What is Buzzing at Manappuram Finance - Exclusive Interview with VP Nandakumar

Manappuram Finance stock was yesterday up by 20%, its maximum daily limit, with no sellers visible by close. Seasonal Magazine caught up with the company's MD & CEO VP Nandakumar to decode what is buzzing at the company:

Manappuram Finance, India’s first listed gold loan company grew at a blistering pace between FY’07 and FY’12 when it saw its revenue rising by an unbelievable 62 times, and its profits rising by a befitting 54 times. That was also the time when its main and only asset class, gold was on a roll. But ever since then, growth was moderated by a slew of regulatory reforms, as well as gold prices falling and consolidating. Managing Director & CEO, VP Nandakumar, a former banker, has been holding the fort admirably since this downturn started, and now feels that the worst days are over for Manappuram Finance as well as the entire gold loan industry. As somebody who defined the trends by identifying the scope for a listed gold loan business that attracted the likes of Sequoia way back in the last decade, Nandakumar is again placing his bets on three new trends to shape the future for all stakeholders of Manappuram - financial inclusion, technology, & diversifications. With PM Modi himself identifying financial inclusion for all as one of the main agendas during his first Independence Day speech, visionary entrepreneurs like Nandakumar cant be wrong. Even while diversifying into home finance, micro finance, auto finance, & finance of consumer durables, Nandakumar is quick to point out that gold finance will remain the mainstay of the listed Manappuram Finance Ltd, for the limitless scope this business offers in India. He is a firm believer that, sooner rather than later, gold loans will be recognized as a financial inclusion tool, and that by innovating on the technology front, Manappuram can carve an edge for itself, and get back to the high growth trajectory.

Seasonal Magazine in conversation with VP Nandakumar:

It has been a few successive quarters of shrinkage in Assets Under Management (AUM) for gold loan companies including Manappuram Finance. But recently you have guided for an AUM growth of 5-6% for this fiscal. Is the trend reversing finally for Manappuram?
 

Yes, definitely the trend is reversing. AUM shrinkage is easing and it will start to register growth from here. In the current fiscal, the growth is expected to be minimal of 5-6%, due to this legacy of old loans, but in the next fiscal we hope to register an AUM growth of around 15%. None of these are official guidance figures, as it is quite difficult to put a specific percentage or number on the variations in gold loan business, but yes, the trend is reversing finally, and we are set for growth again.

You have been quite bullish about two recent RBI moves, the first regarding non-deposit taking NBFCs like Manappuram Finance being eligible for appointment as banking correspondents, and the second being the prospects for being converted into a specialized bank or small bank. Where do these stand now?
 

Yes, we have been bullish on both fronts. Regarding the banking correspondent activity, already a few public sector as well as private banks are talking with us. They have initiated the talks, especially the North based banks that don’t have a huge presence here in South of this country. Manappuram is a ready fit for furthering their financial inclusion agenda in South due to our higher density of branches over here. We are actively considering their proposals. Regarding small banks, we had been bullish, yes, but now our thinking is that we may not fit into the small bank mould due to our larger size. Instead, we will await the new guidelines for regular banking licenses that are due out in December. If we are eligible, which is highly likely, we will apply for a regular banking licence.

Are you very bullish about the being converted into a regular bank?

We are reasonably bullish, and more than that, our thinking is that since the acceptance of the Nachiket Mor committee on financial inclusion, RBI is clearly favouring gradual conversion of large NBFCs into banks, with the remaining small NBFCs to be transferred to state government control. Besides this, newer regulations are much more flexible like the extended period for reducing promoter stake etc, and with the RBI’s ambition to provide banking licence on-tap, we think this will be the preferred choice for all large NBFCs like Manappuram, if not the only choice before them.

Gold has been pausing for the last several quarters. Where do you see gold prices heading? Will it  trend down, or resume its multi-year rally on the safe haven angle?
 

I think gold is fairly priced now, considering the international mining costs and the small margins getting added to it at various levels. It will not trend down much, and any further rally, as you said, will rely more on the safe haven aspect. And that part nobody can predict.

CRISIL has assigned a fair value of Rs. 26 for Manappuram stock. Do you agree?

No, obviously I don’t agree, because they have estimated it on the current performance which is already history. The gold loan business for Manappuram as well as others is definitely turning around, it is gathering momentum, and you will see rating agencies putting out fair values like Rs. 40 or more.

