GOLD LOAN COMPANIES-- MUTHOOT AND MANAPPURAM FINANCE

GOLD LOAN COMPANIES

INDIA IS A HUGE GOLD MARKET ESTIMATED TO HOLD AROUND 10% OF WORLD’S TOTAL GOLD STOCK.    LOANS AGAINST GOLD PLEDGING IS A VERY OLD BUSINESS AND IT IS ASSUMED THAT AROUND 10% OF THE TOTAL GOLD STOCK IS PLEDGED AGAINST LOANS.  THIS BUSINESS IS A HUGE BUSINESS AND THE ORGANISED MARKET HAS ONLY 25% OF THE MARKET SHARE OF OVERALL  GOLD LOAN MARKET, REST ACCOUNTED BY THE UNORGANISED MARKET.  

ORGANISED GOLD  MARKETS HAVE GROWN BY AROUND 40% CAGR IN THE LAST 8-9 YEARS.  THE MAIN BENEFICIARIES OF THIS BOOM HAVE BEEN TWO PROMINENT COMPANIES NAMELY MUTHOOT FINANCE AND MANAPPURAM  FINANCE.   BOTH HAVE GROWN AT A TREMENDOUS PACE IN THE LAST FEW YEARS.  

BOTH THESE SPECIALISED NBFC SCORE OVER BANKS IN THE GOLD LOAN BUSINESS BECAUSE OF CUSTOMER PREFERENCE FOR THESE NBFC.  MAIN REASONS FOR THIS PREFERENCE ARE  LOW LEVEL OF DOCUMENTATION, QUICK DISBURSAL OF LOANS, HIGHER LTV OFFERED , EASE OF ACCESS TO THESE NBFC, PERCEPTION OF HIGHER SAFETY OF ORNAMENTS , FLEXIBILITY OF LOAN TENURES ETC.

BOTH THESE COMPANIES HAVE HAD A DREAM RUN IN TERMS OF THEIR FINANCIAL PERFORMANCE BUT THEY ARE EXPECTED TO FACE SOME HEADWINDS GOING FORWARD.

FIRST, THE HIGHER BASE EFFECT IS LIKELY TO PLAY OUT AND HENCE GROWTH FIGURES SHOULD SHOW SOME MODERATION AS COMPARED TO EARLIER.

SECONDLY, THE COMPETITION IN SOUTHERN MARKET IS INCREASING.

THIRDLY, THE RBI GUIDELINES WHICH REMOVED THESE INSTITUTIONS FROM PRIORITY LENDING SEGMENT IS LIKELY TO PLAY SPOILSPORT FOR THEM.

AND FINALLY FUNDING COST OF THESE INSTITUTIONS IS LIKELY TO BE HIGHER WHICH WOULD PUT PRESSURE ON THE NIM – NET INTEREST MARGINS OF THESE COMPANIES.

THE ABOVE FEARS HAVE LED TO A BIG UNDERPERFORMANCE BY THESE COMPANIES IN TERMS OF THEIR STOCK PRICES.

MUTHOOT FINANCE

CMP 162  BOOK VALUE 62

THIS IS THE BIGGEST GOLD LOAN COMPANY IN INDIA.  IT HAD RECENTLY COME OUT WITH ITS IPO AT A PRICE OF 175 AND WAS WELL SUBSCRIBED BY THE INVESTING COMMUNITY.  POST ITS IPO, THE STOCK HAS BEEN UNDERPERFORMING WITH THE STOCK PRICE HITTING A LOW OF AROUND 150 AND CURRENTLY IS RULING AT AROUND 162.   BASED ON CURRENT MARKET PRICE THE MARKET CAP OF MUTHOOT FINANCE IS 6086 CRORES.

FINANCIALS

YEAR	06	07	08	09	10	11
OP INCOME	145	230	366	615	1077	2298
PBT	41	70	97	148	345	761
NET PROFIT	27	44	64	98	227	494

ROE FOR MUTHOOT HAS BEEN WELL ABOVE 30% AND ROA IS WELL ABOVE 3. 

THERE COULD BE SLIGHT MODERATION IN THESE RATIOS GOING FORWARD DUE TO CONTRACTION IN NIM DUE TO HIGHER FUNDING COSTS.

MANAPPURAM FINANCE

THIS COMPANY HAS BEEN LISTED SINCE MANY YEARS AND HAD A STRONG RUN UP IN NOV 2010 WHEN IT POSTED A HIGH OF 95 (ADJUSTED FOR SPLIT) AND SINCE THEN HAS BEEN UNDERPERFORMING.

BOOK VALUE IS 23 AND MARKET CAP OF MANAPPURAM IS 4714 CRORES.

FINANCIALS

YEAR	06	07	08	09	10	11
OP INCOME	20	43	79	165	477	1178
PBT	6	16	32	46	182	424
NET PROFIT	4	10	21	30	120	282

ROE HAS BEEN IN EXCESS OF 20-25% AND ROA ARE ABOVE 4%.

MANAPPURAM HAS RAISED CLOSE TO 800-900 CRORES BY WAY OF QIP AT A PRICE OF 84 DURING FY 11. THIS SHOULD HELP IT SUSTAIN ITS GROWTH TO SOME EXTENT.

COMING TO INVESTMENT THESIS IN THESE COMPANIES,

1.       THE BUSINESS IS EASY TO UNDERSTAND FOR THE INVESTOR

2.       THE DEMAND FOR GOLD LOANS IS GOING TO REMAIN ROBUST

3.       THE ORGANISED MARKET IS SLATED TO CONTINUE GROWING AT THE COST OF THE DOMESTIC MONEY LENDERS

4.       EVEN WITH REDUCTION IN NIM THESE COMPANIES ARE LIKELY TO SUSTAIN GOOD GROWTH IN REVENUES AND PROFITS

5.       THERE SEEMS TO BE A DISTINCT GAP BETWEEN THE PERCEIVED FEARS OF THE MARKETS AND THE ACTUAL SITUATION FOR THESE COMPANIES.

6.       ANY CHANGE IN THE INTEREST RATE CYCLE WOULD BE VERY BENEFICIAL FOR THESE COMPANIES.

7.       THERE IS  HUGE SCALABILITY AND OPPORTUNITY IN THIS BUSINESS WHICH TILL DATE IS A VIRTUAL DUOPOLY BETWEEN THE ABOVE COMPANIES.

NEGATIVES

1.       ANY GOVT POLICY INTERVENTION FIXING A CAP ON THE INTEREST CHARGEABLE BY THESE INSTITUTIONS IS LIKELY TO PLAY SPOILSPORT FOR THEM.

2.       HIGHER FUNDING COSTS IS LIKELY TO AFFECT NIM AND HENCE PROFITABILITY.

3.       SHARP CORRECTION IN GOLD PRICES OF THE MAGNITUDE OF MORE THAN 20-25% COULD AFFECT THESE COMPANIES.

LOOKING AT THE ABOVE SYNOPSIS IT SEEMS THAT INVESTMENT IN THESE GOLD LOAN COMPANIES IS LIKELY TO BE REWARDING FOR INVESTORS HAVING A CONTRARIAN MINDSET OF INVESTMENT.