Various predictions around gold happening
No one knows but everyone predicts
Next 1-3 years will be interesting for Manappuram
2 Likes
Hello,
Have been studying Manappuram and Muthoot over the past month. Playing the role of devil’s advocate. I think Manappuram is a good company but there are some aspects which make me prefer Muthoot over Manappuram.
Manappuram offers 3 month gold loan while Muthoot offers its loans upto 1 year. I think this is a step which is biased towards safety over growth. Gold loans of Muthoot don’t have very high NPAs and they certainly don’t alarm me. In fact, Muthoot’s management says they never lost a single rupee in gold loans business (yet to verify this). They classify them as NPAs but give time to customer to clear their loans. Apparently lots of customers do come to pay back their loans. This actually helps Muthoot retain the customer while Manappuram is relatively harsh and immediately auctions the gold. This might also explain why Muthoot is seeing higher growth rate even though it is running business on a higher base.
As per Muthoot’s data, 60% of the customers pay back the loan in 6 months. 10% repay in first month. 32% repay in second month. From this, I roughly want to assume that 50% customers repay in first three months. This implies Manappuram is adding unnecessary barriers to 50% of the customer base of Muthoot, as the customer has to visit Manappuram again for renewing his loan and at the same time Muthoot is more customer friendly (as explained above).
On top of all this, I ask what are the chances of seeing a huge correction in Gold prices? I know people refer to the period of 2011-15, but I think this happened due to the huge bull run of Gold during GFC. I would be wary of holding Muthoot in my portfolio if it gives one year loans during the second half of a gold bull run but not during normal times.
Speaking of other aspects of business like Housing Finance business, I think Manappuram is very aggressive in this area compared not just to Muthoot, but also other HFCs.
GNPAs in housing finance business is 3.9% (have been promising to reduce to 2% / 1.5% every year but progress seems far away)
Yields are very high at 15%. Muthoot is at 13% yields. Generally, higher yields imply higher risk. Dedicated HFCs like Can Fin have even lower yields like 10%.
Only 11% of housing loans are to salaried customers (as of Q3FY19).
I don’t know much about MFI and Vehicle finance, so won’t comment anything on that. Yet to do a deep study on MFI…
Manappuram seems to be playing very safe (than it should be) in its focus area aka Gold loans but very aggressive (than it should be) in other areas. I know company is trying to diversify a lot but that doesn’t mean it should be so quick at the cost of potential deterioration in business practices. One thing in which Manappuram is very good is OGL. It already has 42% of its books through OGL while Muthoot’s management said it is a very small number.
Discl: No holdings in both the companies. I’m biased in favour of Muthoot and considering adding it to my portfolio in the current correction phase. Please do your own research. This is not a buy / sell recommendation. Another possible reason for my bias: I don’t understand MFI very well and that might have automatically induced bias for Muthoot as it has lower exposure to MFI.
12 Likes
Gold is going higher but Gold finance companies are going lower from some time. Initially it was inline.
So, is there any limitation when further higher gold price won’t benefit Gold Finance companies?
Currently the way these Gold Fin companies are behaving I feel after some gain in these finance companies, one should sell these companies and should buy Gold ETF.
What could be the switch criteria from Gold Finance cos to Gold ETF?
A few insignificant insider trading violations by the employees. Since all of them are first time offences SEBI has only issued a warning letter but this is the third time the company has disclosed such violations this year. Management ought to get these in check soon as these are unacceptable for a company this size.
Insider Trading.xlsx (9.8 KB)
6 Likes
Hi Sir, Can you please share, from where I can get this insider trading and warning info? Is it from Sebi’s site?
Hi Adarsh,
You can find them for Mana here,
https://www.bseindia.com/corporates/ann.html?scrip=531213
I just did ctrl+f and searched for violations or PIT.
Alternatively, use
https://www.bseindia.com/corporates/Insider_Trading_new.aspx
2 Likes
As per Manappuram’s Q3 FY20 presetation, the company holds 73.5 Tonnes of Gold as Collateral.
That’s 66678 KGs of Gold.
At current prices 17720 Crs worth of Gold.
How can a company that hold 17700 Crs of Gold as collateral be valued at 7400 Crs Market Cap?
