Don’t use credit cards like this!
Do you pay only the minimum amount due on your credit card? How can your debt burden increase just by paying the minimum amount due? Watch this video to know
India is the world’s largest consumer of gold since it’s a wearable wealth. Not only does gold hold sentimental value and is a marker of status, but also financial institutions also hand out loans of up to 75 per cent of the asset’s value based on the current gold price. As a matter of fact lending against is a highly profitable business in India, with a large market opportunity and few key players. Unlike other products, gold loans have negligible credit costs. This has put two specialised gold financiers, Muthoot Finance and Manappuram Finance in sweet spot as they have historically generated ROA (Return On Assets) and ROE (Return On Equity) far superior to that of banks and other NBFC (Non-Banking Financial Companies), noted a report released by CLSA.
Golden opportunity
According to the World Gold Council, Indian households have US$1.5tn of gold, of which only 10% is used for financing and only 35% is from formal sources. “Banks have 75% share, Muthoot Finance is the largest player and Manappuram Finance ranks in the top five. With a differentiated business model, NBFCs have been able to thrive despite charging higher interest rates than banks,” the report stated.
Despite increasing competition CLSA believes there is room for Muthoot Finance and Manappuram Finance to grow at 10-12% CAGR (Compounded Annual Growth Rate) in the next five years, regardless of gold prices.
Negligible risks
Gold financiers have typically had negligible eventual credit losses, given a regulatory loanto-value (LTV) cap of 75% and short repayment schedules. Hence, while there are gross nonperforming loans (GNPLs) on the balance sheet (1-3%), there are no auction losses.
“Gold loan financiers usually incentivise customers to pay on a regular basis, reducing the probability of default at the end of the tenure. This makes gold loans among the safest products of all retail lending products,” the report added.
Net interest margins
“In the past five years, net interest margins (NIMs) improved 300-350 basis points for both players on sharp declines in cost of funds and some yield expansion. Both player’s yields exceeded 20%, comparable to some microfinance players,” said CLSA.
The global brokerage firm is of the opinion that with increasing competition from some banks, a medium-term yield decline may be inevitable. While there may be partial offset due to a lower cost of funds, hence expects 40-80 basis points spread compression over FY21-24.
Preferred picks
Higher profitability with low balance-sheet risk CLSA initiates coverage on Muthoot Finance with a price target of Rs 1,900 per share based on 3x of Sep-23 book value per share. On the other hand, for Manappuram Finance the brokerage firm has a price target of Rs 240 implying a price book multiple of 1.8x and a price to earnings multiple of 9.5x.
(Disclaimer: The recommendations in this story are by the respective research and brokerage firm. Money9 & its management do not bear any responsibility for their investment advice. Please consult your investment advisor before investing.)