Correction in gold loan stocks overdone

While stocks of Muthoot Finance and Manappuram Finance fell, impact of new lending norms is limited

Stocks of gold lenders — Muthoot Finance (Muthoot) and Manappuram Finance (Manappuram) — fell 6-7 per cent on Friday even as the S&P BSE Sensex remained flat. Part of this weakness can be attributed to a sharp rally in these stocks over the past one year. As against an 18 per cent increase in the Sensex, the Muthoot and Manappuram stocks surged 91 per cent and 159 per cent, respectively. Thus, there could have been some profit-booking in these stocks. This weakness could also be attributed to the fact that the RBI on Thursday lowered the maximum amount of cash loans to Rs 20,000 per person from Rs 1 lakh earlier. Fears that this move could materially hit disbursements of these companies aggravated the pressure on these stocks. However, a reality check suggests that the impact may not be as bad as anticipated.

After demonetisation, both these companies increased their focus on cashless transactions and now disburse loans via various cashless routes such as the debit card, real-time gross settlement, and national electronic fund transfer. As a result, the proportion of cash disbursements has come down to 55 per cent for Muthoot and 35 per cent for Manappuram. Thus, even though there will be some near-term slowdown in their disbursals, the same is likely to be short-lived, experts say.

Sunil Shah, head of research at Axis Securities, says: “There will be a very temporary disruption, if any. Borrowers will have to adopt cashless means of taking loans, which should not be difficult, given that after Jan Dhan, 70 per cent of the masses are in the banking net.”

Digant Haria, analyst at Antique Stock Broking, echoes this view. “Gold loan as a product will continue to maintain its charm as the only ‘no questions asked loan’ for India’s informal segment. We continue to remain positive on the gold loan space and any correction in the stock prices could be used as buying opportunity,” he says. Analysts seek clarity on whether companies can extend loans above Rs 20,000 via top-loans or multiple loans to the same borrower. The average ticket size of these companies stands at about Rs 40,000.    

Overall, demonetisation, coupled with the GST rollout, would enable these companies to take away market share from their unorganised counterparts, which are three times bigger than the organised gold lender segment. While both these companies are better-placed now to deal with falling gold prices, a sudden and sharp dip in the price of the yellow metal is a key downside risk. Lower gold prices reduce the value of the gold pledged with these companies and, in turn, can impact their financial performance in terms of asset quality and profitability.