering the cost of expansion. Net profit went above Rs. 1000 crore for the first time. 

Buoyed also by the stock market boom, Suzlon scrip climbed to unprecedented heights of Rs. 2300. It was a good appreciation to 360%, from the 2005 IPO price of Rs. 640. Within three years, it was high-power wealth creation. Enthusiastically, Suzlon also went for a 10/5 split.

However, the very next year, FY’09, signalled trouble for Suzlon. Many critics warned that Suzlon was trying to grow too fast, accumulating massive debt, even in face of the massive slowdown that was then coming up on the world infrastructure space. But Tanti went on with his acquisitions, maybe in the hope that demand would again pick up soon, and by that time he can make Suzlon the second-largest wind power company, if not the first in the world. 

Though he succeeded in doubling sales to a whopping Rs. 26,258 crore in FY’09, profits nosedived to just Rs. 236.48 crore, a 77% fall year-on-year. The former year’s split also came to bite on the EPS, which fell to a measly Rs. 1.52, from FY’08’s Rs. 6.89 and 07’s impressive EPS of Rs. 30.

Even worse was in store for Suzlon in FY’10. For the first time in its listed history, the innovative company went into the red, as it registered a disturbing Rs. 982.56 crore net loss. Within just two years, Suzlon had gone from Rs. 1000 crore annual profit to nearly Rs. 1000 crore annual loss. EPS was deep in red at Rs. -6.39. Even Tanti’s strategy of growing sales come what may, didn’t help in FY’10, as sales also dipped by over 21%, which was also a first in its listed history. 

Ever since then, the company has not come out of the doldrums, even though Tulsi Tanti has started correcting many risky strategies by divesting some acquisitions and by paring debt. Still, with a debt of Rs. 12,000 crore and a debt-equity ratio of around 1.5, the apparent outlook remains grim.

So, why should anybody be bullish on Suzlon? Firstly, the valuations are quite attractive. On a consolidated book-value of Rs. 42.40 (as on March 2010), Suzlon now trades at a P/BV of just 1.25. In its official segment of ‘Engineering - Heavy’, this fares quite attractive as 25 out of 29 peers have a P/BV above 1.25 times, with 10 majors even demanding valuations above 5 times P/BV. 

Even in related sectors like ‘Power - Transmission / Equipment’ and ‘Power - Generation / Distribution’, it is rare to find a company with this P/BV, as 30 out of 34 companies in these sectors - including PSUs - are trading well above these levels.

Secondly, compared with many of the lethargic listed companies in the power or engineering sectors, nobody can ignore the fact that Suzlon is an international franchise in wind power, that makes it an attractive take-over target for strategic investors, if not for pure private equity players. The recent speculative price - Rs. 71 - said to be offered by Spain’s Gamesa for a 51% takeover of Suzlon proves this. 

With the growing focus on carbon credits for large corporations across the world, Suzlon’s core business remains hot and will pick up wind, once the international recovery is in full swing. The recent Vedanta order bagged by Suzlon for 150 MW projects, and the new JV in US shows that the momentum is not lost, but in full recovery mode.

Unitech - The Realty Stock to Bet On in 2011?

Unitech (BSE: 507878, NSE: UNITECH) and DLF are perhaps so often clubbed together that the uninitiated would think they are some sort of cousins. But nothing could be farther from the truth, when it comes to sheer wealth creation capabilities. Unitech Ltd was a listed company when KP Singh was still buying land for his flagship Gurgaon project. But not the DLF-style (BSE: 532868, NSE: DLF) or realty-style of listing, of course, with an IPO price of just Rs. 25 in 1991.

Highest share price of Unitech Ltd in 2000 was Rs. 60. Yesterday’s closing price for Unitech was Rs. 58.95. But you would be fooled only if you started investing in 2010. No, not the usual stock-split stuff. That is there, of course, with the current face value at Rs. 2 and the then face value at Rs. 10. That makes the current price 500% of the 2000 price. But that is not all. Shortly after the split came a 12:1 bonus issue. That made it a 5 X 13 = 65 times appreciating stock. 

Not complete, still. Next year came another bonus, of 1:1. That made the appreciation 5 X 13 X 2 = 130 times or 13,000% of the original value. In other words, if you had invested Rs. 77,000 in Unitech in 2000, the same would be today worth over Rs. 1 crore. Still, the story is not over. For the past six years, Unitech has also been a dividend paying company, with the average dividend being 17% of the prevailing face values. That is why the Unitech story is regarded as one of the most profound wealth creation sagas in India Inc. But all this is history.

Today, Unitech’s year-to-date price-performance is -33%. Even if we discount it for the recent correction, the appreciation has been nil. In other words, Unitech has been trapped in a range, unable to make a convincing close above Rs. 100 for almost a year. Why?

A quick look at the P/E and P/BV signals that even at Rs. 60 levels, the valuation is not cheap, but not obnoxious either.

