Why stocks of gold loan firms are losing sheen

In Q2FY23, the AUM of Muthoot’s gold loan business were flat sequentially, and declined 6.3% quarter-on-quarter for Manappuram.
In Q2FY23, the AUM of Muthoot’s gold loan business were flat sequentially, and declined 6.3% quarter-on-quarter for Manappuram.

Summary

In 2022 so far, the shares of Muthoot Finance Ltd and Manappuram Finance Ltd have slumped 28% and 32%, respectively.

The stocks of gold loan providers have lost charm. In 2022 so far, the shares of Muthoot Finance Ltd and Manappuram Finance Ltd have slumped 28% and 32%, respectively. With that, they have massively underperformed the Nifty Financial Services index, which rose nearly 10%.

Remember, to beat rising competition and retain high-value customers, companies had launched teaser loans in December 2021, which weighed on the net interest margin (NIM). Teaser loans offer lower interest rates for a fixed duration of time. While the loans were discontinued in April, subdued earnings performance in recent quarters has failed to revive sentiments towards these stocks. In Q2FY23, the assets under management of Muthoot’s gold loan business was flat sequentially, and declined 6.3% quarter-on-quarter for Manappuram.

Graphic: Mint
View Full Image
Graphic: Mint

You might also like 

Budget may bolster manufacturing of medical devices

Petronas, Sembcorp, JSW Neo to vie for Continuum

How NRIs visiting India can minimize their expenses

Will steel stocks harden in 2023?

Despite gold prices expected to rise on safe haven demand, a quick turnaround in their key earnings metrics is unlikely. The companies fear losing customers to banks and NBFCs that may offer loans at competitive rates.

“Teaser loans have already hampered the earnings growth of these companies in the past quarters. Further, as things stand, the outlook for both these companies is somewhat negative since they are struggling to grow their key gold loan portfolio due to high competition," said an analyst requesting anonymity.

That said, between the two, Manappuram is said to be better placed than Muthoot. The former is not solely dependent on gold loans and has already diversified into verticals of home loans, vehicle finance and microfinance. Muthoot has also forayed into some of these segments, but its portfolio is largely skewed towards gold loans, with over 90% share. Manappuram expects its diversification strategy to start yielding results in a couple of years, aided by normalisation of credit cost in its microfinance business.

But for now, the road ahead looks bumpy with elevated competition and rising costs of borrowing. In the near-term, their NIM is likely to remain under pressure unless yields on gold loans improve significantly.

The emerging trends in the gold loan NBFC business point to competition intensifying, which is likely to translate into relatively lower return ratio and growth, said analysts at Systematix Shares and Stocks (India). However, significant under penetration of the formal sector, and higher focus on low-ticket customers, is likely to restore growth of gold loan finance NBFCs towards normalised levels by FY24-25, it said in a report.

A sharp correction in gold prices and falling demand for small-ticket gold loans are key downside risks that investors should watch out for.

Elsewhere in Mint

In Opinion, Sunil Duggal tells how to grow India's mineral-intensive new-age economy. Sunjay Kapur says India is well-placed to gain from shifting mobility landscape. Tim Culpan brings positive news from one of the worst years for tech sector. Long Story reveals how telehealth firms are flooding TikTok and Instagram with misleading ads.

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
more

MINT SPECIALS