Friday, July 4, 2014

Why Manappuram Stock is Set to See Better Days

Many stock watchers were confused when certain stocks didn’t participate in the Modi rally at all. Some of these stocks were fundamentally good ones, even while the broad rally could lift up even the worst 100 stocks in the market. A good example of this bizarre underperforming phenomenon was the first listed gold loan firm, Manappuram Finance. But this is all set to change. Why? Is it because of the recent RBI move to allow non-deposit taking NBFCs like Manappuram to be banking correspondents? Though the move will help Manappuram in the long run, the greater reason would be something else, related the their core gold loan business itself.

There were several reasons for Manappuram’s relative underperformance in the market post the poll results. Firstly, Manappuram has had a sharp 160% run up from its year-to-date lows till mid-February when it peaked, with the rally attributed to RBI easing LTV norms again to 75%.

It took only 7 months for that steep hike. So, in a way, the reality is that Manappuram stock just didn’t surpass this peak in the broad post-election rally. However, even this has been a minor cause for Manappuram’s strange pausing.

The bigger reason is that the surge in equities coincided with a fall in gold prices, as it has often happened in the past. When gold falls, quarterly and annual numbers of gold loan companies suffer.

While this has been bad for Manappuram’s stock so far, this is also the precise reason why Manappuram stock is set to see sharply better days, going forward. Why?

The best and the largest investment houses - the cream of the FIIs and DIIs - always go in for highly balanced portfolios. They don’t expect equities or any other asset class to go on appreciating forever.

For them equities is just another asset class, just like gold, or commodities, or real estate. The smartest among them remain invested in all key asset classes and go on accumulating or reducing specific asset classes, according to sectoral dynamics like demand/supply.

But by definition, many of them can invest only through equities into the other asset classes. For example, they buy promising realty stocks instead of investing directly in Indian realty, which is often called a proxy play. Similarly, gold as an investment class also requires a proxy in the equity world.

If you thought gold retailers like Gitanjali or Thangamayil are the best proxies, you are mistaken. Gold retailers don’t do exceptionally well when gold prices go through the roof, because then retail consumption of gold dips.

In contrast, the business of firms that lend against gold surges when gold price surges.

Despite Manappuram underperforming the broad market during the past month, no major fund house has reduced its investments in Manappuram’s equity. That is why even today, the list of largest investors in Manappuram reads like a who-is-who of the global investment world - Baring, Smallcap World Fund, Hudson Equity Holdings, BRIC II, Wellington Management, HSBC, Wellington Trust Company, Allard Growth Fund, Beaver Investment Holdings, Mousse Ganesh etc.

And the total holding by these FIIs in Manappuram is one of the largest in the NBFC sector. Together, these institutional investors hold 39.34% stake in this Kerala headquartered gold loan player with a pan India reach.

To put this stake in perspective, even Manappuram’s founder and promoter, VP Nandakumar has managed to hold on to only 31.55% stake. Under Nandakumar’s guidance, Manappuram has prudently issued new shares through QIP etc in the past to raise capital for expansion, but which inadvertently caused the promoter’s stake to reduce.

So, what makes these global FIIs as bullish or even more bullish than even the promoter? Firstly, as their very eager participation shows, these FIIs/DIIs trust this gold loan company more than other gold loan companies, due to the trust and transparency factors.

Manappuram is also the only gold-loan-only company with a proven track-record in wealth sharing to its institutional as well as retail shareholders.

Secondly, - and we can’t say whether this is the more important or less important reason - gold loan business is not just a proxy for gold, but it has a significant compounding effect over gold prices.

For instance, between 2009 and 2011, when gold prices more than doubled, Manappuram stock had appreciated by 19 times.

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