Gold Loans: 'Lending with comfort'
India - a huge gold loan market
India is one of the largest markets for gold accounting for ~10% (18,000-20,000 tons) of the global gold stock. Rural India is estimated to hold around 65% of this. Shaped by sentimental and structural factors, country's demand for gold has been buoyant defying the phenomenal rally in price. It is estimated that ~10% of country's gold stock has been pledged, of which, ~75% is in the unorganized market (money lenders, pawn brokers, etc) and balance ~25% in organized market (specialized NBFCs, other NBFCs, commercial/cooperative banks, etc).
Organized market growing at robust pace
As per IMaCS Industry Report (2010 update), the organized gold loan market in India stood at Rs350-400bn at end-FY10 having witnessed a robust 40% CAGR over FY02-10. We estimate the market to have crossed Rs550bn by end-FY11 as specialized NBFCs Muthoot Finance and Manappuram combine have grown their book by Rs130bn+ during the year. Share of the organized pie has been increasing rapidly due to significantly lower rate of interest charged, higher LTV offered and perceived safety of the ornaments. With penetration still negligible at 1-1.5%, the organized market would continue to witness strong growth.
Specialized NBFCs better placed than banks
Amongst organized players, specialized gold loan NBFCs have witnessed exceptional growth driven by management aggression/strength, robust branch expansion, belligerent marketing spend and ability to raise capital timely. Given the customers preference for them over banks due to critical factors like low levels of documentation, quick disbursal of loans, higher LTV offered, flexibility in loan terms, etc, specialized NBFCs command premium yields and enjoy superior profitability. Therefore, they represent a much better medium to ride the gold loan growth story.
Initiate coverage on Muthoot and Manappuram with BUY rating
We initiate coverage on Muthoot Finance and Manappuram with a BUY rating. Both the companies have witnessed 100%+ CAGR in their gross gold loan book over FY09-11. Notwithstanding the substantial business investments made, they have improved their profitability profile. Their dream run is expected to normalize though on account of higher base, intensifying competition in the key Southern region, recent adverse regulation with respect to assignments and steep increase in funding cost. Nevertheless, their earnings CAGR is estimated to be strong in the range of 35-50% thereby making current valuations (1.6-1.7x FY13 P/BV) attractive. Key risk factors would be unfavorable regulatory changes and material correction in gold prices.
Muthoot Finance – BUY
CMP Rs154, Target Rs202, Upside 31%
± Largest gold financing company in the country with 20%+ market share
± AUM growth to moderate but remain strong on higher base
± NIM to decline on steep increase in funding cost; yield to be relatively resilient
± Earnings CAGR to remain brisk at 39% over FY11-13E
± RoA to marginally come-off; RoE to normalize
Manappuram Finance & Leasing – BUY
CMP Rs57, Target Rs73, Upside 28%
± Fastest growing gold loan company; 8x AUM growth over FY09-11
± New branches to drive 45% AUM CAGR over FY11-13E
± NIM to contract sharply due to decline in yield and increase in funding cost
± Earnings CAGR to remain robust at 47% over FY11-13E
± RoA to trend down while RoE to improve
Warm Regards,
Amar Ambani
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