RBI has recently allowed banks to disburse higher amounts in non-agricultural gold loans. Will this move affect gold loan NBFCs like Manappuram, going forward?
 

No, I don’t think it will have any impact on Manappuram, as our typical customers, ticket sizes, and tenures are much different. There is also the undeniable aspect of a higher quality of service.

Strategy-wise, how do you plan to differentiate Manappuram Finance’s products from your peers, especially the other NBFCs?
 

I don’t think there is any more room left for competition among peers, in a strategic sense. Like, earlier we were competing on dimensions like LTV, interest etc. Since the last two years, gold loans has become a much more regulated market, and the regulator has largely removed the scope for such competition. Instead, what we plan to do is compete with others using technology as a leverage.

Can you elaborate on that plan?

Well, what we are witnessing today is the rapid change brought about by technology. Be it online retailers like Flipkart or telemedicine driven hospitals, technology is shaping the future. Financial services too is no exception, with innovations like net banking and mobile banking already here. Frontline private banks and NBFCs are offering multi-crore personal loans swiftly, based on machine-made decisions on metrics like CIBIL score etc. So, what we are doing is, we are constantly thinking of bettering our core gold loan services using technology. Some tech majors are helping us out on this, and we also have an in-house tech division that can create, test, and integrate such solutions. And I believe that this is not only about competing effectively and a higher market share; but that it is about the very survival of any organization. If we don’t embrace tech in a dynamic way, tech trends will shape the industry in some other way that we won’t like. Nobody can predict what will be the shape of many service industries, one year from here.

The listed Manappuram Finance is on a diversification spree. Where do these initiatives stand now?

Diversification was a natural progression, and it was speeded up by our regulator RBI clearly favouring it. Instead of just one asset class - gold loans - the regulator wanted us to pursue various other asset classes to reduce the perceived risk. We had taken over a home finance business from Jaypee Group sometime back, and it now has all necessary approvals to start operating. A competent CEO is being identified and it will soon commence operation, with its headquarters being in Mumbai. It will focus on the affordable segment of home loans, which is much broader now, but with the typical ticket-size being around Rs. 15 lakhs. We are in the process of identifying a suitable microfinance institution for takeover, and our microfinance operation will be headquartered in Chennai. Both the home finance and micro finance companies will be 100% subsidiaries of Manappuram Finance. We are already into vehicle and consumer durables finance, and these activities are being beefed up. Domestic money-transfer service is another area we are getting into shortly, after our successful foray into overseas money transfer. Overall, our aim is to diversify at least 50% of our business or assets into non-gold activities.

That also means gold loans will remain your mainstay. What makes you so bullish about it?

There are several dimensions to it, but the main angle is that compared with the household gold in this country, only a miniscule percentage has been put to productive use through gold loans. That will change due to greater acceptability of this product brought about by greater availability and full transparency. Estimates put India’s privately held gold to be somewhere around 20,000 tonnes, of which 65% belongs to rural households. And 75% of the gold loan business is still controlled by private moneylenders who charge exorbitantly. So, there is a huge room for growth for organized players like Manappuram in this business, and we hope to tap it by various tech-enabled services.

You had started several ventures outside the listed Manappuram Finance, like MAcare Diagnostics, Riti Jewellery, Magro Farm etc. Where do they stand now?
 

All of them are progressing well. Riti has already achieved break-even status, which has been one of the fastest performances in the multi-city multi-branch gold retailing industry. MAcare is fast nearing the break-even status, and it already has several enquiries for private equity infusion, which we are not keen at this stage. Magro Farm is mainly into coconut oil and milk production, and it has already launched its own brand Mafarm. That too is progressing well.

Are you eyeing any major fund raising through QIP etc for Manappuram Finance?

No, we are comfortably capitalized, and don’t see the need for any further capitalization at the moment.

Last time we met, which was before the elections, you were very bullish on Modi coming in. How do you assess the situation now?
 

I remain bullish on India, as it is today led by a leader whose party has majority on its own, and as such, can take difficult decisions on his own without waiting for a consensus. My observation since Modi’s rise to power is that this PM has no other agenda than economic development. I am also very optimistic about the leadership at RBI. Though earlier Governors too have been knowledgeable, Raghuram Rajan has been much more dynamic as well as independent, and I am confident that his tenure will see a revolution in the financial services industry, driven by the government’s agenda to speed up financial inclusion for all.