>GOLD LOAN NBFC's: Muthoot Finance & Mannapuram Finance

Glittering as Gold!!!


Gold financing: Strong growth here to stay



The structurally strong business of gold financing has been and is expected to remain an attractive form of consumer financing given the dichotomic lending structure in India, highly liquid collateral and huge untapped potential in terms of value unlocking opportunity that the asset offers. Considering this, we are bullish on gold NBFC’s and initiate coverage on Muthoot (MUTH) and Manappuram (MGFL) with a positive outlook given their extensive network in place, better services and variant/dynamic product range. With Unorganized segment getting re-aligned towards Organized lending market, we believe that these companies are well positioned for the next leg of growth and expect MGFL and MUTH to grow their AUM at CAGR 48% and 32% respectively for FY11-14E.


Indian gold loan market – Opportunities galore
Historically, given the “urgent and essential” nature of this loan, the leadership is with the unorganized sector (75%/25% market share for Unorganized/Organized in FY09) in spite of an analogous existence of Banks and RRBs. However over the years, the organized segment has grown at CAGR of 68% in FY07-11 with an estimated market share of ~34% as on FY11. Going forward, considering the buoyant gold demand (32% of world gold demand), hefty gold holding of Indian households and voluminous market size, we believe that the strong growth for the organized players remains the leitmotif.


Under-penetration the drive-network the key
Within the organized segment, specialized NBFCs have witnessed extraordinary growth with MUTH and MGFL growing their branches at CAGR 67% and 99% respectively through FY09-11 due to their swift branch expansion, superior service offerings and timely infusion of capital. Given the growth nature of the gold loan market, the sole cost to grow would be network expansion. Henceforth, major drive for MUTH and MGFL, apart from their new branch openings, would also be coming from the maturing branches and hence increasing the penetration of the immature branches, which as on FY11 comprised a substantial weight in the blend: 64% for MUTH and 75% for MGFL.


Spreads to normalize- Scale to offset
Removal of PSL status from the funding by banks (direct or indirect), increases the cost of funds by 150-200bps. Adjacently, the competition intensities, should going forward result in yield moderation.


Impact of both of which should be normalization in the spreads by ~75bps for MUTH and ~200bps for MGFL. Having said that, with the increasing weights of mature branch in the blend, the benefits of operating leverage would reduce the Opex/Avg. Assets.


Attractive return ratios; Initiate with Buy rating
The current valuations of MGFL and MUTH are at 1.3x and 1.4x of FY13E BV respectively and doesn’t really factor the scalability, potential earnings growth and attractive model of high yield-low risk business in comparison with other asset financing NBFCs. We expect MGFL and MUTH to deliver an average RoE’s of ~26% and 30% through FY12-14E driven by their earnings growth of 47% and 32% respectively for the similar period. Given the huge value unlocking potential that this business has, we remain upbeat on the gold financing sector as a whole and initiate coverage with BUY rating on MGFL and MUTH with a target price of ` 76 and ` 232 respectively. Key risks: i) Significant and sustained drop in gold prices ii) Regulatory risks iii) Capital constraints and iv) Stiff competition from new entrants and banks.


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