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Our view ‐ Large gold stock decline comes as a negative surprise   

Operating in the higher range of regulatory prescribed LTV and lower interest collection during the loan tenor lead to higher auctioning during the quarter (mainly in April) in response to significant gold price decline during Feb‐March period. With auctions at Rs15bn/4.5 tones, company’s gold loan portfolio/tonnage declined by substantial 13%/11% qoq.

Besides clean‐up of high LTV portfolio (non‐payment by borrowers too is such cases despite being served notices), other reasons that impacted tonnage/AUM accretion were a) lower new customer addition (down 36% qoq  ‐  customer base declined by 7% qoq) due to Covid headwinds (impacted demand and branch operations), b) higher churn in high‐ticket portfolio (>Rs 3‐5 lakhs) as a result of aggressive pricing by certain competitors and c) higher than usual collateral redemption by borrowers (also seen in Q4 FY21).

Having taken corrective actions in terms of harmonization of loan pricing towards competition, introduction of high‐ticket loans (> Rs10 lakhs) at lower prices (starting at < 10% interest rate) for longer tenor of 9‐12 months and new customer addition normalizing from July, gold loans portfolio growth should resume subject to stable gold prices.  

Non‐gold loans segment performance was marginally better than expectations with Asirvad MFI reporting AUM growth of 1% qoq/20% yoy and marginal profits despite elevated provisioning (ECL at 5.5% v/s PAR 90 of 3.6%). Collection efficiency has bounced back to 95% in July. Vehicle and Housing finance portfolios were nearly flat on qoq basis and the increase in NPLs was limited.

We downgrade our recommendation on MGFL from BUY to ADD as we expect the following a) a gradual improvement in Gold AUM growth to moderate levels (8‐10% pa, lower than management’s guidance of 10‐15% pa), b) sharp reduction in portfolio yield due to competitive pricing, c) additional impact on gold loan business profitability from operating deleverage and d) continuity of higher credit cost in non‐gold businesses in the near term. We cut earnings estimates by 6‐12% and BV estimates by 2‐5% across FY22‐24 on moderation of growth and NIM assumptions. Projected RoAs have seen a cut of 30‐50 bps. Given structural headwinds in the mainstay Gold Loan business, we downgrade rating to ADD from BUY and lower price target to Rs200 from Rs230 (now ascribing a lower valuation multiple).

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