An employee selects a gold ring from a jewelry tray. (Photographer: Qilai Shen/Bloomberg)  

Are Manappuram, Muthoot The New Safe Havens Among NBFCs?

Gold loan companies have returned best gains among non-bank lenders in the last seven months even as the cash crunch triggered by Infrastructure Leasing & Financial Services Ltd. crisis raised borrowing costs.

Stocks of Muthoot Finance Ltd. and Manappuram Finance Ltd. have risen 50 percent and 26 percent, respectively, since September. By comparison, peers either tumbled or returned single-digit gains. A series of defaults by stressed infrastructure builder and financier IL&FS last year pushed up borrowing costs for most non-banking finance companies, raising concerns over their asset-liability position. The ones which relied on short-term borrowings suffered the most.

What Led To The Rally

Gold lenders stood out because of a positive asset-liability situation, low leverage, and gold itself—a highly-liquid collateral. The market distinguished between the NBFCs with good and bad asset-liability position.

Safe Haven Bets?

The Reserve Bank of India’s regulations to cap loan-to-value at 60 percent in 2012 from 90 percent had curbed lending by the gold loan companies. As a result, disbursements for Manappuram fell 35 percent in 2012-13 and net profit fell 65 percent. Muthoot, however, did relatively better as its net profit grew 13 percent in FY13. But it could not sustain that in FY14 as its profit fell 22 percent.

In 2017, the central bank further reduced the upper limit of cash that could be advanced by the gold loan companies to Rs 20,000 per borrower against an earlier cap of Rs 1 lakh.

Still, Vasant Lohiya, an analyst at JM Financial Services Ltd., told Bloomberg Quint that most of the taxing regulations for gold loan companies are now over and the only concern is moderate growth in the segment. De-linking of loan book from gold prices helped these companies in the last two-three years, he said.

Vasudevan Ramaswami, chief operating officer at Muthoot Fincorp, told BloombergQuint that there’s no risk of potentially adverse RBI regulations at this point. “Our business is relatively stable as we get gold as a collateral for loans. We are targeting growth rates of 16-18 percent for FY20.”

Muthoot Finance and Manappuram Finance have also started taking equated monthly instalments. While Manappuram reduced the tenure of its gold loans to three to four months, Muthoot continues with tenors of up to one year.

When gold prices are high, the amount of lending goes up leading to higher growth. The fall in gold prices, however, used to increase non-performing asset risk. These measures strengthened the risk practices, boosting investor confidence.

Still, Centrum Broking said in a note that possible regulatory changes to curb gold loan tickets and disbursements is a risk factor.

Outlook Ahead

Manappuram and Muthoot have diversified their portfolios into commercial vehicles, housing finance and microfinance. In an earlier interview, the management of Manappuram Finance told BloombergQuint that it expects the share of non-gold business to grow 2 percentage points to 32 percent of the total book as of March even though gold portfolio continues to grow at 10-12 percent.

Muthoot Finance seems to have found the right balance to diversification—continued investments in gold loan business as well as a steady growth in its non-gold business, Antique Stock Broking said in a note. “On gold loan business, we expect it to grow at 12 percent CAGR and generate 6 percent-plus return on assets.” The brokerage said valuations at 9.6 times of FY21 earnings and 1.9 times the book value are compelling and don’t completely factor in the growth prospects and the success of diversification.

The gold loan business of Manappuram could be well at peak profitability—lending rates are at multi-year highs while marketing and promotion expenses are at lows, according to Antique Broking. Further improvement in profitability has to come from either growth in gold loans or improved profitability of non-gold businesses, it said. While the gold-loan business will continue to generate high cash, the brokerage said valuations at 9.3 times on FY21 earnings and 1.8 times the book value have already factored that.

Out of the 10 analysts covering Manappuram Finance, 80 percent have a ‘Buy’, 20 percent recommend ‘Hold’. The 12-month target price of Rs 124.50 apiece suggests a potential upside of 0.4 percent.

For Muthoot Finance, 80 percent of the analysts tracking the stock have a ‘Buy’, while 10 percent each recommend ‘Hold’ and ‘Sell’. At a target price of Rs 630.13 per share, analysts see an upside of 2.3 percent.