Manappuram Finance shares tank 15% to 11-month low on RBI action against subsidiary Asirvad Micro, multiple downgrades

Manappuram Finance shares plunged 15% during early trading on Friday, October 18 to their 11-month low of ₹150.73 apiece. This decline followed a downgrade from analysts who revised their target price downwards for the stock in response to recent regulatory restrictions imposed by the Reserve Bank of India (RBI) on its subsidiary, Asirvad Micro Finance.

On Thursday, the RBI announced that it has prohibited four non-banking financial companies (NBFCs), including Asirvad Micro Finance, from sanctioning or disbursing loans. This action was taken due to concerns regarding "usurious" pricing practices, with these companies reportedly charging significantly higher markups compared to their funding costs.

The restrictions affecting Asirvad Micro Finance, along with Arohan Financial Services, DMI Finance, and Navi Finserv, will take effect at the close of business on October 21, as stated in the RBI’s release.

The RBI's investigation revealed that the pricing strategies employed by these NBFCs were excessive and failed to comply with established regulations. Additionally, the companies did not adhere to the guidelines regarding the assessment of borrowers' household incomes and their ability to repay microfinance loans.

The central bank also highlighted issues such as non-compliance with norms that lead to the continuous renewal of loans and a lack of transparency in disclosing interest rates and associated fees to customers.

Despite previous warnings from the RBI over the past few months, these companies continued to engage in such practices, prompting the regulator to emphasise the importance of responsible use of their regulatory freedoms to ensure fair, reasonable, and transparent pricing, particularly for small-value loans.

In the recent monetary policy meeting, RBI Governor Shaktikanta Das expressed concerns that some Indian NBFCs are aggressively pursuing growth while chasing excessive returns on equity, potentially jeopardising financial stability.

Analysts turn bearish on Manappuram Finance

Morgan Stanley has downgraded Manappuram Finance to Equal Weight (EW), reducing the target price to ₹170 as it believes RBI's prohibition on new business activities by Asirvad Micro Finance is expected to materially impact profits in both the short and long term.

It has cut consolidated earnings forecasts by 20% for FY25 and 30% for FY26-27. While the standalone valuation remains attractive, it may take some time for investor interest to rebound, it added.

Similarly, Jefferies downgraded the stock to 'Hold', lowering its target price to ₹167. The RBI's ban on loan disbursements from the subsidiary Asirvad, which accounts for 27% of consolidated assets under management (AUM), presents challenges for growth, it said.

Jefferies has revised its earnings per share (EPS) estimates downwards by 11-19% for FY25-27. Although shares may come under pressure, with a valuation at 0.9x FY26E book value, the potential downside is expected to be limited, it added.

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.