Paid Research.
Sequoia-Backed Rupeek On Fixing India's Unorganised Gold Loans Biz.
can new boy in the town … can fintech like rupeek , breach the gold finance market 
The risk of new age gold financing is real. 2Point2 Capital which is managed by Amit Mantri discuss this in their latest presentation. It’s a must read for folks who are interested in learning about gold financing
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Short but Good management commentary:
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Another good article from soic. Their other blogs are good as well.
https://soic.in/blog-description/playersingoldindustry
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Muthoot Finance Q4FY21 Concall Update
• Gold loans (~90% mix) increased 27% YoY & 5% QoQ to Rs. 51,927 Cr. On YoY basis it was mainly supported increase in gold prices while tonnage declined by 3%. On QoQ growth was driven by a revival in tonnage growth of 3% and increase in LTV, while gold prices declined on QoQ basis.
• Gold tonnage secured was at 171 (-3% YoY & +3% QoQ)
• LTV keeps fluctuating depending on the gold prices bt co does not exceed 75%. Today it is at 66% at portfolio level.
• Total disbursements in FY21 were at Rs. 1.24 Lac Cr.
• April and May months were washout as many branches were not operating due to lack of demand.
• Co also offers loan at home facility for some extra cost. Miniscule customers opt for this facility especially in higher ticket size of 2-3 lacs.
• Today avg loan per branch is 11-12 cr. Co has some branches which already do 25 cr business so in future this is a possibility that all branches reach this number and in future co shall target to reach 1 lac cr loan book from 52k cr today.
• Tenure: Contract is for 12 months but 60% of disbursals are repaid within 6 months.
• GNPA/NNPA declined to multi year lows at 0.9%/0.0% (2.2%/0.9% in FY20).
• Total auctions were at just 171 cr in FY21 on a book of 52k cr. Co tries to delay auctioning and give a chance to customers to repay loans unlike competitors who immediately auction. This has increased the trust factor for Muthoot as customers perceive that their gold is safe with the co.
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Things have started picking up, we will be able to do at least 15% growth this year.
Read more at:
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Good result inspite of lockdown
-able to maintain consolidated loan AUM on a QoQ basis despite the tough environment
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Why this business is undervalued apart from drop in gold prices and tinkering of LTV by government is there any other major risk associated in this business….I find this company grossly undervalued
Invested - largest allocation in PF
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Thats Right… Earlier it was stated that by allowing banks will create competitors in this space , however that proved -ve for banks
- They didnt have that much expertise and channels
- Allowing 90% LTV for banks proved disastrous example CSB
- Manappuram and Muthhot have huge N/w of branches all over India where as banks do not have that kind of speacialized privilege… Just own this business it has still a long way to go… They will be compounders
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The future remains bleak, at some point in time their business model will go unsustainable.
- Competition - Here you see the competition(banks) there are providing interest at 8% but in Muthoot, you get at more than 20%. One advantage Muthoot had is flexibility and Turnaround time, Day by day banks are bringing down the turnaround time and adding flexibility in repayment. You can say banks burnt their fingers due to 90% LTV, but they still do gold loans, Now they are doing at 70 odd %
- Book size: if you see housing finance, they are long-term loans, where if you disburse a loan now, you will get payments for more than 10 years, but gold loans in Muthoot closed on an average of 6 months, so they keep on hunting for customers.
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SUSTAINABILITY
I don’t think good loan sustainability will ever be a issue .Every person on planet earth need money ( business/education /marriage /investing /farming and endless reasons
Those who need it for short term purpose don’t care about interest rate ,they want it fastest and in hassle free manner .Such people prefer gold loan from pvt companies like Muthoot /Manappuram
Many people take it as a bridging loan from Muthoot/Manapp till they can arrange money at lower interest rate
There are n number of reasons for short term loan need ,that’s why these businesses are surviving for decades .Even today gold loans are dominated by Unorganised players who charge higher interest rates than pvt gold NBFCs .Hence all players are able to grow their business
COMPETITION : There is huge operational issues in gold loans and its not at all easy to scale up Also there are so many geopolitical issues so most players fail to sustain the business
Muthoot and Manappuram have established themselves over decades
Its very high ROE business high free cash flow business so everyone wants to come here
VALUATIONS : Why low then ,gold rate fluctuations ,fear of new players taking away market share,NPA issue if gold rate tanks in short period of time
I think ,it will keep trading between PE 10-20
Muthoot to me is very risky business model as they don’t offer short term loans of 3 months like Manappuram
in 2009 I was unaware of gold loans ,I was in urgent need of some money and I sold some gold .That gold is in now 3x .In retrospect I could have taken gold loan and paid some interest for short term.
