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Improved trends in customer growth/metrics without reduction in yield and with augmented focus on marketing/outreach could imply better growth and profitability outcomes, thus providing a credible reason for valuation re-rating of Muthoot and Manappuram. While commentary from both the managements about receding of competition from Banks is difficult to eschew, the trend reversal in customer base growth during Q4 FY23 and ground checks are hinting towards improved trends in incremental market share. Gold Loan portfolio at Muthoot and Manappuram grew at similar or higher rate than many of the Banks in Q4 FY23.

Ground checks suggest some reverse migration of customers - many customers who had left for lower rates coming back, and notably both high-value and low-value customers. Probable reasons behind customers coming back are a) TAT/convenience, b) valuation/LTV, c) flexibility/ease of foreclosure, part prepayment/release, etc., d) higher proc. fees and documentation/other charges at banks, and e) online gold loans and doorstep gold loans offered by GL NBFCs. Many customers weigh these benefits more than higher pricing of GL NBFCs (though which is competitive than pre-Covid). GL NBFCs are now emphasizing more on local marketing, celebrity endorsements, business promotion and employee incentivization for driving growth, rather than playing with the yield again.

The real measure of structural growth would become clear when gold price stabilizes for a long period of time (Q1 FY24 will have value growth). While formalization of gold loans remains a structural trend, the market position of Gold NBFCs along and their RoEs would be closely monitored. At present, both growth and RoE seems to have likely hit the trough and are undergoing some reversal. This may not only translate into earnings upgrade but also underpin valuation re-rating, as most investors are expecting either growth or RoE recovery. Maintain BUY on Manappuram with revised 12m PT of Rs160 and upgrade Muthoot to BUY with new 12m PT of Rs1435.

MUTH IN - likelihood of 4-6% qoq growth in Gold Loans in Q1 FY24

Muthoot witnessed a near 2% qoq growth in customer base in Q4 FY23 along with firm portfolio yield, after experiencing a 3.5% decline in customers over preceding five quarters along with significant erosion of yield. In the latest quarter, there was improvement in customer acquisition (up 8% qoq), customer reactivation (up 5% qoq), customer attrition (down 4% qoq) and customer engagement (additional collateral to existing borrowers - up 2% qoq). The tonnage growth in FY22 was driven by significant dropping of yield (gold prices were even through the year), and it came on a flat customer base. Now the customer mix (high value v/s low value) has stabilized, reflected in reversal of avg. pledge/customer to before the teaser rate period. Thus, tonnage growth should henceforth move largely in-line with customer growth. Current momentum in customer metrics could drive 1.5-2% qoq customers/tonnage growth in Q1 FY24 and the loan/gram can increase by 3-4% (increased by 8% till Q4 FY23 v/s ~20% increase in gold price). Resolution of OD portfolio could impact portfolio yield but would also release ECL provisions and hence can be RoE neutral.

MGFL IN - likelihood of 2-4% qoq growth in Gold Loans in Q1 FY24

Manappuram’s customer base grew 2% qoq in Q4 FY23 after declining significantly in preceding two years. While portfolio yield came-off in Q4 FY23, the management attributed it to portfolio shift to 6m loans from 3m loans (resulting in lower fees, charges & penal int. income), and not due to reduction in product yields. Over the past couple of quarters, Manappuram has witnessed an acceleration in new customer acquisition (particularly low-value customers). Management expects gradual growth is customer base to continue and an improvement in portfolio yield (portfolio pricing has improved marginally from April). While tonnage movement would be impeded by portfolio mix shift towards lower-value higher-yielding customers, there is likelihood of 2-4% qoq growth in Gold Loan AUM in the current quarter aided by higher gold prices.

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