After the pandemic-induced liquidity squeeze and rising gold prices, the gold finance industry has seen favorable winds. Muthoot Finance, which is a leading player in gold lending, increased its gold lending portfolio by 27% year-on-year in FY21 to 51,926.6 crore. While it is expected to benefit more from the current low penetration of gold financing, the company has also witnessed increased competition from banks and new fintech players.
In this changing environment, Muthoot was able to compete well to a large extent, although this caused yields to contract in the June 2021 quarter, which is expected to continue in the near term. However, the impact on margins can be largely contained by a likely reduction in the cost of funds.
Despite short-term margin aberrations, the stock continues to be a good bet in the long term, given its strong business fundamentals and strong balance sheet that can help withstand competitive pressures. Besides its dominant share in the formal gold financing market, negligible loan cancellations in the past, a collateral buffer (60% LTV), small ticket size, and shorter repayment terms have worked well. for the society. These positive aspects of the business model helped translate the high returns into higher returns for shareholders – a return on assets of 8% and a return on equity of 27.8% in fiscal year 21. The company is based also on healthy cushions – the capital adequacy ratio was 27.3% in June 2021.
Since our previous call last year (published in the October 19, 2020 issue), the headline is up 28%. It is currently trading at 3.9 times its June 2021 book value, 22% above its 3-year average multiple of 3.2 times. With the stock rising (trading just 6% below its highest standard of living), investors can use market volatility to buy the stock, instead of adding to it. one time. .
Its counterpart Manappuram Finance is comparatively smaller and has less exposure to gold lending, only 66.5% is global pound gold lending of 24,800 crore as of June 2021. It has slightly lower financial metrics ( RoA and RoE of 5.6 and 26.2%, respectively in FY21). Manappuram stock is trading at 2.26 times its June 2021 book.
According to the World Gold Council, while Indian consumers hold $ 1.5 trillion in gold (mostly jewelry), gold financing penetration is only around 10%. Although only 35 percent of funding comes from formal sources (banks and NBFC), these should better benefit from increasing penetration, given the competitive pricing and institutional security they offer clients. Within the formal segment, Muthoot has more than 10 percent of the gold lending market share (compared to leading banks such as SBI and Indian Bank whose gold lending portfolio is each less than 5 percent). percent market share).
Despite the efforts of banks to increase their gold loan portfolios and the entry of many fintech players into the gold financing market, Muthoot has managed to hold onto his ground. This has been possible thanks to its presence in unbanked cities (65% of its branches are in rural areas), its institutional pedigree, and its digital offerings (such as home loans, digital integration and credit options. payment). About 28.5% of the company’s gold lending customers currently transact online.
While the company’s loan portfolio also continued to grow at 27% in the June 2021 quarter, intensifying competition caused yields to contract (down 195 basis points year-on-year). Net interest margins, however, fell only 101 basis points to 12.9 percent due to the reduction in the cost of funds (down 94 basis points).
Going forward, as we expect yields to continue declining, margins may be further shielded from the likely revision in the cost of funds. With a diversified borrowing profile – 30% MNT and bonds, 44% banks and financial institutions, and 16% external commercial borrowing – the company could benefit more from persistently low interest rates .
Other positive points remain
Benefiting from the highly liquid nature of the attached collateral and the low loan-to-value ratio (LTV) maintained by the NBFC – 50-60% on the overall portfolio, the company’s loan write-offs were negligible. Its stage -3 assets were also low, due to smaller loan sizes and flexible repayment options. In June 2021, phase 3 gross assets (Ind AS equivalent of GNPA) represented 1.22% of the gross loan portfolio, compared to 2.56% in the previous year period.
In addition, the decline in its operating expenses further contributed to its profits. Operating expenses as a percentage of loan assets, which had been above 5 percent since March 2014, fell to less than 4 percent in March 2021 (to 3.21 percent in the June quarter 2021).
Muthoot Finance conducts its gold lending business primarily through its stand-alone entity. The company has seven subsidiaries (including an overseas NBFC) which are active in the business of real estate finance, vehicle finance, microfinance, insurance brokerage and other forms of lending. Subsidiaries contribute about 10 percent of the company’s consolidated loan assets, which stood at 58,134.8 crore at the end of the June 2021 quarter. These contribute less than 3 percent of consolidated profits of the company, which stood at 978.6 crore in the last quarter of June (consolidated revenue for the quarter was ₹ 2,963.4 crore).