Now I keep all my emergency money in gold and never keep cash for emergency and it has paid me handsome money as gold prices keep on increasing with inflation.
Now if I know need money in emergency then I can pledge gold .Because emergencies are rare and I don’t want to keep cash as I will miss growth
Also with online gold facilities its so easy to keep it in their locker and avail loan instantaneously
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Yes it seems Muthoot is undervalued on many parameters if you compare it with other NBFC and Banks
Possible reasons might be that
- Gold Loan NBFC find it really hard to grow loan book at very high rate especially when macros are good other NBFC and Banks can increase their Loan Book at higher rate also there is chance on de-growth of loan book if gold loan prices fall sharply. Market felt muthoot was boring slow growing company that is why they were given non-growth company PE for long time.
- Gold Loan NBFC were considered as last option of credit to customers as they were in distress but slowly markets are realizing theme of Business loans, many clients are taking loans to extend their business and not availing loan for their survival needs on day to day basis. Once Broder market realizes these theme I feel muthoot might get slightly rerated.
- Gold Loan NBFC have supernormal profits and many Banks and PE firms are trying to disrupt this space and since loans are also of short term it is easy to capture them by competitors unlike Can Fin or HDFC were you are stuck with them for several years because of these uncertainty muthoot is not given higher PE rating.
For Gold loan NBFC it is better to value it with P/B rather then P/E with its peers like other NBFC or Banks as by PE gold loan NBFC will always look cheap. Until then enjoy high dividend yield in muthoot which is rarely seen in NBFC/BANKS because CAR requirements.
These are possible reasons I could think of why Gold loan NBFC might be undervalued maybe I am right but I will let Mr Market decide that.
Disc: Invested & Biased and not SEBI register advisor.
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Risks of gold finance cos:
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High portfolio churn - the same customer may or may not take a loan of a similar quantum. Also, a good part of these loans are short-maturity ones; growth isn’t secular and not easy to achieve all the time
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With the emergence of tech, disruption is a given. Like most folks have already pointed out, how Muthoot/Manappuram handle it will determine their future! One more point to ponder is whether they can protect their interest margins with the increase in competition
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High cost of operations - Muthoot has close to 5500 branches which is the same as HDFC bank. Muthoot’s cost to income ratio is much higher than other nbfcs.
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Maintaining the vaults is never easy, this is an additional burden that a Bajaj finance or Can Fin doesn’t have to worry about. Of course, a better granularity of loans is achieved due to more branches-vaults
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Risk of default rises as the gold prices tumble (not a big risk since gold doesn’t usually crash 20% or higher in a short period of time but it can happen, who knows)
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Optionality - yes both the incumbents are trying to venture into other segments but the ability to reinvest a large portion of the cash flows into a new segment and thereby capture other profit pools looks challenging. This is certainly not helped since they don’t possess the data analytics skills of tech-enabled nbfcs/backs who already have skin in the game. Fighting against bigger & better players and also protect margins is a game where the risk-reward is stacked against the gfcs
Note - This is not to say that Muthoot is a bad company or a bad investment; just pointing out the inherent risks in the business which might be dragging the valuations.
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At around 25:50, management explains that gold loan business is not just giving a loan based on LTV and auctioning it, rather one has to stay connected with the customer for it to work.
I feel the management is giving reference to banks who have recently started focusing on gold loan business.
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Result
Investor presentation
*Management Quote:
While commenting on the results George Jacob Muthoot, Chairman, Muthoot Group said, “As second wave of the pandemic has ebbed and economy further unlocks, corporate India has emerged stronger and better. We were able to maintain growth momentum during the quarter with all of our branches now open for business. Our consolidated loan AUM stood at Rs.60,919 crores as of end September 2021, clocking a growth of 5% QoQ and a growth of 17% YoY despite a challenging business environment. Consolidated Profit after tax stood at Rs.1,981 crores for the half year ended September 2021, registering a growth of 11% YoY. The contribution of our subsidiaries to the overall consolidated AUM stands steady at 10%. As a responsible NBFC, we have been consistently working towards an overall growth strategy focusing on governance, performance and ESG framework.”
George Alexander Muthoot, Managing Director, Muthoot Finance said, “The demand environment remains strong and as we enter the festive season we remain optimistic about growth momentum in gold loan over the second half of FY22. We are optimistic about growing our gold loan book further and maintain 15% growth guidance for FY22. We are witnessing improved collections across Micro finance, vehicle finance and home loans. In the last quarter we had consciously decided to go slow on non-gold lending business, we continue to remain conscious and monitor the space for emerging opportunities. We will continue to follow the strategy of balanced growth while maintaining overall asset quality.”
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