>GOLD LOAN INDUSTRY: Gold loan NBFCs

Standing up to the test of fire


Genuine and structural demand; business model here to stay
Our branch visits of gold financiers made us more confident about genuineness of gold loan demand. Gold loans as a product is gaining significance as it is the fastest and most convenient form of financing, finding use in meeting urgent personal/business needs. Even though the current regulatory changes will impact growth, margins and hence profitability of business, the business model has merit and will continue to embark on a steady growth path post the consolidation period i.e., FY13. Despite heightened competition from banks like Federal Bank, HDFC Bank, ICICI Bank, etc., the USP that established gold loan NBFCs have developed, i.e., scale, first‐mover advantage, brand equity, accessibility, relatively lower documentation and fast turnaround time, will ensure that customers keep flocking to their branches aiding gold lenders to continue to hold forte.


RBI came cracking; industry coping up better than expected
We believe investors are skeptical on monoline gold financiers considering recent regulatory
upheavals and peak/volatile gold prices coupled with active competition from banks and NBFCs.

What if…
Regulatory landscape becomes further assertive
We cannot call it an end of regulatory rigmarole till the report of KUB Rao Working Group is tabled by July 2012. Even in a stress case, assuming further regulatory strictures either with respect to limit on cash disbursals or increase in risk‐weights or definition of collateral value (though we assign low probability to this playing out), we expect 25%‐30% decline in growth from our base case scenario. Even under these circumstances, it will continue to deliver 2.5%‐3.0% RoA and 10%‐15% RoE.

How should investors view this space?
Regulatory risks remain only in interim, long term fundamentals stay firm We accept that FY13 will be the year of consolidation for gold finance companies in term of growth and margins though stability at the ground level might surprise the consensus numbers and expectation. From FY14 onwards, the business model would deliver steady state of 15%‐20% growth, impressive return profile (ROA and ROE) and benign asset quality metrics, a key investor pull. We are confident of substantial merit in this business model as gold loan demand is genuine being the fastest and the most convenient form of financing short term personal/business needs. Leading gold loan financiers will continue to hold the forte considering their USP – branding, convenience, trust, faster turnaround unless: 
     
     􀂃 Customers become averse to pledging of gold and instead prefer selling gold
     􀂃 Banks get aggressive grabbing significant share due to rate, LTV and reach advantage


Play this space via Muthoot Finance and Federal Bank
We prefer to play this space via quality players like Muthoot Finance or major beneficiary of
regulatory changes like Federal Bank. We also upgrade Manappuram Finance to BUY.

Highlights of survey across 150+ branches

1. Is gold financing just reaping the benefits of a benign gold price cycle? 
2. Where do we stand in terms of penetration and product potential? 
3. What can lead to customers becoming averse to pledging of gold? 
4. Did rapid growth, burgeoning competition see some dilution in lending? 
5. NBFCs will hold the turf; but big private banks can change the game 
6. RBI came cracking; industry coping up better than expected 
7. Consolidation in the interim; long‐term fundamentals intact 
8. Is this is the end of regulatory rigmarole? 

To read report in detail: GOLD LOAN INDUSTRY

RISH TRADER