Manappuram Finance Q2 FY26: Sharp Profit Decline Amid Rising Provisions and Margin Pressure

The Thrissur-based NBFC, with a market capitalisation of ₹23,421 crores, has seen its stock decline 0.52% to ₹275.10 as of October 30, 2025, though it remains substantially elevated on a longer-term basis with year-to-date gains of 46.14%. The latest quarterly performance represents a concerning reversal from the company's historically robust profitability metrics.

The second quarter results reveal multiple pressure points converging simultaneously. Net sales contracted 9.08% year-on-year to ₹2,262.39 crores, whilst also declining 2.76% sequentially from Q1 FY26. More concerning is the collapse in profitability margins, with the PAT margin compressing dramatically to just 5.86% from 22.37% in the corresponding quarter last year. This represents one of the weakest margin performances in recent years for the company.

Financial Performance: Margin Compression and Profitability Collapse

The detailed quarterly financials expose the depth of operational challenges facing Manappuram Finance. Whilst net sales declined modestly to ₹2,262.39 crores in Q2 FY26, the real damage manifested in the cost structure and profitability metrics. Operating profit before depreciation, interest, and tax (excluding other income) stood at ₹1,029.04 crores, representing an operating margin of 45.48%. Whilst this figure appears substantial in isolation, it marks a significant deterioration from the 65.98% operating margin achieved in Q2 FY25.

Interest expenses remained elevated at ₹855.28 crores, consuming a substantial portion of operating profits. The company's profit before tax collapsed to ₹101.52 crores from ₹752.80 crores year-on-year, an 86.51% decline that underscores the severity of margin pressure. Depreciation charges increased to ₹74.79 crores from ₹64.39 crores, reflecting ongoing business expansion even as profitability deteriorated.

The tax reversal of ₹30.95 crores (representing an effective negative tax rate of 30.49%) provided some cushioning to the bottom line, though this is unlikely to be sustainable in future quarters. The gross profit margin compressed to just 7.79% from 32.84% year-on-year, whilst the PAT margin plummeted from 22.37% to 5.86%. These metrics collectively paint a picture of a business grappling with multiple headwinds simultaneously.

Operational Challenges: Asset Quality Concerns and Elevated Costs

The dramatic profit decline appears to stem from a confluence of factors including elevated provisioning requirements, higher credit costs, and operational inefficiencies. Employee costs increased to ₹474.41 crores in Q2 FY26 from ₹446.38 crores in Q2 FY25, reflecting a 6.28% year-on-year increase even as revenue contracted. This inverse relationship between costs and revenues has severely impacted operational leverage.

The company's return on equity has deteriorated significantly to 9.78% in the latest quarter, down from the five-year average of 16.74%. This metric is particularly concerning for an NBFC, where capital efficiency and return generation are critical performance indicators. Whilst the company maintains a reasonable debt-to-equity ratio of 2.90 times, the declining profitability raises questions about the sustainability of returns on this leverage.

The balance sheet reveals shareholder funds of ₹12,432.19 crores as of March 2025, reflecting steady capital accumulation despite recent profitability challenges. Current liabilities stood at ₹36,926.90 crores, up from ₹35,487.46 crores in the previous year, indicating continued business growth in terms of scale even as margins compressed. Fixed assets increased to ₹594.93 crores from ₹511.32 crores, suggesting ongoing investment in branch infrastructure and technology.

Industry Context: NBFC Sector Headwinds and Competitive Pressures

The non-banking financial company sector has faced mounting challenges in recent quarters, including regulatory tightening, increased competition from banks in the gold loan segment, and rising funding costs. Manappuram Finance's struggles reflect broader industry trends, though the magnitude of profit decline suggests company-specific issues may be compounding sector-wide pressures.

The company's stock has significantly outperformed the broader NBFC sector over the past year, delivering returns of 70.71% compared to the sector's 18.11% gain. This 52.60 percentage point outperformance suggests the market had priced in strong growth expectations, making the recent profit disappointment all the more jarring for investors. The stock trades at a price-to-book value of 1.87 times, reflecting a premium valuation relative to some peers despite the operational challenges.

Relative to its peer group, Manappuram Finance demonstrates superior return on equity at 16.74% compared to the peer average of approximately 10%, though this historical strength has been significantly compromised in recent quarters. The company's P/E ratio of 29.11 times appears moderate compared to peers like Poonawalla Fincorp (180.87x) and Tata Investment Corporation (115.37x), though these comparisons are complicated by vastly different business models and growth trajectories.

