IGI Logo

High spread between ROE and AUM growth set up strong compounding plays

We initiate coverage on gold loan companies with BUY ratings on Muthoot Finance (Muthoot) and Manappuram Finance (Manappuram), with target prices of Rs1,904 and Rs280, respectively, based on Sep’23E (average FY23/24E) SOTP valuations (3.3x/2.2x P/B for gold loan business of Muthoot/Manappuram and 1.0x P/B for non-gold businesses for both players). Key investment thesis remains that of steady 15% growth outlook in gold loan AUM with 6.0-7.0% expected RoA and 22-26% RoE over the medium term. We believe this should lead to 18/14% earnings CAGR over FY21-25E for Muthoot/Manappuram at standalone level.

* Gold loan continues to exhibit low risk steady growth business potential. Gold loan AUM of Muthoot recorded 13%/16% CAGR over last 10/5 years till FY21. This has been achieved with average credit cost of 0.4/0.5% and average RoE of 24.4/24.5% over last 10/5 years. Comparable numbers for Manappuram are 10/14% gold loan AUM CAGR with average RoE of 18.4/23.1% and credit cost of 0.5/0.4% (all over last 10/5 years).

* We do not agree on the concerns surrounding growth. Gold loan offers the largest market of secured lending in India. The prevalence of gold among Indian households (~20-25k tonnes out of which ~4% is kept as collateral under organized gold loan market) and the vast population without formal credit availability (Indian household debt to GDP ratio was ~12% in Mar-20 vs ~60% in China) is a combination which we believe will keep gold loan very relevant as an overdraft facility for masses. This is underlined by the near 20% CAGR in gold loan AUM over the last decade despite intermittent periods of regulatory changes.

* Concerns on market share loss to banks and new age tech players remain unfounded. Higher LTVs and relative lower growth in other segments had made gold loan an area of heightened interest for banks in FY21. However, operationally intensive nature of the business, existing well-distributed infrastructure across India and a well-established client base provide strong business moats for specialized NBFCs. The ability to focus on low ticket, large scale and operationally demanding nature of gold loan business also remains challenging and sub optimal for banks in the long run. Similarly, there are new online players that are using digital channel to offer gold loans (also started by Muthoot/Manappuram). Yet, the ultimate physicality of gold transfer makes gold loan relatively secure from any major disruption.

* Price risk remains the sole business vulnerability; tenure and LTV provide safeguards. The price risk has been managed by a somewhat linear relationship between the loan tenure and the LTV while rest is managed through auctions.

* ROE>>AUM growth=Diversification. The superlative spread between RoE and AUM growth for gold loan NBFCs generates extra cash, which can be put for diversification. As such, it is on expected lines that Muthoot and Manappuram have diversified into non-gold segments led by microfinance, affordable housing and vehicle loan. Non-gold loan business contribution to consolidated PAT has been 4.7/2.5% for Muthoot and ~16.9/1.6% for Manappuram in FY20/21.

To Read Complete Report & Disclaimer Click Here

For More ICICI Securities Disclaimer https://www.icicisecurities.com/AboutUs.aspx?About=7

Above views are of the author and not of the website kindly read disclaimer