As of today’s high of Rs. 12.90 in NSE, Manappuram Finance has rebounded by over 31% from its 52-Week Low, within days. The trigger has been the disclosure of a significant 2% accumulation of the stock by Baring. Seasonal Magazine interviews Manappuram Finance’s MD & CEO, VP Nandakumar:
From Rs. 0.15 in 2003, it went to Rs. 94.95 by 2010. Which makes Manappuram Finance stock a 633X bagger within 7 years, qualifying it among India’s best performing wealth creators. Initially, the investors were largely people who knew this business and its promoter, ex-banker VP Nandakumar. But when the growth pace accelerated around 2007-08 onward, and Manappuram became a well-researched company, some of the largest and most celebrated PE funds like Sequoia - of Apple-Google fame - came in to support, and exited soon with more than 5X returns. That was the time when Manappuram was featured even in New York Times and Wall Street Journal as the poster boy of the new wonder business - organized gold loans - in India. But times have changed. The growth and rise of Manappuram was not just the product of Nandakumar’s visionary leadership and wealth-sharing attitude, but of the unprecedented rise in the value of gold between 2007 and 2012. It goes to his credit that he made the best use of this rare window of opportunity to expand Manappuram’s branch network at a blistering pace, across India. Under his guidance, Manappuram also went in for a mammoth QIP at the peak of this bull run in gold and gold loan stocks. But times have changed too much. Starting in 2011, the regulator of the sector, RBI became extremely cautious regarding an impending fall in gold price, and the impact it would have on all gold loan operations in the NBFC and banking space. They put in place several restrictions on the unbridled growth in the sector, including a severe cap on Loan-to-Value, as well as on caps on how much banks are allowed to lend to gold loan companies. The sector went in for a toss. And has not quite fully recovered ever since. Manappuram’s stock started correcting from Rs. 94.95 and recently went as low as Rs. 9.90, which is nearly a 90% erosion in value from the peak. The fall was dramatic, only falling short of the spectacular rise, just a few years back. Meanwhile, gold corrected much more than anyone had anticipated, before finding support from the physical demand in India and China. The recent stability of gold is inevitably bringing up the question - Can Manappuram, the gold loan stock with the longest listed history, bring back the wealth-creation magic? Because, here is a promoter who has once proven that he has no issues sharing immense wealth with all kinds of investors, from retail to high-profile institutional investors. Even today, the kind of foreign institutional investors betting on Manappuram reads like a who-is-who of bluechip investors - GMO, Bric II, Baring, Sanlam, Wellington, Morgan Stanley, HSBC, Smallcap World Fund, Beaver, AA Development Capital, and Hudson Equity Holdings. Seasonal Magazine caught up with VP Nandakumar to find out how authentic is the hope all stakeholders still have in this organization.
Seasonal Magazine in conversation with VP Nandakumar, MD & CEO, Manappuram Finance:
Are you shocked at the way things have panned out in the gold loan sector? Was any of these issues anticipated 1 or 2 years back?
