Gold loan companies may take time to shine

Intense competition in the industry, slowdown in gold assets under management (AUM), and rising cost of funds are among the key factors playing spoilsport. Shweta Daptardar, analyst at Elara Securities (India) said, “The competitive intensity has increased lately. Over the years, new-age fintech companies and other NBFCs have not only expanded but built infrastructure such as vaults and storage facilities, to compete in the gold-loans segment."

Note that banks, other NBFCs and new age fintech players such as Rupeek and Indiagold charge relatively lower rates.

In the December quarter (Q3FY23), Muthoot Finance’s gold AUM fell by 0.6% on a sequential basis and Manappuram saw a second consecutive quarter of drop in gold AUM. Weak gold loan AUM is a concern and improvement is likely to be gradual. This is because companies choose to protect margins, at least for now. Overall, in Q3, net interest margin (NIM) of Muthoot rose sequentially, while Manappuram’s remained flattish. “Yields and growth cannot go hand-in-hand, in the near-term. Because companies may have to sacrifice on yields if they want growth or vice versa," said Akshay Ashok, research analyst, Prabhudas Lilladher. Companies’ management have hinted to maintain their yields at current levels (over gold AUM growth). For instance, Muthoot’s management has a conservative estimate on gold AUM growth of 4-5% in FY23 .

“We expect gold AUM to rebound by Q1FY24, as lower interest rates offered by new age fintechs will lead to cash burn and is not sustainable. Re-rating can happen if company starts seeing traction in gold loan business after many quarters of softness," said Ashok in the Q3 results review report on Muthoot.

Expansions can help in customer acquisition. Muthoot Finance has received permission from the Reserve Bank of India (RBI) to open 150 branches. The company has completed 120 branches and 30 more are to be completed by the March quarter.

Manappuram, too, continues with gold loan branch openings. But, what gives it an edge over Muthoot Finance is its relatively much higher diversified portfolio. In Q3, non-gold AUM share formed about 12% and 42% for Muthoot and Manappuram, respectively.

Another key development for investors in Manappuram stock is that as a part of its succession strategy, Sumitha Jayasankar, the daughter of managing director and chief executive officer VP Nandakumar has been appointed as an executive director. Remember, the lack of succession planning was seen as a dampener for the stock.

That said, near-term triggers for the stocks appear few and far between.

“Until the competition intensity slows down and AUM improves, the stocks are expected to be laggards.

However, we are expecting the AUM to show signs of improvement after 2-3 quarters," said Bunty Chawla, AVP (BFSI), IDBI Capital Markets & Securities

Furthermore, though new customers are being acquired at a higher interest rate, the rate for both the companies is lower than earlier.

Thus, NIMs are expected to be lower. “NIM versus growth conundrum stays and the industry has to come to a new normal where the ROE is likely to be around 17-18% from historical levels of 26-27%," Daptardar said.