Valuation Analysis: Premium Multiples Despite Operational Struggles

Manappuram Finance currently trades at a P/E ratio of 29.11 times trailing twelve-month earnings, representing a substantial premium to the NBFC sector average of 23 times. This valuation appears stretched given the recent deterioration in profitability metrics and negative financial trends. The company's price-to-book value of 1.87 times, whilst not excessive in absolute terms, appears elevated considering the declining return on equity.

The stock's valuation grade has oscillated between "Expensive" and "Very Expensive" throughout 2025, with the most recent assessment categorising it as "Very Expensive." This classification reflects the disconnect between current market pricing and underlying fundamental performance. The dividend yield of 0.91% provides minimal income support for investors, particularly in a rising interest rate environment where fixed-income alternatives offer increasingly attractive yields.

The stock's 52-week range of ₹147.50 to ₹298.00 illustrates the volatility in investor sentiment over the past year. Trading at ₹275.10, the stock sits 7.68% below its 52-week high but remains 86.51% above its 52-week low, suggesting significant gains may already be priced in. The year-to-date return of 46.14% substantially outpaces the Sensex's 8.02% gain, though this outperformance appears increasingly vulnerable given deteriorating fundamentals.

Shareholding Pattern: Institutional Confidence Building Gradually

The shareholding structure reveals a stable promoter base holding 35.25% of equity, unchanged over the past five quarters. This consistency provides some comfort regarding management commitment, though the static holding also means promoters have neither increased their stake during recent market weakness nor reduced it during periods of strength.

Foreign institutional investors have gradually increased their stake from 27.01% in December 2024 to 30.16% in September 2025, demonstrating growing confidence despite operational challenges. This 318 basis point increase over three quarters suggests sophisticated investors see value in the long-term franchise despite near-term headwinds. The presence of 231 FIIs holding the stock indicates broad-based international interest.

Mutual fund holdings have declined from 9.49% in September 2024 to 6.93% in September 2025, a reduction of 256 basis points that signals domestic institutional caution. This divergence between foreign and domestic institutional behaviour merits attention, as local investors may have greater insight into competitive dynamics and regulatory developments affecting the company. Insurance company holdings have increased modestly to 1.20%, whilst other domestic institutional investors hold 1.04%, bringing total institutional holdings to 39.33%.

Stock Performance: Strong Long-Term Gains Mask Recent Weakness

Manappuram Finance's stock performance presents a tale of two timeframes. Over the longer term, the stock has delivered exceptional returns, with a three-year gain of 163.51% and a remarkable ten-year return of 1,034.43%. These figures substantially outpace the Sensex's corresponding returns of 40.77% and 216.63%, generating alpha of 122.74 and 817.80 percentage points respectively.

However, recent performance reveals growing weakness. The stock has declined 2.46% over the past week and 1.94% over the past month, underperforming the Sensex by 7.09 percentage points on a one-month basis. This near-term weakness likely reflects investor concerns about the deteriorating quarterly results and uncertain outlook. The stock trades below its 5-day, 20-day, 50-day, 100-day, and 200-day moving averages, a technical configuration that suggests negative momentum.

The stock's beta of 1.35 indicates higher volatility than the broader market, with annualised volatility of 33.73% compared to the Sensex's 12.49%. This elevated volatility, combined with recent operational challenges, places the stock in the "high risk, high return" category. The risk-adjusted return of 2.10 over the past year, whilst positive, has likely deteriorated following the recent profit disappointment.

Investment Thesis: Quality Franchise Facing Temporary Headwinds

Manappuram Finance's investment case rests on several pillars, though recent developments have weakened the overall thesis. The company maintains a "Good" quality grade based on long-term financial performance, supported by an average return on equity of 16.74% and healthy institutional participation of 39.33%. The five-year sales growth of 10.65% demonstrates the company's ability to scale its business, though the five-year EBIT growth of just 1.67% reveals challenges in translating top-line expansion into bottom-line improvement.

The current financial trend is classified as "Negative," reflecting the sharp profit decline and margin compression evident in recent quarters. The technical trend remains "Mildly Bullish," though this assessment appears increasingly tenuous given the stock's position below all key moving averages. The valuation grade of "Very Expensive" represents perhaps the most significant headwind, as the stock's premium pricing leaves little room for disappointment.

Key Strengths & Risk Factors

Outlook: Critical Monitoring Points for Recovery Assessment

The path forward for Manappuram Finance hinges on the company's ability to stabilise margins and return to profitable growth. Investors should closely monitor quarterly results for evidence of operational improvement, particularly in terms of margin recovery and asset quality trends. The management's ability to articulate a credible turnaround strategy will be crucial in determining whether the current challenges represent a temporary setback or a more fundamental business model issue.