Deep Value Investment- Paul Merchants Limited

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PML has 2 business – one is money exchange and remittance business and other is gold loan business. Money exchange and remittance business is not in focus here. I’m more interested in the hidden value of the gold loan business.

PML subsidiary Paul Merchants Finance PVT ltd. gives gold loan and it currently has 90+ branches in the North India. Revenues are increasing at a rapid rate. In the last 6 years FY18-24, revenues increased by 78% CAGR, PAT 92% CAGR and Networth by 30% CAGR and loan book increased by 57% CAGR.

When I looked at the PML, then the question in my mind was, why the company is trading at cheap?

PML’s money exchange and remittance business was suffering revenue loss. In FY23 revenue peaked to 6,900 crore, it then declined by 6% yoy to 6,500 crore in FY24 and in TTM it’s around 3,800 crore. This business overshadowed the gold loan business which contributed revenue of 160 crore (51.5% yoy growth) in FY24. However the PML was able to maintain the bottom line which was mostly due to contribution from the gold loan business which was around 30 crore.

My calculation was that the gold loan business with FY 24 PAT 30 crore, i.e a proxy of free cash flow. Using DCF – and calculating 27 crore FCF (after some CAPEX, which is related to opening new branches) – divided by 12% discount rate (with no growth) – value = 225 crore. Plus 100 crore (based on similar transactions in the past) value of forex business. Total value was 325 crore i.e a upside of upside of 14% vs Current mkt cap as 13 oct of 285 crore.

With worst case - Liquidation value 312 crore assuming 10% default in gold loans – upside of 9.5%

With Bull case which is very likely based on the operating history of past 6 years of the gold loan business, the valuation of total business was 557 crore gold loan business plus 100 crore from forex business i.e total value of 657 crore (upside of 2.3 times from Oct 13 level). The stock will double, If this gap closes in 3 year then the return on investment will be 26% for 3 years.

But things have changed in the last 5 months, I mean it’s more interesting. In February, PML ( parent company) announced that they are selling the gold loan subsidiary business to L&T finance for the lump sum of 537 crore with more considerations subject to performance post the acquisition.

The business transfer is expected to close by the second quarter of the financial year 2025-26. If this transaction closes, the cash balance of PML increases by 537 crore plus 164 crore (which is discretionary to L&T if they opt to refinance, as PML have lent this to PMFL). This all put together increases the Total Assets to 828 crores which includes 700 crores of cash and cash equivalent. And the book value of 778 crore after subtracting all liabilities which is practically none i.e total liabilities of 50 crore based on Sept 2024 balance sheet and no long term debt. It’s very obvious to me that stock can’t trade below the cash on the balance sheet. I’ll wait for 7 months till September 2025 and see how is market going to react as soon as cash will hit the bank.

Risk –

  • Post transaction close, management’s capital allocation decision is still unknown
  • if the transaction doesn’t close, we will still have a growing gold loan business
  • Corporate Guarantee of 575 core in Respect of OD Limits taken by Paul Merchants Finance Private Limited

Disclosure - Invested

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yes… there is deep value at current prices… only caveat is whether the promoters are small shareholder friendly or not …they last gave dividend five years ago… recent bonus was good … but as buyback is not tax efficient the question is how can the cash be used and value created ?

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I would worry about the trust of the free money. How they used it?

Its not about the capital, but the person who wields it.

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First of all, thank you for starting this thread and highlighting the deep value of Paul Merchants Limited. I was reading the press release issued by the rating agency and was surprised that they did not mention anywhere about L&T Finance acquiring the gold loan business of Paul Merchants Finance Pvt Ltd. Can anyone provide more insights on this?

The company looks interesting given the valuation at which it is trading and the cash on its balance sheet, which is likely held in the bank.
pr-paul-merchants-25feb25.pdf (292.2 KB)

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In 2017 company sold their IMT business for 264 crore and that money was absorbed in the gold loan business. Going forward management mentioned that they won’t be able to grow gold loan business similar to the past rate because of the small size of the balance sheet. So with the cash coming in, they might pursue other ventures. Even with the fixed deposit with 8% yield the interest income on 500 crore will be around 40 crore.

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The company has a market capitalization of approximately ₹250 crores and is expected to have ₹500–600 crores in cash by June 4, 2025 (with a possible extension of two months). It also operates a forex business that does not require much capital in its current form and does not generate significant revenue unless the number of students going abroad for education increases.

The value of the business depends on:

  1. The forex business
  2. How they utilize the cash

Given the uncertainties in the US, Canada, and the UK, it is unclear when the forex business will recover. However, the downside risk is limited as fixed costs in this business are low.

As per the 2024 AGM , which took place before the announcement of the Gold Loan deal, the promoters expressed interest in the following businesses due to the decline in the forex business:

  1. International inward remittance: The company is considering re-entering the international inward remittance business, which they previously operated. This likely refers to the Money Transfer Service Scheme business they sold to Ebix in 2017. Given their experience in this sector, they may succeed.
  2. Forex cards & other products: The details are unclear.
  3. Travel business: Limited information is available. The company’s travel website (https://pmlholidays.com/) is not fully updated, and even the customer care number is not functional. They may aspire to be like https://www.thomascook.in/.
  4. Insurance business: They currently distribute insurance products from companies like Bajaj.
  • Competing with players like PolicyBazaar may be difficult.
  • Since their Gold Loan branches will be sold to L&T Finance, they cannot rely on these offline channels for insurance distribution.
  • They may focus on travel insurance if their travel or forex business expands.

Due to their weak credit rating, they may not distribute the cash as dividends, as doing so would require them to borrow at higher costs in the future.
They might venture into an entirely new business.

The upside potential depends on the success of the aforementioned businesses. If they announce clear plans in the 2025 AGM, the stock price may start rising. However, any new business will take time to become profitable, which could delay a significant price increase.

Summary:

  1. It is currently a high-risk, high-reward investment, as their plans remain unclear. However, it is reasonable to assume that a significant portion of the cash—if not all—will be allocated to the travel and inward remittance businesses.
  2. If the stock price declines further due to tariff wars, the risk decreases slightly.
  3. If the price remains stable until their plan is announced (likely in the next AGM), the risk will further reduce.

If anyone has insights into the travel or inward remittance business, as well as the PML team’s general business acumen and chances of success, we can make a more informed decision.

@Charlie99 As an investor, do you think they will succeed if they decided to invest in travel & inward remittance?

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Thank you for the details. The right share price for this business should be between 350 to 550. Lower the better. regards