Worry about investments in Mannapuram Finance
The local paper of DNA, DNA Navi Mumbai has covered the happenings in a branch of the loan against gold company Mannapuram finance. The branch was looted and borrowers who have pledged their gold are not able to get back their assets.
Spectacular growth story
Mannapuran until 2007 was a local Kerala based non banking finance company (NBFC) carrying on the business of lending against gold. The company caught the eye of private equity firms and from there on the growth was at breakneck speed. A very strong resemblance to micro finance companies that grew too fast with initial private equity backing and are now struggling for survival.
Mannapuram in 2011 has 2280 branches spread across the country, though 76% of the branches are in the south of India. The number of branches has grown by at least twenty five times in the last five years. The company’s turnover has grown from Rs 43 crores in 2007 to Rs 1100 crores in 2011, a jump of over 25 times. The company’s assets have grown multi fold over the last five years. The promoters have been busy diluting equity at every opportunity and currently own around 36% of equity a dilution of over 50%. The stock has been a multibagger giving returns of around 25 times since 2006. The stock has been helped by generous bonus issues with two 1:1 bonus since the last two years.
A growth to be admired or to be worried about?
The happenings in a small branch in Navi Mumbai are a worry sign. A small, local lender suddenly becoming a large national lender by growing at breakneck speed in a business that is fraught with risks should be looked at with a lot of trepidation. The quality of credit controls, the risk in storing physical gold, the high price of gold at present which can crash leading to defaults by customers and the competition from banks should be looked at carefully. A dilution happy promoter who goes in for QIP (Qualified Institutional Placement) as soon as the word “Q” is mentioned is definitely not shareholder friendly. Investors in equity and debt of Mannapuram should exit first and think later or should keep a closer watch on the happenings in the operation of the company.