GOLD LOAN
Manappuram Finance has been operating in the financial industry for several decades and has acquired expertise in the field of gold lending. While numerous players have attempted to enter this market in the past and achieved short-term success, they have not been able to sustain it over the long term. The primary reason for this is that banks tend to lose interest in the business after a while, particularly when they begin to issue large loans to infrastructure ,reality ,big business etc.Manappuram Finance is currently experiencing a difficult phase, but it is expected to bounce back to its typical valuation once this period passes. At present, the company’s valuations are quite low, and the margin of safety is high since it is trading at nearly book value. The situation that could potentially jeopardize the company’s book value or business model would be highly unlikely.
There is potential for increased demand for gold as a result of rising inflation, as well as the growth of emerging markets like China and India, which have traditionally been significant consumers of gold.
Manappuram Finance, Muthoot Finance, are popular in particularly in rural areas where gold is a common form of savings. Both companies have established a large network of branches across the country, making it easy for customers to avail gold loans.
The government of India has initiated several schemes and programs to promote rural development and improve the living standards of rural populations.
Rural sector remains an essential part of the Indian economy .
MFI
Microfinance institutions (MFIs) have also been playing a crucial role in providing credit to rural households. MFIs typically provide small loans to people who do not have access to formal banking services. These loans are often used for income-generating activities
However, there is still a long way to go to ensure that all rural households have access to credit and other financial services.
So there is huge scope for Ashirwad Microfinance also
MANAGEMENT
.Manappuram’s management has responded to tough times by diversifying its business, focusing on digitalization, optimizing costs, and maintaining a high quality of assets in its loan book. These strategies have helped the company to navigate challenging times
It has seen and overcome many challenges in past .Especially diversification strategy has helped the company to reduce its overall risk and improve its resilience to external shocks.
Nandakumar has been committed to maintaining a high standard of corporate governance and has been recognized for his ethical and transparent approach to business.
The following are some questions and answers about Manappuram Finance:
- Fundraising has not been an issue so far.
- The business model is flexible as they can change the interest rate to adjust returns.
- Competition will always be there and is mostly cyclical.
- Cross-selling products is possible.
- The company has a long track record of success.
- The management is clean and innovative. However, it’s mainly a one-man show, which poses a risk.But now they have come up with some succession plan
- Geopolitical risks exist.
- The long-term sustainability is likely since people always need money. Additionally, 2/3 of gold loans are with the unorganized sector, leaving a huge scope for the organized sector to grow. A growth of 10% -20% is achievable in gold loans, and microfinance, housing, and vehicle loans combined
- The gold market is a dynamic process with ongoing changes in market share among banks, NBFCs, and other unorganized sectors.
- The brand value is good.
- The business is not easy to replicate.
- Consistent dividends are available.
- Gold prices are likely to go up gradually with inflation but are cyclical with an upward trajectory.
- Disruption by digital players is unlikely as gold storage is necessary. The company is also evolving its online process.
- The pricing is below book value, which is not bad.
- Diversification is ongoing. With diversification, operating leverage kicks in, which helps to bring down the operative cost combined with cross-selling, reducing the operational cost for individual portfolios.
- Although housing and vehicle loans are not high-yield businesses, the reduced operating cost combined with the gold loan branch’s presence can increase overall profits.
- Profits going down further is possible, but looks like all is priced in
- Market perception is poor so far
- The company has gone through many rough cycles and ongoing issues but has been steady in generating profits.
- Non-gold portfolio NPAs are cyclical. For example, Microfinance had a tough last two years, but the projected growth for the next couple of years is very strong, with 20-30% plus growth expected by industry players, which will take care of previous bad years in one go.
- Good lending practices have kept losses minimal
- Promoter buying in a tiny amount.
- Analyst views are mixed, depending on the market price. Some have exited, but most are buying.
- Ease of doing business is not easy.
- The ground is saturated, with new people still entering to get some pie, so profits are getting distributed.
- Banks’ main advantage is low-interest rates, which is good for long-term loans like housing. However, gold and microfinance are not their strong suits. Gold loans for banks comprise a minuscule percentage of their portfolio, while for NBFCs, it is a major portfolio. Since banks prefer to target it less aggressively, it remains a minuscule portfolio for them.
- NBFCs have a quick disbursal process, making them the kings of low-ticket size. Banks focus on high-ticket customers in all segments, including gold, housing, and vehicles. They don’t treat low-ticket customers same as high loan customers and most get lost in the crowd and big lines.
- The unorganized sector has high-interest rates but is connected to people with less exploring capabilities.
- The loan duration is short, so slight fluctuations in interest do not have much effect.
summary:In the short term, there can be multiple permutations and combinations in the market and it may take time to gain clarity on which companies will emerge as strong players and which ones will struggle. However, in the medium to long term, companies that are able to consistently grow at a rate of 10-20% will be successful. Strong companies are likely to emerge stronger, while weak players may not be able to sustain their position in the market in long term
Manappuram has witnessed loan gold competition in the past also , but the reason for its transient nature is manifold, including exorbitant operational expenses, waning attention over time, fatigue and service problems, and unattractive prospects for small loans among banks.
