Parallel economy is a delusion. It’s toughest for muthoot to hit the altime high. Mr.market is genius and he is giving the valuation the nbfcs deserve. They will become history
Gold loan is a commodity business. If you take a home loan or vehicle loan or business loan, your repayment ability is the highest priority for any loan lender. Even though the loan is sufficiently collateralized, banks always prefer to get money from repayment rather than auction the asset and getting the money. Reason it is very difficult for lender to recover money in auctions and it’s a very long process. But in case of gold loan it is very easy for banks or nbfc to auction the gold and get back the money. This is the same reason on why we cannot compare a home loan from Bank versus home loan from an nbfc with gold loan from my bank versus gold loan from nbfc.
Unlike other loans where we classify loans accordingly to the credit risk and banks provides low risk loans where nbfc provide high risk loans, gold loan is classified on its maturity since there is a no credit risk involved. Here banks willing to take longer maturity loans and nbfcs like manappuram less maturity loans.
When did think about gold loans we can even get parallel from microfinance loans. Even though microfinance loans higher amount of margin still there is a huge operational expenditure associated with the loans and they are of high churn. Bank generally do not like loans which have a shorter maturity time and high opex, so they always prefer a longer maturity loan since for a longer maturity loans, opex is comparatively small.
How I say why Muthoot and manappuram is preferring low maturity loans? You can see from management commentary where Muthoot say majority loans mature from 3 to 6 months.
And nbfc has higher proportionate of loans where we will just pay interest and preclose at any time rather than EMI. Majority banks always prefer to go with EMI (exception is agri related gold loans).
For providing gold loans you need a separate infrastructure which is entirely different from vehicle loan or business loan or home loans. We need a gold assessor, he have to sit in bank to process as and when customer reaches. But when you reach many banks for gold loans they typically do gold loans once in a week.
This is what changing right now many banks are appointing some gold assessor. Whenever we see competition from Bank, we directly look for CSB Bank, federal Bank, they are in no mood to reduce their gold loan portfolio. Even many PSU banks have increased their gold loan portfolio even after excluding agri related gold loans. And their growth rate is 20% plus
Some might argue banks burnt their fingers during covid in gold loans. The decision to move LTV from 75 percentage 90 percentage during covid for banks is a socialist move done by RBI to support the economy, not to make banks more competitive than nbfc. Everyone knows 90% LTV is risky, that’s why RBI want to do this only with banks, not with nbfcs. But unfortunately during the time gold price turn downwards. Even with or without this reduction in gold price, RBI would definitely changed the LTV back to 75 percentage.
On what is difference in customers between them, Customers with small loan ticket size with very short term fund, they will stick with nbfcs and customers with long term fund need and a bigger ticket size, they definitely prefer banks.
Every customer who gets loan from NBFC also can get a gold loan from bank. Unless branch manager decided to not to lend him, may be because of some existing default in his name or some fraud. I don’t agree with things like people don’t have bank account prefer nbfcs, since most of the disbursement is on online only and in case of parallel economy money also these transactions will still get track, only this people wont report this to credit bureau but still there will be a KYC for these loans.
Disclosure: Exited manappuram recently and have position in IIFL
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I would highly disagree with this statement. There is a huge parallel economy that’s not part of any financial regulations and totally outside of taxation net of government. Anything beyond Tier 1 cities has bigger parallel economy than formal economy.
I think, you are not talking on the basis of facts and figures but just to justify the position or viewpoint which you have taken. You have said that in recent years Most NBFCs shares have not moved anywhere…For this I am presenting some facts and figures…Consider them and it may help you change your views :
Muthoot Finance share Price 3 yrs CAGR 25% and 5 yr CAGR 21%
Chola Finance share price 1 yr cagr 56%3 Yrs CAGR 43% and 5 yrs CAGR 28%
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also what must be your reasoning to make Bajaj Finance as exception in NBFC sector? The reasons you are giving for other NBFC down performance, they get applied even to Bajaj Finance also. Why cant bank get into Consumer Finance and other segments which Bajaj Finance Currently servicing?
I think, you have developed a huge bias against NBFC and paricularly regarding Muthoot Finance and hence justfying the stand . Once you make up your mind about something, then as Charlie Munger says you start exhibiting confirmation Bias…thus twisting the evidences as well as facts.
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Bajaj finance business is completly different. They offer unsecured loans with short duration for which they can charge higher interest rates. Banks can’t match the ticket size Bajaj finance offers. (Though it can be done through credit cards). And more over they are diversifying into housing loans and broking industry (to offer MTF). where as muthoot is a pureplay gold loan company which banks are targeting.
Yes, there is product difference.
Loan payment terms for NBFCs are different. They don’t require borrowers to pay the principal in emi. That comes as a big relief. Only the interest component needs to be paid.
In Bank Vs Nbfc discussion, the challenge I feel is opening a branch. It entails expenses, and a certain break even point needs to be reached.
Muthoot is seasoned. It can open a branch, and reach break even, after covering its expenses of security and assessors. But, can banks?
Banks do Gold loan as a cross selling product at its branches. And that is smart and efficient. But, to get into rural India and take market share is a different challenge.