From Rs. 0.15 in 2003, it went to Rs. 94.95 by 2010. Which makes Manappuram Finance stock a 633X bagger within 7 years, qualifying it among India’s best performing wealth creators. Initially, the investors were largely people who knew this business and its promoter, ex-banker VP Nandakumar. But when the growth pace accelerated around 2007-08 onward, and Manappuram became a well-researched company, some of the largest and most celebrated PE funds like Sequoia - of Apple-Google fame - came in to support, and exited soon with more than 5X returns. That was the time when Manappuram was featured even in New York Times and Wall Street Journal as the poster boy of the new wonder business - organized gold loans - in India. But times have changed. The growth and rise of Manappuram was not just the product of Nandakumar’s visionary leadership and wealth-sharing attitude, but of the unprecedented rise in the value of gold between 2007 and 2012. It goes to his credit that he made the best use of this rare window of opportunity to expand Manappuram’s branch network at a blistering pace, across India. Under his guidance, Manappuram also went in for a mammoth QIP at the peak of this bull run in gold and gold loan stocks. But times have changed too much. Starting in 2011, the regulator of the sector, RBI became extremely cautious regarding an impending fall in gold price, and the impact it would have on all gold loan operations in the NBFC and banking space. They put in place several restrictions on the unbridled growth in the sector, including a severe cap on Loan-to-Value, as well as on caps on how much banks are allowed to lend to gold loan companies. The sector went in for a toss. And has not quite fully recovered ever since. Manappuram’s stock started correcting from Rs. 94.95 and recently went as low as Rs. 9.90, which is nearly a 90% erosion in value from the peak. The fall was dramatic, only falling short of the spectacular rise, just a few years back. Meanwhile, gold corrected much more than anyone had anticipated, before finding support from the physical demand in India and China. The recent stability of gold is inevitably bringing up the question - Can Manappuram, the gold loan stock with the longest listed history, bring back the wealth-creation magic? Because, here is a promoter who has once proven that he has no issues sharing immense wealth with all kinds of investors, from retail to high-profile institutional investors. Even today, the kind of foreign institutional investors betting on Manappuram reads like a who-is-who of bluechip investors - GMO, Bric II, Baring, Sanlam, Wellington, Morgan Stanley, HSBC, Smallcap World Fund, Beaver, AA Development Capital, and Hudson Equity Holdings. Seasonal Magazine caught up with VP Nandakumar to find out how authentic is the hope all stakeholders still have in this organization.
Seasonal Magazine in conversation with VP Nandakumar, MD & CEO, Manappuram Finance:
Are you shocked at the way things have panned out in the gold loan sector? Was any of these issues anticipated 1 or 2 years back?
Not really shocked at the developments. While I don’t deny the developments during the past two-years have been dramatic, Manappuram is a very old company to be affected fundamentally by such cyclical issues. Manappuram, which was founded by my father VC Padmanabhan, has been in gold loans since 1949. Like many businesses, gold loans too have some cyclical issues, may be not annual problems, but occurring every few years. Ever since I was a small boy, often visiting my father’s office, I have been witness to some of these issues. But they keep changing, of course. And it has been 27 years since I directly took over the leadership role at Manappuram Finance, and we have seen many ups and downs. We have survived all those, and still grown dramatically, especially during the last 10 years. Coming to your question of whether all this was anticipated, well, some issues like gold price correction was anticipated as it had kept on appreciating, outperforming all other assets. So, some correction was indeed anticipated. But nobody can ever claim to have an accurate handle on the extent of correction.
Was last quarter’s loss a one-off affair? What really contributed to it? Didn’t it show that apart from sectoral woes, Manappuram had some unique issues?
No, we didn’t have any unique issues other than the one with Manappuram Agro Farms, which has been sorted out long back. It was done in good faith, but since RBI opposed it on technical grounds, we complied. There are no other such issues pending. What happened in Q4 was that we went in for cleaning up and strengthening our balance sheet. It was an inevitable step for any gold loan company, given the dynamic changes in the industry like the gold price correction and change in LTV norms. Due to this bold and transparent move, what I can vouch for is that Manappuram Finance has got the strongest and cleanest balance sheet among all gold loan companies. On whether it is a one-off affair, yes that has been our intention and hope. I feel that our competitors might not have yet taken such a step, and that is why that loss appears unique in the industry.
One problem with Manappuram seems to be the funding crunch. How are you planning to address this issue?
We have no funding crunch as such. Today, we are the most well capitalized gold loan company. This is partly thanks to our visionary capital raising around two years back through a QIP. Secondly, despite a media perception to the contrary, banks are still positive towards the gold loan companies even under the new RBI guidelines. And lastly, most gold loan companies including Manappuram have moderated their growth plans in FY’14. So, there is no funding crunch whatsoever. That is why we are not currently looking at NCDs either.
Coming back to the issue of gold prices correcting. Do you think the correction is almost over now, and that Indian and Chinese demand for physical gold would act as a support?
