S&P Global Ratings has upgraded the long-term issuer credit rating of Manappuram Finance to 'BB-' from 'B+' while keeping the outlook 'stable'. The ratings agency has also affirmed the 'B' short-term rating for the company.
Explaining the rationale for the upgrade, S&P Ratings said that the gold-based lending business of Manappuram Finance has proved to be an effective counterbalance to the weakness in India's microfinance segment.
"We upgraded Manappuram because we expect the company to continue to perform better than its NBFC peers over the next 12 months. This would be reflected in the company's lower credit costs, above-average profitability, and strong capitalisation," the ratings agency said.
Manappuram Finance's gold-based lending model with a three-month tenor allows it to recognize asset quality stress early. While 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, S&P Ratings expects the company's gold auctions 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 per cent as of June 30, 2021, from about 71 per cent as of end-March 2021, providing the company some buffer to absorb price fluctuations," it added.
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Gold loans account for about 70 per cent of Manappuram Finance's total loans, with micro finance loans accounting for about 25 per cent, and vehicle finance and affordable housing contributing most of the rest.
"Stress will likely remain high in Manappuram Finance's non-gold portfolio, especially in the micro finance business. The asset quality of the non-gold loan portfolio has deteriorated sharply over the past two years," the agency said.
However, it said, billing and collection efficiency are increasing back to close to pre-Covid-19 levels, hinting at improving asset quality trends. Besides, as Manappuram Finance has pre-provisioned for the micro finance business, any residual impact can be largely absorbed by the company's earnings.
S&P Ratings forecasted that the company's risk-adjusted capital ratio will stay above 30 per cent over the next 12 months and its core earnings are likely to remain at more than 5 per cent of its average managed assets during this period. It added that this ratio is one of the highest among rated peers.
It said Manappuram Finance's funding profile is also improving with a shift toward longer tenor debt. Despite the contraction in margin, S&P Ratings expects the company's margin and profitability to remain much better than that of the peers.
It said it could downgrade Manappuram Finance if its credit costs increase substantially more than the agency's expectations, particularly in microfinance loans, while more stability in funding profile can lead to an upgrade.
Shares of Manappuram Finance were trading 2.18 per cent higher at Rs 204.20 on the Bombay Stock Exchange (BSE) during the afternoon trade on Tuesday.
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