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.
Results seem largely in line with expectations … especially considering time for business to pick up after demonetization impact and Return to normalcy somewhere in mid q4 … concall details will be awaited
However, diversified Microfinance is loss making in Q4 (-151.7% Q-o-Q). Not sure does management is capable to turn around, as they have limited understanding of that business. GNPA 4.66%!.
Observation is correct, but i believe it should be seen in larger perspective of on annual basis.
industry situation due to demonetisation was being disrupted and hence reading in between the lines for one odd quarter may mislead. having said so, important will be to be alert for current quarter Q1 trend to really confirm Q4 being one off to ignore.
I saw it. If you compare with other Microfinance companies who released Q4 results, these incumbents have recovered well in Q4 with some growth. Hence, need to view critically Mana Fin Management’s competency, which is deep red. As microfiance biz need different strategy…
One critical question with Manappuram’s business strategy going forward is how viable this gold loan product’s going to be in the years to come. I mean, what’s stopping banks from winning away a sizeable market share from gold loan nbfc’s. In the Q4 investor presentation, Manappuram has done a great job comparing their product with that of banks. But the interest rate differential is just too high to sustain. It’s quite a low hanging fruit for banks to exploit. Online gold facililty where you deposit gold at any branch and avail of loan 24x7 is not a technological innovation by any means.
Also, the general argument that people may not have a bank a/c but would most definitely have some gold doesn’t hold merit. Manappuram is disbursing 60% of incremental gold loans directly into bank accounts. So their target customer base is definitely not the unbanked!
Management commentary too is focussed on the size of the non-gold portfolio.
Views and thoughts invited!
I think what separates any NBFC from banking channel is the reach, penetration and focus. It includes micro finance, transport finance, gold loan or simply home loans. Banks have been doing this for years but they are also doing a ton of other things and somehow NBFC’s have made hay where banks overlooked.
Another point is a large bank would’ve rigid policies and documentation process while Mannappuram/ Muthroot provide that personal touch at local level that a borrower might be looking for.
That argument can be made for why can’t banks do any NBFC can do. For one, Banks do come under different rules and guidelines compared to NBFC. A simple example, we have a HMCL dealership - NBFCs can advertise 0% interest but Banks can not due to some RBI rules/guidelines.
NBFCs provide greater penetration, they have more relaxed policies, they focus on getting more smaller customers and are focused on the loan business.
Consolidated Assets (Fixed+Other) de-growth -7.9%, while income from Operations increased by 43% (Y-o-Y). How management able to do it? OR Is I am missing anything?
As I m banking professional, i know that though we offer lowest interest rate, our loan to value s still lower than nbfc such as manappuram, muthoot etc…, Those customers who need more money , have no other option than nbfc . Therefore, set of people still depends on it only.
Business hours of psu banks are 10am to 3.30 pm. So customers can pledge their gold ornaments during this hours only. In case of NBFC, customers may pledge their jewels , even at 8 pm i think so.
Nothing. But banks tried that in the past and it didn’t work for them as they are not geared for making small ticket loans. They are looking for multi-crore wholesale loans. Banks with wider reach have assets that are about 100 times assets of gold loan companies. even if they take entire business away from gold loan companies it will only add about 1% to their loan book.
Gold loan is practically micro finance with adequate security and that’s why it has best of both worlds. Any financial institution will die for the combination of very high yield and low NPA since gold is the most liquid assets. The key question of execution is more or less settled. The quick turnaround, flexibility in packaging loans and low cost operations compared with banks is not the only advantage. IMO, there are few issues to be settled for which some cooling period is required. Volatility will always be there in this biz and past corp governance transgressions would need to be forgotten. Only thing it needs is time to settle all negative notions and domestic investors to come back.
Manappuram share price is undervalued (Price Vs Value) though it has good business model, strong management, decent growth, good results. What could be reason from Mr. Market? If the stock is undervalued for so long we may need to re-think!
Disc: Invested during demon. If i find better opportunity, i will switch lanes for long-term
One of the reasons stock is undervalued (I think) is Mutual Funds are staying away from gold loan companies. Manappuram is owned by very few MFs, the market is reaching new highs on backs of SIP revolution.