Not surprising that Muthoot has 65% presence in rural India, where tax filing is expected to be minimum. Banks cannot do such unregulated business. And I don’t think RBI is going to relax norms for Banks to compete with NBFCs… Banks have a different and a much wider role in the economy. To put it to perspective, largest bank has Mcap of 8L Cr, and largest gold loan Nbfc has Mcap of 47K Cr.
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Banks are everywhere in rural India. There are regional rural banks and cooperative banks…many more…
Now I think you have witnessed the difference between muthoot and Bajaj finance. Mr.market rewarded Bajaj finance with 10 percent rally on stellar results and punished muthoot with 12 % down move. Single product dependent companies won’t survive in this fast moving world. And many people are thinking the fast service and rural reach are the unmatchable moots of muthoot should evaluate their thesis once again. these companies will mostly trade in a range untill and unless they reinvent the wheel and make a complete transformation (which is highly improbable). The most likely scenario would be merger of gold finance nbfcs into any midsized private bank. That should be the end game. Because after the first generation promoter passes on the reins the second generation wont have any motivation to run a stangated business. These are my 2 cents.
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I have special appreciation for a critical view. A person, not an investor, yet takes time out to post.
From the recent annual report:
During the year under review, our
gross loan assets under management
increased to 580,532 million, compared to 526,223 million in the
previous year, recording an increase
of 10%. We have noticed a significant
increase in our average ticket size from
61,743 to 68,739, validating the
growth momentum in the economy. Our
gold loan portfolio increased by ~11%
and reached ` 575,313 million during
the year under review.
This illustrates, that, a growth of 10% kind is what this business offers. Add to it appreciation in gold price. Bottom line.
It is no Bajaj Finance or Nykaa that will grow fast.
With this in mind, what expectations should one have at CMP. This line of discussion will put things in a perspective and will benefit us.
Imo, it’s a good deal for some of us aiming for 20% kind return in next few years.
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The NIM will decrease in gold loans eventually. U can’t expect people to cough up 24% interest when there is loan on offer at 7 to 9 %. And more over muthoot and manappuram were in existence since several decades. They never ever tasted success in other line of businesses, when they tried they burnt fingers in microfinance etc. The management haven’t demonstrated any success except for gold loans. So considering all these factors don’t you thing their future earning potential is already embedded in present valuation?? There are no triggers what so ever to give any hope of making it into the big league. The 10% growth in gold loan portfolio is nothing , most banks doubled their gold loan portfolio in last 1 year. And contrary to the popular belief here that banks burnt their fingers when LTV was increased to 90% during covid, no bank made losses in the gold loan segment(i can confirm for my bank). When you have stiffest competition in your core area and no ability from management to diversify into other lines of business what valuation will you give?? It’s upto the individual to decide what they are willing to pay for a sunset business.
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I think there a few things to remember here:
- The differential in interest rates has existed for a while this is not new despite that gold NBFCs were able to grow at 15-17% CAGR over the last few years (ignoring the low base post 2013-14) This was mostly because people could walk in an NBFC and get a loan in 10-12 mins vs 30-40 mins in rural banks (which is the target audience for Muthoot)
- The LTV change was the biggest benefit for banks in a long time! Gold loans under 1lac count as priority sector lending and have a risk cover of 50% according to RBI so there was a lot of reason for banks to push gold loans they just weren’t able to dislodge the strength of the NBFC pace. Will this lead to a shift in customer behaviour over a long term is something you can argue about
My 2 cents is that this is a very cheap valuation for a company that is generating incredible return on its assets and can be a great turn around story for a medium term
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Banks’ Gold exposure increased in last quarter.
*Due to RBI increased LTV for Banks, to support.
*unsecured Lending was stopped/ceased by many lenders, Gold is secured lending and a good Avenue.
Muthoot AUM decreased. They follow a certain system. Where existing, tried and tested, clients are a preferred business. Whereas new clients are dealt with more carefully. Apparently, caution was on their minds, just like it was for Kotak Bank, for one.
Plus a fall in gold price.
But, this is not expected to repeat in the coming quarters. Gold is taking strong support at usd1700.
Hii Everyone
I have recently started studying Gold Finance companies
I will be glad if someone could explain me that why Gold Loan Companies tend to have lower P/E multiple compared to other financing companies whereas they have the Gold as Collateral which is more Secure.
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Market usually gives high PE to stocks that have
a. Growth
b. Visibility of earnings
c. Fewer uncertainties
Like Dmart, Pidilite etc.
Market perceives Muthoot to have headwinds in the form of competition from nbfc and banks. This is also showing in numbers. The management of mannapuram and Muthoot are denying. They are attributing degrowth to Covid.
Gold prices add to uncertainties.
All this could change in a year’s time. It has turned around in the past.
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Even the jandhan yojana made significant impact on the business of the gold loan nbfcs . The unbanked people were made to open the accounts and the demonetisation pushed them further to the banks. That’s the biggest change has occured in the behaviour of the unbanked people who are the largest customers of the manappuram and muthoot. With COVID banks tasted the blood of the gold laons and they are pushing further. This is the most secured retail loan any bank can offer.
Currently all banks are focusing on only retail.
This is an irrevocable change and the gold loan nbfcs are here to die.
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If they survive big money will be made. But chances are low…and that’s fully priced in.
Disclosure: Invested in IIFL Finance only.
A business that has been running for 150+ years surely has met formidable competition.
At 10 PE I am betting they have an inning or two to go. Die another day, they say.
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