Gold lenders shine in Q2

Strong growth outlook, reasonable valuations should help Muthoot, Manappuram deliver good returns.

Despite macroeconomic headwinds like higher interest rates and slowing consumption growth, Muthoot Finance and Manappuram Finance, the two major gold-based lenders, continued to deliver robust results. For the quarter ended September 30, their revenues and profits grew between 90 and 125 per cent, year-on-year.

Notably, despite the volatile gold prices and regulatory overhangs, their stocks have outperformed the broader markets since June-end. Both are companies are expected to deliver strong loan growth, led by an under-penetrated market and their expansion plans. Thus, most analysts remain bullish on the two stocks, trading at a price to equity ratio of nine to 11 times and a price to estimated book value of about 2.2 times, based on 2011-12 estimates. The caveat, say analysts, is that uncertainty regarding regulatory changes could be an overhang for their stocks, while a sharp correction in gold prices could pose risk to growth.

 

STRONG SHOW IN Q2
Both Muthoot and Manappuram reported robust net profit growth for the quarter ended September, beating Street expectations, primarily driven by strong loan growth. Higher gold prices also fuelled the growth in their assets under management (AUMs). Manappuram’s calculated net interest margin (NIM) remained stable sequentially at 13.1 per cent, despite higher cost of funds (up 115 basis points). Muthoot posted an 18-bps sequential increase in its NIM to 11.38 per cent for the quarter. Both companies have raised their rates to combat higher funding costs, which have cushioned the downsides in their NIMs.

ROBUST GROWTH
In Rs crore	Muthoot Finance		Manappuram Finance
	Q2 ’12	FY12E	Q2 ’12	FY12E
NII	553	2,011	371	1,556
Y-o-Y chg (%)	96.8	59.0	107.2	83.7
NIM (%)	11.4	9.7*	13.1**	14.7
Y-o-Y chg (bps)	46	-120	-156	-10
Q-o-Q chg (%)	18	-	3	-
Net profit	216	802	135	509
Y-o-Y chg (%)	90.2	62.3	124.8	80.1
** Calculated on the basis of average quarterly balances; E: Estimated; * Spreads, indicates difference between interest yields and costs; NII: Net interest income; NIM: Net interest margin Source: Companies, Analyst reports

On asset quality, the trend was a bit divergent. While Manappuram reduced its net non-performing assets (NPA) ratio to 0.25 per cent on a sequential basis, Muthoot’s nearly doubled to 0.51 per cent. While Manappuram’s management expects to maintain its asset quality (as well as NIMs) at these levels and does not expect significant pressure there, Muthoot’s management expects this ratio to improve in the next two quarters, citing seasonality as the key reason for the uptick in the September quarter.

Given that the pledged jewellery is in the lender’s custody and the strong sentimental value attached to this, analysts say the default rate in the gold loan business typically remains low. Second, the average loan to value (of assets) for both companies is comfortable, at 58-66 per cent, which could provide cushion in the interim if gold prices fall.

OUTLOOK, VALUATION
Both Manappuram and Muthoot added over 200 branches in the quarter, in line with their historical average. While Manappuram expects another 150 branch additions in the next six months, Muthoot expects to add close to 250 branches in the rest of 2011-12.

Apart from branch expansion, the companies are also witnessing increase in loans (given) per branch. Manappuram’s average per branch grew 20 per cent in the September quarter (compared to the March quarter), higher than Muthoot’s 10 per cent growth. This helped Manappuram clock savings in the operating expenses/assets ratio, which fell by 66 bps to 6.74 per cent over the March quarter. On the other hand, Muthoot recorded a rise of 48 bps to 4.8 per cent in this ratio, impacted by higher expenses on new branches. Going forward, rising loan dues per branch would bring down the expense ratio for these companies, thereby improving their profitability, say analysts.

On the outlook for the stocks, analysts see an upside of 20-25 per cent from current levels of Rs 187 for Muthoot. While loan growth for the company is expected to moderate from the erstwhile high levels of 80-plus per cent, it is still expected to be robust at 29 per cent (annually) over the next three years.

Kunal Shah of Edelweiss Securities, who has a hold on Manappuram’s stock, believes the company could deliver 46 per cent loan growth in 2012-12. He says, “While we remain positive on its niche business model of collateralised lending, generating RoEs (return on equity) of 20-plus per cent, RoEs will be vulnerable to increased competition, margin pressure, volatility in gold prices and, most important, regulatory risk.” However, some other analysts have a buy on the stock. Analysts at Bank of America-Merrill Lynch have a buy rating on Manappuram with a price target of Rs 80, translating into an upside of 25 per cent from current levels of Rs 63.80.