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We interacted with branches of Muthoot Finance, Manappuram Finance and Muthoot Fincorp in the outskirts of Mumbai to understand any change in growth and competitive dynamics in the light of recent embargo on IIFL Finance and steep rally in gold prices. The surveyed branches were less enthusiastic about acquiring IIFL customers, cited no easing in competitive intensity and envisaged limited benefits from higher gold prices in the near term. However, they remained sanguine about moderate growth and firm yields. Elaborate takeaways mentioned below in the note.

Empirical data suggests that whenever there has been a sharp up move in gold prices, it translates into significant growth (though not commensurate) in Gold AUM of Muthoot Finance and Manappuram Finance if the customer base/loan accounts are not de-growing. In recent quarters, we have seen sustained positive movement in the customer base with competition stabilizing (at least not increasing at the margin) and may be due to a pick-up in growth of overall organized gold loan market (from better adoption and customer transition from private financiers). Also, it seems that while initial growth response to higher gold prices takes shape through need-based Top-up loans, eventually a substantial AUM re-prices to the prevailing gold prices (portfolio LTV comes back to mean after dipping). Interestingly, Muthoot and Manappuram are yet to even depict the growth gain from the gold price increase during the December quarter (portfolio LTV at 65%/61% for Muthoot/Manappuram), and thereafter gold prices have rallied even more sharply.

On incorporation of higher gold prices (reserved 5-7% cushion on current price) and marginal benefit from IIFL embargo, our consolidated PAT/RoE estimates for Muthoot Finance increase by 3-8%/1-1.5% and for Manappuram Finance increase by 5-6%/0.8- 1%. There is inherent operating leverage with value-driven growth uptick. Also, there is inherent co-relation between gold prices and valuation multiples. Muthoot and Manappuram are also credible plays on funding cost down cycle, but we haven’t baked that in. Retain positive stance on both the cos. and have raised 12m PT by 10-20%.

Key takeaways (arranged topically) from the Branch Visits

* Counterintuitively, not a significant number of IIFL customers seems to have enquired with Muthoot Finance, Manappuram Finance and Muthoot Fincorp as per the branches we surveyed.

* Also, not many of such enquiries were fulfilled due to mismatches in Valuation, LTVs and Rates (not fitting in the policy).

* There is less eagerness too in taking over (BT IN) IIFL customers due to perceived riskiness of loans and lower rates.

* Many IIFL customers have likely gone to competition like SBI, ICICI Bank, HDFC Bank and Muthoot Mercantile who are offering lower rates.

* A couple of the surveyed branches did share that BT Out volume has come off post IIFL embargo.

Footfalls have increased; conversion remains the same

* Footfalls have increased by in the recent days/month by 20-25% at the surveyed branches of Muthoot Finance, Manappuram Finance and Muthoot Fincorp.

* Main reasons behind increased footfalls cited were significant rally in gold prices attracting new customers and enquiries from some IIFL customers due to proximity of branches.

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