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Channel checks in Southern India: A few interesting insights

* Key highlights from our channel checks in Southern India for gold loan NBFCs in general and MUTH in particular are: a) teaser rates have not gone away – just that the 6.9% teaser rate has been replaced by 9.9%-11.9% teaser rates, b) banks and gold loan fintechs (despite the recent media coverage on Rupeek) have still not reduced their aggression, c) gold loan demand was weak in May’22 and redemptions were high because of the wedding season; but the demand has swiftly recovered in the first ten days of Jun’22 and gives hope to salvage the quarter, d) MUTH is re-pricing its teaser rate gold loans disbursed at 6.9% p.a. between Dec’21 and Mar’22 to higher interest rates of 9.9%-11.9%, which can have multiple implications with the most obvious being the potential for increase in the portfolio yields of the gold loan book.

* We delve deeper into each of these and also highlight a few questions that still remain unanswered. Our estimates are largely unchanged and we maintain our BUY rating on MUTH with a TP of INR1,220 (based on 2.0x FY24E P/BV).

Teaser rates have not gone away – 6.9% replaced with 9.9%-11.9% rates

* We agree with consensus to the extent that the 6.9% p.a. (0.57% p.m.) products have been withdrawn by the gold loan NBFCs and that disbursement yields in 1QFY23-QTD are much better than the insanity that was evident in the gold lending segment in 4QFY22.

* However, we still choose to call the 9.9%-11.9% gold loan products as teaserrate products since: a) these products are being offered at ticket sizes above INR50K (albeit with a lower LTV of 65%), and b) we believe that if MUTH continues to offer these interest rate products, there is a risk to the compression in the blended portfolio yields (in FY23E) despite the sequentially higher disbursement yields in 1QFY23E.

* Based on our channel checks, we provide details of the schemes that are currently being offered to customers by MUTH in Southern India (Exhibit 1).

Aggression of banks and gold loan fintechs has still not abated

* Feedback from our channel checks unanimously suggested that aggression from banks and gold loan fintechs is not showing any signs of ebbing.

* Rupeek is still offering gold loans above ticket size of INR50K at lowest interest rate of 5.88% p.a. (0.49% p.m.) along with 60% LTV and contracted tenure of nine months on making monthly interest payments. On bullet repayment products, Rupeek is offering maximum loan tenure of six months, 75% LTV and interest rates between 16.2% and 18.6%. (Exhibit 2).

* We believe that the gold loan NBFCs have withdrawn the 6.9% teaser-rate products not because the competition has turned benign but instead somewhere they all realized that it is better to fight their biggest competition – banks and fintechs – with a united front rather than bleed by fighting among themselves.

Weak gold loan demand in May’22 but Jun’22 might salvage the quarter

* Our channel checks suggested that the gold loan demand in May’22 was weak due to higher gold redemptions because of the wedding season.

* We believe that the demand in the sub-INR100K ticket segment has still not recovered, which necessitates MUTH/MGFL to gain higher share in the >INR100K segment by offering competitive interest rates. Gold loan fintechs such as Rupeek do not lend below INR50K (due to even poorer economics) and MUTH/MGFL are able to command 21%-24% yields in this ticket size.

MUTH is re-pricing its teaser rate gold loans disbursed between Dec’21 and Mar’22 to higher interest rates

* Our channel checks suggested that the gold loan demand in May’22 was weak due to higher gold redemptions because of the wedding season.

* We believe that the demand in the sub-INR100K ticket segment has still not recovered, which necessitates MUTH/MGFL to gain higher share in the >INR100K segment by offering competitive interest rates. Gold loan fintechs such as Rupeek do not lend below INR50K (due to even poorer economics) and MUTH/MGFL are able to command 21%-24% yields in this ticket size.

MUTH is re-pricing its teaser rate gold loans disbursed between Dec’21 and Mar’22 to higher interest rates

* MUTH has commenced a special branch incentive program under which it has started re-pricing (with explicit consent) the contracted interest rates of its existing 6.9% p.a. teaser-rate customers to higher interest rates of 9.9%-11.9% depending on the loan ticket size. We present the re-pricing schemes with corresponding ticket sizes and interest rates in Exhibit 3.

* Based on our understanding, this incentive scheme was started around 25th May’22 and will remain active until 30th Jun’22. Under this scheme, the branch will be provided an incentive under different slabs (Exhibit 4), based on what proportion of the active teaser-rate outstanding customer pool is successfully re-priced to the higher interest rates. One of the conditions to be eligible for the incentive is that the customer who has been re-priced to the higher interest rate should continue the loan at least until 31st Jul’22.

* We found that this exercise is being done with the explicit consent of the customer wherein if a customer agrees, an OTP is trigged to the customer which then has to be fed into the system for the teaser-rate gold loan to be re-priced to the higher interest rate.

* Interestingly, our sampling suggested that some clusters have already achieved ~65%-70% conversion of the teaser-rate loan pool to the higher interest rates. We were also given to understand that this is selectively being done by one of the other gold loan NBFCs as well.

* While it is difficult to extrapolate the conversion rate based on our sampling, the most obvious positive is the potential for increase in the portfolio yields of the gold loan book.

Key risks to our BUY rating despite a ~25% stock price correction over the last three months

* Both MUTH and MGFL have not been able to procure the RBI approval for new branch openings over the last two years. While the underlying reason behind this is still a mystery, we believe that gold lending is a distribution business and inability to open new branches is a clear headwind when a few of the peer NBFCs with decent-sized gold loan book (and which require RBI approval) have been given approvals for new branch openings.

* Retrospective re-pricing of teaser rate gold loans might help the company improve the portfolio gold loan yields but quite naturally convincing customers to agree to the re-pricing would be difficult. MUTH enjoys a strong brand trust and has always been at the forefront to support its customers during difficult times. We are yet to ascertain what impact this re-pricing could have on the customer relationship.

* Customers whose existing teaser rate loans have been re-priced higher could potentially be at higher risk of being poached by banks and fintechs who are still offering much lower interest rates on gold loans.

Valuation and view

* We expect MUTH to deliver a standalone AUM growth of ~8%/13% in FY23/FY24, respectively. RoA/RoE is likely to decline (to ~5%/18%) over the next two years.

* Our FY23/FY24 EPS estimates are largely unchanged. The current stock valuation of 1.7x FY24E P/BV reflects concerns on tepid gold loan growth and a consequent impact on margins and profitability. We maintain our BUY rating on MUTH with a TP of INR1,220 (based on 2.0x FY24E P/BV).

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