Disclosure: Invested
Because collateral and market cap are not exactly comparable. Yes, most financial service companies are trading at attractive valuations compared to the past but has Coronavirus changed the dynamics of the global economy for the next 3-4 years or even longernis the question.
1 Like
Collateral is pledged asset, can also be considered as a liability and Mannapuram does not own the gold technically
1 Like
Also LTV ratio is around 60%. So assets (loans) outstanding are much lower than total collateral value.
Collaterals are like CASA or FD of banks …not owned by Company
This is true, read an article in wall Street journal that gold bars are vanishing like toilet rolls in market and not available. Only 400 ounce bars are available and 33 ounce (1 kg) are vanished. Also thinking wildly if there are difficult times ahead then people will really come forward for pawning. May be it will balance out by NPA situation in MFI (IF any)
1 Like
https://www.bloomberg.com/news/articles/2020-03-24/fed-stimulus-is-game-changer-for-gold-and-analysts-say-buy-dip
Gold spot prices rose as much as 4.7% on Tuesday on fresh waves of potential stimulus measures, which prompted Goldman Sachs Group Inc. to say that bullion is probably at an inflection point and it is time to buy. The NYSE Arca Gold Miners Index surged as much as 13%.
READ: Gold May Reach $2,500 in 3Q on Fed Stimulus, B Riley FBR Says
1 Like
Notably, there could be spurt in loan demand after the lockdown period. According to Manappuram’s management, “Our past experience is that in periods of economic crisis, the wider financial services sector is put to stress and lending activity slows down. Gold loans had then become the fall-back option for borrowers denied access to their regular channels.”
9 Likes
Both mannapuram and muthoot have a good track record. Both are big and have pan india presence. Business is also less risky ( Compared to other NBFCs) due the collateral and LTV. But market never gives high valuation for these two. What could be the reason?.
Discl: Not invested
1 Like
i am not quite sure WHY market doesnt give good valuation multiples to Manappuram… could it be because of lack of growth rate ? meaning, Gold loans are not as easily scalable as consumer loans (Bajaj Finance?)
But i want to make a observation here…
Manappuram finance vs Bajaj Finance
guys in this thread think twice to invest because market is giving low valuations…
and guys in bajaj finance thread think twice to invest because market is giving high valuations…
strange ? or not so ?
3 Likes
Totally agree…Thinking logically, especially in the rural pockets when the cash flows cease the only option, probably ,is to keep the gold savings as a collateral and get some cash. I think these sort of loans might see an upswing in a cash crunched economy…
1 Like
There are two reasons that come to mind instantly for this undervaluation. First, almost 20% of loan book comprise of MFI apart from some lending to other small MFIs. This is a cause for concern because of lockdown especially because the ticket size is slightly higher than other MFIs. Second is liquidity. During demonetization period, I think management in concall accepted that growth moderated due to liquidity crunch. Same is possible now but I hope company is managing better and has learnt its lessons. Also the small vehicle finance book may face some stress. Also, I believe branches are closed but other digital mode of disbursements are still on. So quarterly earnings may take a hit.
On the positive side, as you guys have already mentioned AUM under gold loans may increase. And my guess is LTV may end up higher than 60% that we saw recently. Next, because of the interest rate environment cheap availability of credit is a possibility and might decrease the borrowing cost. Finally there may be delinquencies in other retail focused banks because of “the Great Shutdown”. And they might be wary of having too much exposure in the retail unsecured side. That may in turn nudge people to take gold loans.
Overall, yes, the company may face issues especially if the lockdown is extended for a long time. However, if the company is able to sail through next two months without taking a hit, it might give a more than decent return in the next few years. Also, the stock looks damn cheap!
Disclosure: entered recently andAccumulating
1 Like
Three reasons for market assigning them lower multiple:
-
AUM growth: They cannot grow AUM at 25 to 30% like other NBFCs.
-
Cyclical business: LTV is dependent on gold price. AUM can go down if gold price corrects. Similarly, rising gold price helps in posting higher AUM growth.
-
Regulatory risk: They charge 24% interest per annum and most of the borrowers are bottom of the pyramid folks. There is always a knife hanging around their neck w.r.t regulator making any change which impacts their business negatively.
2 Likes