Manappuram Finance shines on non-gold loan shift | Mint

Manappuram Finance shines on non-gold loan shift

Microfinance, housing finance and vehicle finance typically have higher slippages in difficult economic conditions, cautioned HDFC Securities
Microfinance, housing finance and vehicle finance typically have higher slippages in difficult economic conditions, cautioned HDFC Securities

Summary

  • While Manappuram Finance Ltd's shares have gained over 40%, its larger peer Muthoot Finance Ltd has seen only a 27% rise

With domestic gold prices hovering near record highs, shares of Manappuram Finance Ltd and Muthoot Finance Ltd, two major non-banking gold financiers, have been shining. But one of them has sharply outperformed the other. Over the last six months, Manappuram Finance Ltd's shares have gained over 40%, while its larger peer Muthoot Finance Ltd has seen only a 27% rise.

Manappuram's focus on diversifying towards the non-gold loan segment is a positive move. In the September quarter (Q2FY24), the company saw growth in assets under management (AUM) driven primarily by the non-gold segment. This was largely due to the growth in microfinance lending, which led to non-gold AUM accounting for approximately 47% of the overall AUM mix in Q2, compared with 37% in Q2FY23. Manappuram has guided for a 50:50 mix between gold and non-gold segments in its portfolio.

Muthoot is slowly expanding its reach while focusing on a carefully planned approach to non-gold loan business. Their management is aiming for a gradual and calibrated growth in areas such as microfinance, housing finance, vehicle loans, personal loans, and corporate loans. They plan to increase the share of non-gold businesses from the current 13% to 18% over the next five years.

Although the surge in gold prices could result in an increase in demand for gold loans, the gold lending business is cyclical in nature and is facing stiff competition from banks and NBFCs. This competition has intensified post the covid-19 pandemic. As a result, gold financiers are venturing into non-gold loan segments. But, Manappuram needs to consistently demonstrate success in its non-gold segments.

Microfinance, housing finance and vehicle finance typically have higher slippages in difficult economic conditions, cautioned HDFC Securities in a report dated 28 November.

During the recent analyst day meeting, the Manappuram management said the cost of borrowing is expected to increase due to the new risk weight norms announced by Reserve Bank of India. However, the management is confident of passing on the increase to customers. The cost of borrowing could go up by 15-25 basis points on both the incremental and existing borrowings. Despite this, the company's gold loan asset under management (AUM) growth guidance for FY24 remains at 7-8%. The consolidated AUM growth guidance is higher at over 20% and would be led by the non-gold businesses.

To be sure, after the sharp run-up in the stock, investors must not ignore the potential concerns. For example, a rise in delinquency in non-gold businesses leading to higher non-performing assets could be worrisome. “Higher-than-expected competition in future impacting profitability would be a key risk to our estimates," said a report by Nirmal Bang Institutional Equities on 29 November.

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