Gold at ‘work’

Organized gold lending - a fast-growing and highly profitable niche: Organized gold loan NBFCs have grown at a tremendous rate of 76.2% CAGR over FY2007-10 and a reasonably large potential market still remains, considering: a) even as of FY2010, ~75% of the total market is with the unorganized money lenders and pawnshops (Source: RHP, CRISIL), b) relatively lower rates of interest and higher trust factor than unorganized players, c) increasing reach due to rapid branch expansion, d) fast and convenient service and e) increasing acceptability of gold loans aided by heavy advertising. Further, as of FY2010 only ~4.7% of India’s gold holding is pledged for gold loans, highlighting further potential for future growth. Moreover, small-ticket gold loans are a highly profitable niche, as the target market for gold loan NBFCs are mainly un-banked customers and credit costs are also low due to the gold collateral.

Leading organized player with proven track record: Muthoot Finance Ltd. (MFL) has capitalized on this opportunity, growing its AUM at 93.8% CAGR over FY2008-8MFY2011 (~20% organized market share as of FY2010 as per IMaCS Industry Report). This growth has been underpinned by a strong branch network through rapid expansion (56.5% CAGR over FY2008-11MFY2011), a strong and trusted brand which has enabled swift customer acquisition, fast and convenient service and relatively more flexible products than banks.

Outlook and Valuation: While gold loan NBFCs like MFL have seen highly profitable growth so far, this has occurred in an environment of consistently rising gold prices. Any sharp decline in gold prices could pose downside risks to growth and asset quality. Moreover, recent developments regarding lending to relatively low-income segments have highlighted regulatory risks to MFL’s business from any regulatory capping of its currently high yields (~19% in 8MFY2011). That said, post-correction, MFL’s closest competitor Manappuram (MGF) is trading at 1.8x FY2013E BV (Bloomberg consensus) and MFL has been priced equivalent to MGF’s valuations at the upper end of the price band. Considering the reasonably high growth potential and profitability, we expect moderate upsides at the upper band, also taking into account MFL’s higher market share than MGF, better operating efficiency, higher leverage and a more extensive pan India branch network. Hence we recommend a Subscribe to the issue at the upper price band.

If you have any further queries, feel free to call us on 022 39357600, Extn: 6864 / 6865  or mail us at advisory@angelbroking.com