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All that glitters may not be gold
Investors need to keep in mind that in the absence of a re-rating in the valuation multiple, long-term performance will largely track earnings growth.
In the past 1 year, Muthoot and Manappuram have generated returns of a negative 16 percent and 2.4 percent, respectively, as against over 12 percent gains for the Nifty. While the weakness prima facie looks like an opportunity,
Gold loan is inherently a secure lending business, with adequate collateral in the form of gold jewellery. Muthoot saw a sharp spike in its non-performing assets to 7 percent of loans (90 day past due) from 5.6 percent (120 dpd) in Q3 FY18 and 2.1 percent (120 dpd) in Q4 FY17 due to increase in share of shorter tenure loans and change in recognition norms to a borrower-based recognition.
Muthoot’s management is confident of recovering the entire amount in the next couple of quarters. However, it was quick to add that they do not want to auction the gold quickly as it kills customer loyalty. Manappuram kept a check on delinquency in its core business, with a strategy of prompt auctioning.
Both gold financing companies are diversification their loan book. Manappuram, for instance, now derives 25 percent of its assets under management (AUM) from non-gold lending. In FY18, its non-gold portfolio grew much faster.
Muthoot too is walking the path of diversification and plans to boost its share of non-gold loans to 20 percent by 2020 from 10 percent at present. It has two wholly-owned subsidiaries in the areas of home finance and insurance broking. It owns 66.6 percent in microfinance entity: Belstar Investment & Finance. The company also owns 60 percent stake in an asset financing company in Sri Lanka.
While a diversification strategy de-risks the book, the same is fraught with risks. For instance, diversification has come at a price for Manappuram. Growth in its non-core businesses accompanies a steady asset quality deterioration in its new businesses.
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