S&P Global Ratings raised its long-term issuer credit rating on Manappuram Finance Ltd to 'BB-' from 'B+' with a stable outlook. It sees the gold-based lending business of the company as an effective counterbalance to the weakness in India's microfinance segment. S&P also affirmed the 'B' short-term issuer credit rating on the India-based finance company.
It says, "We upgraded Manappuram because we expect the company to continue to perform better than its non-banking finance company (NBFCs) peers over the next 12 months. This would be reflected in the company's lower credit costs, above-average profitability, and strong capitalisation."
S&P's BB rating is from a speculative grade, which denotes that the issuer is less vulnerable in the near term but faces significant ongoing uncertainties to adverse business, financial and economic conditions.
In its view, S&P says, Manappuram's gold-based lending model with a three-month tenor allows it to recognise asset quality stress early.
Gold prices had fallen significantly till April 2021, from a peak in August 2020. The stress in the economy owing to the second wave of COVID-19 infections during April-June 2021 and the decline in gold prices led to increased auctions of higher loan-to-value (LTV) loans in the first quarter of fiscal 2022, ending 31 March 2022.
"Manappuram's gold auctions are likely to gradually return to their normal level as economic conditions improve. Elevated auctions have, in part, lowered Manappuram's average LTV ratio to about 65% as of 30 June 2021, from about 71% as of end-March 2021, providing the company with some buffer to absorb price fluctuations," the rating agency says.
Gold price movements play an essential role in the cushion available to lenders like Manappuram, which is predominantly in the collateral-based gold lending business. Gold loans account for close to 70% of the company's total loans, with microfinance loans accounting for about 25%, and vehicle finance and affordable housing contributing most of the rest.
However, S&P says, stress will likely remain high in Manappuram's non-gold portfolio, especially in the microfinance business. "The asset quality of the non-gold loan portfolio has deteriorated sharply over the past two years. However, billing and collection efficiency is increasing back to close to pre-COVID-19 levels, hinting at improving asset quality trends. Also, the company has pre-provisioned for the microfinance business. Therefore, we believe the company's earnings can largely absorb any residual impact."
"We forecast Manappuram's risk-adjusted capital ratio will stay above 30% over the next 12 months. The company's core earnings are likely to remain at more than 5% of its average managed assets during this period. This ratio is one of the highest among rated peers. Manappuram's funding profile is also improving with a shift toward longer tenor debt. However, the company still has material exposure to short-term wholesale funding," S&P added.
According to the rating agency, Manappuram also benefitted from lower interest costs due to increased liquidity in the Indian banking system. Its interest expenses on average outside liabilities declined to 9% as of 31 March 2021, from 9.8% as of 30 June 2020.
"Despite this gain, margins shrank because the company chose to maintain higher liquidity, and yields declined. We expect Manappuram's margin and profitability to remain still much better than peers'," it added.
The stable outlook on Manappuram reflects S&P's view that the company will essentially maintain its financial profile over the next 12 months, supported by an improvement in economic conditions in India.
It, however, warns a downgrade if Manappuram's credit costs increase "substantially more than we expect, particularly in microfinance loans."
"We see limited rating upside for Manappuram over the next 12 months. We will upgrade the company if we believe its funding profile has become more stable. Increased access to longer-term funding that reduces the rollover risk associated with short-term wholesale funding could indicate such improvement," S&P says.