We can readily blame dilution that happened due to the mega bonuses, but better is to remember that Unitech is a company that had not only maintained but increased its standalone EPS by nearly 10% in FY’07, a year in which equity went up to 1300%. It has remained as a performance benchmark that is difficult to beat by any company in any sector. So, dilution per se was not the problem. The company had grown its income and profits even faster.

But when Unitech attempted to do a repeat performance in FY’08, disaster struck. Standalone sales and profit growth slowed, and the equity doubling that year ensured that EPS nosedived to 50%. Next year, even Unitech didn’t have the guts to attempt a repeat. By fiscal 2010, the situation was so bad that Unitech had to fortify its equity - without any bonus, of course - just to stay afloat.

Now, the question is has the ship stabilized enough to go for another battle? One hint is that though sales is still struggling, Unitech is now much leaner and smarter. Operating profit margin has increased by almost 7% from FY’10 levels to reach nearly 62%. Net profit margin has also improved by almost 2% to reach above 30%. What this means is that if housing demand picks up again, Unitech is battle ready.

In a sector, where DLF can still command a P/E of over 50 and Godrej Property (BSE: 533150, NSE: GODREJPROP) can trade on a P/BV of over 5, a much more diversified player like Unitech’s consolidated TTM P/E of 20.83 and P/BV of  1.44 comes across as cheap. That is why, if the sector turns around in 2011, Unitech might be the realty share to watch. Of course, that is a challenging 'if'.

Now forget all these, and to the real reason. Unitech’s capabilities in wealth creation will bring back all those old memories, and expect a quite a lot of investors, including foreign institutional investors, to join the fray, if and when Unitech Ltd presents a true breakout. Again, it is a challenging 'if', but one worth watching and waiting for.

MIDVALLEY IPO - Can Midvalley Climb Up on Third Attempt?

On a net worth of Rs. 54.35 crore and equity base of Rs. 25.65 crore of Rs. 10 face-valued shares, the pre-issue book value of Midvalley Entertainment Ltd works out to around Rs. 21.20. At the upper end of the issue price of Rs. 70, it works out to a pre-issue price-to-book-value of 3.30 times, which is very expensive compared with even industry leaders like PVR’s (BSE: 532689, NSE: PVR)  P/BV of 1.60 times or Inox Leisure’s (BSE: 532706, NSE: INOXLEISUR) 1.29 times.

Midvalley Entertainment is a much smaller player than these competitors, but even if it projects more diversified operations than mere film exhibition, Midvalley is costlier than the most diversified player, Reliance Mediaworks (BSE: 532399, NSE: RELMEDIA), which is available at 2.43 times, which in itself is regarded as costly by some analysts.

Valuating the offer by earnings also, the Midvalley IPO comes across as very expensive, as the Weighted Average EPS for the last three fiscals is just Rs. 0.52, which works out to a pre-issue P/E of 134 times. Needless to say, this is very expensive compared with PVR’s 24 odd P/E or Inox’s 12 odd price-earnings multiple.

And, if you take the 12 months ended April 2010, the EPS is just Rs. 0.01. Since the offer involves around 33% dilution, the actual post-issue P/E can turn prohibitively expensive.

However, in the May-June-July-2010 quarter, Midvalley has managed an EPS of Rs. 0.56. Due to the erratic nature of the entertainment business, it remains to be seen whether this relatively good results can be be extrapolated for the year.

Though there are players in the entertainment industry that enjoys much higher P/E and P/BV ratios than Midvalley, like Balaji Telefims (BSE: 532382, NSE: BALAJITELE), Fame India (BSE: 532631, NSE: FAME), or Eros International (BSE: 533261, NSE: EROSMEDIA), it is more or less due to either their competitive edge in the industry or due to recent takeover attempts like in the case of Fame.

Perhaps due to such difficult financials, two earlier IPO attempts by Midvalley in July 2007 and October 2008 could not be carried out.

There is also a worry that the current IPO may eventually amount to a sell-off by the current promoter group as their stake will get reduced from 49.9% to around 34%. Such gradual sell-offs are common in the entertainment industry, with the most famous or infamous being K Sera Sera (BSE: 532081, NSE: KSERAPRO), which now doesn’t have a promoter group at all.

Rating agency Brickworks has assigned IPO Grading 1 to Midvalley IPO, signalling poor fundamentals.

On the upside, the most notable aspect of Midvalley Entertainment is its business model, which is not very capital intensive, as it advances its business by tying up with independent screens, and helping them renovate to new technologies, rather than starting screens or multiplexes on their own.

Midvalley also has a presence of script-to-screen in the business, and focuses on B & C class cities/theatres where there is lesser competition from bigger players.

Midvalley’s main promoter and Chairman is now a prominent Malaysia based NRI of Tamil origin, Datuk K Keetheswaran, who took over the company in 2006. 

The company is managed by a team including Executive Director and COO, K Murugavel, who was earlier with global majors like EDS, AIG, & Total Systems, and Company Secretary and Compliance Officer, SN Madhavan, who was earlier with PVP Ventures.