The shares of Manappuram Finance Ltd have been on a significant downward trajectory, hitting a low of Rs 145.50 during Monday's trading session, which represents a notable decline of nearly 24% over the past eight trading days. This ongoing slump has raised serious concerns among investors and market analysts alike, prompting urgent questions about the underlying factors contributing to this sharp drop in stock value.
One of the primary reasons for the downturn in Manappuram Finance's stock is a recent directive issued by the Reserve Bank of India (RBI) regarding its subsidiary, Asirvad Micro Finance. Effective from October 21, the RBI has mandated that Asirvad must cease all loan sanctioning and disbursement activities. This order poses a considerable challenge for Manappuram Finance, particularly since Asirvad is a crucial component of its overall business performance.Â
Asirvad Micro Finance accounts for approximately 27% of Manappuram Finance's consolidated assets under management (AUM). As of June 30, 2024, Asirvad's AUM stood at an impressive Rs 12,300 crore, which includes a significant gold loan portfolio valued at Rs 1,200 crore. The suspension of loan activities will not only impact the overall financial health of Manappuram Finance but will also affect the operations of its 515 branches that handle gold loans through Asirvad, thereby compounding the company's challenges and limiting its growth potential in a competitive market.
In response to the RBI's stringent instructions, Manappuram Finance has emphasized that it is treating the matter with the "utmost seriousness." The company has committed to addressing all observations made by the central bank and is planning a comprehensive review of its governance, risk management, and regulatory compliance practices. They have pledged to submit a detailed corrective action plan to the RBI within the specified timelines, showcasing their commitment to rectifying the issues raised and ensuring compliance with regulatory standards.
The market reaction to these developments has led several brokerage firms to reassess their outlook on Manappuram Finance. Notably, Motilal Oswal Financial Services Ltd (MOFSL) has downgraded the stock from a ‘Buy’ rating to ‘Neutral,’ setting a revised target price of Rs 160. Analysts at MOFSL anticipate that the RBI's ban on Asirvad will likely persist for a period ranging from six to nine months, resulting in a downward revision of loan growth and earnings estimates for the company's microfinance segment. Consequently, they have adjusted their profit forecasts for FY25 and FY26 by 9% and 17%, respectively, reflecting the anticipated impact on financial performance as the company grapples with these regulatory hurdles.
Despite the grim outlook from some analysts, not all experts share this pessimistic perspective. Amit Goel, co-founder and chief global strategist at Pace 360, argues that the market is overreacting to the situation. "We’ve bought shares of Manappuram Finance because we believe the drop is excessive given the circumstances. The fundamentals of the company remain strong, and the valuation is attractive," Goel stated, highlighting a potential opportunity for investors looking for value amid the volatility and uncertainty surrounding the stock.
From a technical analysis standpoint, the stock of Manappuram Finance is currently showing multiple signs of weakness. The shares are trading below several key simple moving averages (SMAs), including the 5-day, 10-day, 20-day, and even the 200-day averages, which can often indicate bearish sentiment in the market. Furthermore, the stock's 14-day Relative Strength Index (RSI) stands at a notably low 15.72, suggesting that it is significantly oversold. An RSI reading below 30 typically indicates that a stock may be oversold and could be due for a rebound, while a reading above 70 indicates that it might be overbought, pointing to potential market corrections.
Despite the recent decline in its stock price, Manappuram Finance retains a fundamentally robust profile, which should not be overlooked. Data from the Bombay Stock Exchange (BSE) reveals that the company boasts a price-to-earnings (P/E) ratio of 7.56 and a price-to-book (P/B) ratio of 1.26. Its earnings per share (EPS) is recorded at Rs 20.29, accompanied by a return on equity (RoE) of 16.59%. As of September 2024, the promoters of Manappuram Finance held a 35.25% stake in the non-banking financial company (NBFC), reflecting a significant degree of ownership and confidence in the firm’s long-term prospects, even amid the current turmoil.
As the situation unfolds, investors and market watchers will closely monitor Manappuram Finance's responses to the RBI's directives and its strategic actions moving forward. The coming months will be crucial in determining the company’s ability to navigate these challenges and restore investor confidence in its stock performance. Additionally, stakeholders will be keen to see how effectively the company can manage its operational risks, improve its governance structures, and adapt to the evolving regulatory landscape in order to regain its footing in the highly competitive financial services sector. The developments surrounding Manappuram Finance could serve as a critical case study on the intersection of regulatory oversight and corporate governance in the financial industry, especially within the realm of microfinance.
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