Muthoot, Manappuram to regain lost sheen

Stable gold prices, expectations of significant reduction in auctions due to customer defaults and attractive valuations make analysts bullish on the two companies

Gold financiers- Muthoot Finance (Muthoot) and Manappuram Finance (Mannapuram) are on the verge of a turnaround. These companies had witnessed pressure on assets under management (AUM) as well as on their overall profitability due to sharp fall in gold prices, change in regulations and slowing credit demand in recent quarters.

Gold prices have corrected 15 per cent to Rs 2,800 per gram since September 2012 and have stabilised recently. Notably, the auctions (due to higher defaults and weaker gold prices) are likely to be much lower in coming quarters, which in turn will improve financials of these companies from the September 2014 quarter, believe analysts.

"In the past two quarters, Muthoot and Manappuram faced large scale auctions on their legacy portfolio. However, most of the stress is out of their loan books and growth could re-start over Q2'FY15", says Digant Haria of Antique Stock Broking. He believes Muthoot and Manappuram's strong branch network, coupled with leadership position in gold loans, will enable 10-15 per cent AUM CAGR over FY14-16.

In the June 2014 quarter, AUMs contracted 17 per cent year-on-year to Rs 21,464 crore for Muthoot and 10.5 per cent to Rs 8,198 crore for Manappuram. Their net profit, too, fell by seven per cent to Rs 180 crore and 16.8 per cent to Rs 440 crore, respectively, in the June 2014 quarter. Positively, the pace of AUM fall came down in the June 2014 quarter as compared to that in the March 2014 quarter, suggesting that the companies' efforts on cost management and garnering new business are yielding results.

Both these companies have stepped up efforts to acquire new customers as well as to optimise their cost structures. For instance, Manappuram is in the process to reduce under-utilised branches and improve its employee utilisation. Muthoot, too, has appointed McKinsey and Company to optmise its costs. The companies have also started focusing on local marketing and are offering attractive interest rates/customised products to the end users in their bid to boost sales. All these steps should aid in driving profitable growth for these companies going forward.

Most analysts remain positive on the two companies and believe current valuations appear attractive. Their average target price stands at Rs 224 for Muthoot (upside of 17 per cent from current levels of Rs 191.60) and Rs 29 for Manappuram (upside of 5.3 per cent from Rs 27.55 currently). Muthoot trades at 1.3 times FY16 estimated book value, while Manappuram's FY16 price/book stands at 0.8 times. Overall, analysts expect earnings of both the companies to grow at 15-16 per cent over the next two years. Muthoot has recently bought a 30 per cent stake in Sri-Lanka based retail financing company - Asia Asset Finance (AAF) for $2.1 million which will help the company sell its gold loans in Sri Lanka market as well.

On the flip side, any unexpected sharp fall in gold prices is the key downside risks. While intensifying competition is also a risk, the two companies' long-track record provides some comfort. Any aggressiveness by banks in the gold loan space though could impact growth rates of gold loan companies.

"We believe achieving AUM per branch north of Rs 6 crore is critical for Muthoot to achieve 18 per cent plus Return on Equity (15.8 per cent in Q1FY15) and would need asset growth of 20 per cent over next four quarters. While we feel that balance of probabilities still lie in favour of achieving this goal, the difficulty in turning the tide for disbursement run rate merits some caution", says Santanu Chakrabarti of ICICI Securities. He also adds that removal of ticket size cap for gold loans by banks may increase competition in this segment.