Manappurum share price is well correlated with price of gold at least in the short to medium term. So far discussion on this correlation has been focused on effect of drop in gold prices on the NPAs and resulting credit costs. While we have seen credit costs have gone up in the past when gold prices dropped, rise in credit costs were not big enough to say that gold prices have a substantial impact on the bottom line simply due to rise in credit costs.
Upon further analysis, I noticed that a drop in gold prices forces Manapputum to reduce (or limit the growth of) its loan portfolio as it has to maintain loan-to-value ratio. This limit on loan portfolio actually has a big impact on its interest income and bottom line more than the credit costs.
Only way Manappurum can grow its loan portfolio (in terms Rs Cr) is to grow the size of its gold holdings (in tons) such that rise in tonnage will more than offset drop in gold price thereby keeping value of collateral from falling too much.
Here is a quick chart that shows gold tonnage, loan portfolio and LTV ratio over last few years.
Source: Company Annual Reports
This chart clearly shows that company's loan portfolio (green columns) is well correlated with value of the collateral (yellow column) and its LTV is maintained just close to prescribed minimum (which was cut in 2012).
Value of collateral is further broken into gold tonnage and gold price. Chart below shows two numbers.
Source: Company Annual Reports & IR Presentations.
This chart shows that until 2012, both gold prices and gold holdings were rising which resulted in sharp rise in value of collateral and loan portfolio. 2013 came as a shock as LTVs were brought down by RBI so gold holdings dropped even if gold prices rose. Since borrowers could not put up more collateral, gold holdings dropped further in 2014. Gold prices also dropped in 2014 resulting in a sharp drop in collateral value and loan portfolio. Over the next 2 years, while gold prices continued to trend lower, Manappurum was able to grow its gold holdings fast enough to offset the drop in gold prices resulting in growth in net loan portfolio.
Last one year has seen the dual effect of rise in gold price and rise in gold holdings (exact opposite of 2014) resulting in sharp rise in gold portfolio and recovery in share price (which has quadrupled in last one year).
The point is, gold prices do affect Manappurum profits and share price but not because of impact on credit losses but rather for a simple reason of its impact on size of the loan portfolio.