Unfortunately, no one including me can be a prophet regarding gold prices. What you mention, that is, Indian and Chinese demand for physical gold acting as a support, is precisely what we are witnessing now. Nothing more can be said. Gold is so very much a part of global economy and heavyweight nations’ monetary policy, that it is next to impossible to predict its price trajectory. The recent correction in gold was partly due to dollar strengthening. But from a purely Indian context, I feel that rupee weakening substantially is something that is going to help gold prices. But having said all these, I personally feel that gold wouldn’t correct much from this level. It might remain at the current level for longer than expected, before eventually moving up.
The issues faced by gold loan companies have highlighted the problem of focusing on just one asset class. Do you now think that Manappuram Finance should have a diversified portfolio?
No, not at all. And I don’t think anybody who takes an objective look at the NBFC sector would disagree with me. What has thrived the most in this sector is a mono-line focus. And it is not just about gold loans. You take any asset class, and you can see this in action. We see it in HDFC which does only home loans, we see it in Shriram Transport Finance that does only commercial vehicle finance. Shriram’s big break had come in an even narrower niche, which is used-truck financing. Such players have clearly outperformed jack-of-all-trades NBFCs in sheer growth momentum. Same is the case with a gold loan company like Manappuram that has a sharp mono-line focus. In fact, we grew dramatically only because of our mono-line.
But haven’t there been exceptions like L&T Finance Holdings?
L&T Finance is not the rule, but the exception. And if you look deeply, it is really a holding company of many niche or mono-line NBFC operations. Despite their significant size, in most of their segments, I think they won’t be in the top-three. That is because, it is much more challenging to scale up a multi-line operation.
Still, don’t you think diversification from a single asset class would have been more risk-free?
Well, it is really all about a trade-off. Between growth and short-term risk. Mono-line NBFCs are much easier to scale up. There is tremendous growth potential that can be rapidly executed. The flipside of it, the so-called risk, is only cyclical or short-term in nature. Just because gold is currently going through a corrective phase, we can’t come to the conclusion that gold loans as a mono-line business is risky. Such cyclical issues crop up in every sector. Would HDFC diversify from home loans, or Shriram from truck finance, if those sectors enter a trough? No, in my opinion. They would simply wait it out. This is not something that I am saying hypothetically. It has happened in those sectors, and they have waited, and they have thrived subsequently. I think gold as a loan asset is even more well-poised for recovery. So, we will focus on the prudent mono-line model, and simply wait it out.
Do you think that some in the regulatory bodies like RBI unnecessarily focused on gold loan companies and their funding banks, thereby crippling the sector?
Not really. I think the limit on LTV and some other changes brought forth by RBI has been good for the sector. At least now there is a level playing field. Earlier, some companies were giving 90% or even 100% LTV on gold loans, which was clearly not sustainable. It was not only the small firms, but even big banks like HDFC Bank was reportedly doing it. So with regard to changes like in LTV, the regulator’s move has been beneficial to the industry. But having said that, there have been some other moves from the regulator which are aimed at all NBFCs, and which have been imposed on gold loan NBFCs too. I think those changes are not fair, considering that the average tenure of gold loans are around three months. It doesn’t make sense when a regulation intended for 5-year car loans or 15-year home loans are imposed on three-month gold loans. The sector has been hurt to that extent.
How far have you trimmed your employee base? Do you subscribe to the view that you expanded too fast, especially into less understood markets like North India?
We have trimmed our employee base by less than 15%, and that was solely due to Sunday being made a holiday for all our branches. Under the new circumstances that the gold loan business is operating, we came to the conclusion that it would be better if Sunday is kept a holiday. Coming to the second part of your question, no, I don’t ever think that we expanded too fast into markets like North India. As I said before, gold loans are also of a cyclical nature. There will be some window of opportunities when we can expand fast, and some other time-periods when we should be lying low or consolidating. So, if we hadn’t utilized that opportunity, we would have lost out. And there has been absolutely no problem with any of our geographical expansions. Regarding North India, maybe an organized gold loan sector was new to them, but our services are still very much in demand there.
