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Shares of Manappuram Finance Ltd continued to slide on Monday, dropping 5% during the day’s trading session. The stock hit a low of Rs 145.50, marking a decline of nearly 24% over the past eight trading days. The downward trend has raised concerns among investors, prompting questions about what is driving the sharp drop.
The major factor behind the slump in Manappuram Finance’s stock is an order from the Reserve Bank of India (RBI) involving its subsidiary, Asirvad Micro Finance.
The RBI has instructed Asirvad to stop sanctioning and disbursing loans, effective from October 21. This comes as a blow to the company, especially since Asirvad is a key contributor to Manappuram Finance’s overall performance.
Asirvad Micro Finance accounts for 27% of the consolidated assets under management (AUM) for Manappuram Finance. As of June 30, 2024, Asirvad’s AUM stood at Rs 12,300 crore, which includes a Rs 1,200 crore gold loan portfolio. The halt on loan activities will also impact the 515 branches that handle gold loans under Asirvad, adding further pressure on the company.
Manappuram Finance has responded to the situation, stating that they are treating the RBI’s instructions with the “utmost seriousness.” The company has committed to addressing every observation made by the central bank and plans to conduct a thorough review of its governance, risk management, and regulatory compliance practices. The firm has promised to submit a detailed plan to the RBI within the given timelines.
Several brokerage firms have reacted to the news. Motilal Oswal Financial Services Ltd (MOFSL) has downgraded Manappuram Finance’s stock from ‘Buy’ to ‘Neutral,’ setting a revised target price of Rs 160.
“We expect the RBI’s ban on Asirvad to last between six to nine months. As a result, we have lowered our loan growth and earnings estimates for the company’s microfinance business, cutting our profit forecasts for FY25 and FY26 by 9% and 17%, respectively,” said MOFSL.
However, not all experts share this pessimistic view. Amit Goel, co-founder and chief global strategist at Pace 360, believes that the market is overreacting.
“We’ve bought shares of Manappuram Finance because we think the drop is excessive given the circumstances. The fundamentals of the company remain strong, and the valuation is attractive,” Goel said.
From a technical standpoint, Manappuram Finance’s stock is showing signs of weakness. The shares are trading below several key simple moving averages (SMAs), including the 5-day, 10-day, 20-day, and 200-day averages.
Additionally, the stock’s 14-day Relative Strength Index (RSI) stands at 15.72, which indicates that it is oversold. Typically, an RSI below 30 suggests that a stock may be oversold, while an RSI above 70 is considered overbought.
Despite the recent drop in its stock price, Manappuram Finance remains fundamentally strong. According to data from the Bombay Stock Exchange (BSE), the company has 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) stands at Rs 20.29, with a return on equity (RoE) of 16.59%. As of September 2024, the promoters held a 35.25% stake in the non-banking financial company (NBFC).
(Disclaimer: The views, opinions, recommendations, and suggestions expressed by experts/brokerages in this article are their own and do not reflect the views of the India Today Group. It is advisable to consult a qualified broker or financial advisor before making any actual investment or trading choices.)