Business Standard

Margin concerns largely priced in for Muthoot, Manappuram

- DEVANGSHU DATTA

The rising price of gold has a positive effect on the assets under management (AUM) of goldbacked lenders such as leading gold NBFCS, Muthoot Finance, and Manappuram Finance – AUM rises when gold price increases. This is also true in the gold-financing segment for banks. Due to competitiv­e intensity, there may also be yield compressio­ns in gold loans.

In the October-december quarter (Q3) of FY24, stable yields and AUM growth have helped gold loan businesses improve their financials despite competitio­n. Non-gold segments have also performed well. Higher competitiv­e intensity remains a key risk, going forward.

Three NBFCS in gold financing, Muthoot, Manappuram, and IIFL Finance have average gold loan yields of 17.8 per cent, 21.5 per cent and 18.3 per cent respective­ly across nine months, ending December 2023 (9MFY24).

All three have seen AUM growth on a quarter-on-quarter (Q-O-Q) basis for the gold segments over the last three quarters. Muthoot and Manappuram maintained their FY24 guidance of 15 per cent and 10 per cent gold AUM growth. Domestic gold prices are up 3.4 per cent (February 2024 compared to April 2023) and 3.7 per cent up Q-O-Q in Q4 (January-march quarter) of FY24 till mid-march 2024.

Given the Reserve Bank of India’s (RBI’S) risk weightage increases for unsecured lending, there could be some more movement towards loans against gold.

The tonnage of loans remained almost flat and the customer base has not grown much.

There has been strong profit growth in subsidiary businesses for Manappuram and Muthoot in both FY23 and also 9MFY24.

Non-gold AUM growth was 56 per cent year-on-year (Y-O-Y) in FY23 over FY22 for Manappuram and 29 per cent Y-O-Y for 9MFY24. Non-gold AUM growth was 25 per cent Y-O-Y in FY23 for Muthoot and 40 per cent Y-O-Y in 9MFY24. Q4 is seasonally the strongest quarter for gold finance and given the strong historic correlatio­n of rising AUM with rising gold prices and the uptrend in gold, AUM in gold should continue to grow.

Both companies are present in other segments. Although, with RBI restrictin­g IIFL Finance from offering new gold loans it may help the two gold-finance NBFCS in the near-term, competitiv­e intensity has risen as banks and other NBFCS like Bajaj Finance have moved into gold.

Manappuram claims standalone cost of borrowings rose 20bps Q-O-Q in Q3FY24 due to the increase in risk weights on bank term loans to NBFCS. It guided that costs of borrowings may rise by 10-20bps Q-O-Q in Q4FY24. Muthoot also expects an increase in borrowing costs over the next two quarters.

Muthoot has asset quality concerns in that its Gross Stage 3 loans (GS3) are high at 3.8 per cent (December 2023). This is despite an ARC transactio­n with a gold loan pool of ~700 crore in Q2FY24. Further auctions may be required to reduce its GS3. It will try to manage NIMS or net interest margins (stable at 10.9 per cent in Q3FY24) given the rising cost of finance while it tries to grow tonnage and acquire new clients. It has not yet received the full benefit of branch expansions. It has opened 487 new branches at the group level in 9MFY24. It is guiding for a target mix of 15 per cent non-gold by FY27 which implies a CAGR of about 20 per cent. Managing asset quality in non-gold, especially in the microfinan­ce (MFI) subsidiary Belstar will be crucial.

Manappuram has a high cost of funding, and it is waiting for Sebi clearance for an IPO in its MFI subsidiary, Asirvad (kept in abeyance since January 2024), and says it has responded to all regulator’s queries. GS3 is in the range of between 2 per cent and 3 per cent in different segments (standalone, housing finance, MFI) and Asirvad has done an ARC of ~200 crore. Management admits to collection issues in MFI and for digital personal loans.

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