What all are the other issues faced by NBFCs like Manappuram? It is said that you have issues with excise and service tax…
Well, I too heard the media rumours. All I can say is that we have not received any communication regarding any fresh tax claims. Whatever taxes are applicable, we have paid, and we are up-to-date. I don’t know whether any other gold loan companies have such pending issues. What I feel is that when gold loan stocks get corrected, media invents these rumours on hearsay. The market correction might have more to do with the tapering off of QE3.
How would you guide for Q1 and the whole of FY’14?
We don’t usually provide guidance. All I can say is that we expect a bounce back to profit, sooner rather than later. The business just has to adjust to the new norms regarding the gold price correction and lower LTV. It won’t take more than a couple of quarters for Manappuram Finance, as the difficult clean-up of the balance sheet is behind us now. Branch wise, we won’t be expanding much during this fiscal, but in FY’15, we plan to add around 400 to 500 branches more to the Manappuram network.
How are your other diversifications panning out, like Riti and MAcare?
Both are doing well, but we are not hurrying up things. Riti as you know is again in the gold business, and the current changes affecting gold retailers are applicable. Regarding MAcare, we are performing well, but we are executing the expansion judiciously, as we will wait for each major branch to break even, before launching a new one. Being in the medical diagnostic business, it is a very capital intensive operation.
How would you assess the gold import situation in India, and government’s unsuccessful efforts so far to curb imports? Do you have any holistic alternatives to suggest?
There are two aspects to this issue. One is the newer speculative demand for gold as seen during the last 4 to 5 years, which is reflected in the demand for bars, coins, e-gold, ETF etc. For controlling Current Account Deficit, the government might be able to control such demand to a large extent, by restricting imports and banning sale of gold coins by banks etc. But the other conventional aspect of gold demand is fully socio-cultural in nature as far as India is concerned. Gold remains one of the foremost assets of Indian households, together with land and bank deposits. Even if one doesn’t have any land or deposits, he is likely to have gold. Gold is not only an integral part of Indian family formation through marriage, but it is bequeathed across generations. No amount of government efforts can curb this demand, which is largely a demand for gold jewellery. Similarly, no amount of awareness-building regarding gold as a locked-up asset is going to work. Because, gold loan companies like Manappuram have proved that gold jewellery is as liquid as cash. We are proud that we could unlock this treasure and bring it to productive work.
Have any large institutional investors bought into Manappuram stock in recent months?
Most probably, yes. Manappuram as you know is known for high FII stake. So, some churn is inevitable. We had Hudson paring their stake a bit and GMO coming in during January. Some funds like Baring, which clearly understand the potential of gold loan business, might have averaged at lower prices to account for the new norms the business find itself in. Many of the smaller deals go unreported immediately as it is not necessary. We have to wait for the quarterly shareholding to get an updated picture.
Are you hopeful of reigniting investor interest? Is gold loan here to stay as a viable business? And can it stay as a listed business?
There is no need to reignite investor interest. It will happen automatically. In fact it has already started happening. It is a function of the market plus a function of the sector plus a function of how well we are strategically performing in it. I think Manappuram still has one of the best and most diverse foreign institutional investor profile among all NBFCs. Coming to the second part, well, of course gold loans will continue to be a viable business in India forever. Some sections of the financial media mistakenly think that we are doing less brisk business now. In fact, going by the number of transactions, we are doing more than ever, but due to gold price correcting and the lower LTV in place, the total value or volumes have come down. That is why I remarked earlier that it would take a couple of quarters more for the business to adjust to new norms. And answering the last part of your question, Manappuram was the first listed gold loan company, and therefore has the longest listed history, and we don’t find any reason why gold loans can’t be a listed business anymore.
Do you have any plans for QIP like issues? And are promoters planning to up their stake substantially?
No QIP is in the horizon for one or two fiscals, as we are more than adequately capitalized. I would definitely like to up the promoter stake, as I had to pare some stake last year to raise some money and repay investors in some promoter group companies. But all that is behind us now, and I would be mulling the ways and means to up the promoter stake in Manappuram Finance in the coming quarters.
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