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India Equity Research Reports, IPO and Stock News
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Organised gold lending – A fast-growing and highly profitable niche: Organised gold loan
NBFCs have grown at a tremendous rate (76.2% CAGR over FY2007-10). A reasonably
large potential market still remains, considering a) even as of FY2010, ~75% of the total
market is with unorganised money lenders and pawnshops (Source: DRHP, CRISIL), b)
relatively lower rates of interest and higher trust factor than unorganised players, c)
increasing reach due to rapid branch expansion, d) fast and convenient service and e)
increasing acceptability of gold loans aided by heavy advertising. Further, as of FY2010,
only about 4.7% of India’s gold holding is pledged for gold loans, highlighting further
potential for future growth. Moreover, small-ticket gold loans are a highly profitable niche,
as the target market for gold loan NBFCs are mainly un-banked customers and credit costs
are low due to the gold collateral.
Leading organised player with a proven track record: Muthoot Finance Ltd. (MFL) has
capitalised on this opportunity, growing its AUM at a 93.8% CAGR over FY2008-
8MFY2011 (~20% organised market share as of FY2010 as per IMaCS Industry Report).
This growth has been underpinned by a strong branch network through rapid expansion
(56.5% CAGR over FY2008-11MFY2011), a strong and trusted brand that has enabled
swift customer acquisition, fast and convenient service and relatively more flexible products
than banks.
Outlook and valuation: While gold loan NBFCs such as MFL have seen highly profitable
growth so far, this has occurred in an environment of consistently rising gold prices. Any
sharp decline in gold prices could pose downside risks to growth and asset quality.
Moreover, recent developments regarding lending to relatively low-income segments have
highlighted regulatory risks to MFL’s business from any regulatory capping of its currently
high yields (~19% in 8MFY2011). That said, post-correction, MFL’s closest competitor
Manappuram (MGF) is trading at 1.8x FY2013 BV (Bloomberg consensus) and MFL has
been priced equivalent to MGF’s valuations at the upper end of the price band.
Considering reasonably high growth potential and profitability of both MFL and MGF
along with MFL’s higher market share than MGF, better operating efficiency, higher
leverage and a more extensive pan India branch network, we expect moderate upsides at
the upper band. Hence, we recommend a Subscribe to the issue at the upper end of the
price band.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Subscribe to Muthoot Finance IPO
Organised gold lending – A fast-growing and highly profitable niche: Organised gold loan
NBFCs have grown at a tremendous rate (76.2% CAGR over FY2007-10). A reasonably
large potential market still remains, considering a) even as of FY2010, ~75% of the total
market is with unorganised money lenders and pawnshops (Source: DRHP, CRISIL), b)
relatively lower rates of interest and higher trust factor than unorganised players, c)
increasing reach due to rapid branch expansion, d) fast and convenient service and e)
increasing acceptability of gold loans aided by heavy advertising. Further, as of FY2010,
only about 4.7% of India’s gold holding is pledged for gold loans, highlighting further
potential for future growth. Moreover, small-ticket gold loans are a highly profitable niche,
as the target market for gold loan NBFCs are mainly un-banked customers and credit costs
are low due to the gold collateral.
Leading organised player with a proven track record: Muthoot Finance Ltd. (MFL) has
capitalised on this opportunity, growing its AUM at a 93.8% CAGR over FY2008-
8MFY2011 (~20% organised market share as of FY2010 as per IMaCS Industry Report).
This growth has been underpinned by a strong branch network through rapid expansion
(56.5% CAGR over FY2008-11MFY2011), a strong and trusted brand that has enabled
swift customer acquisition, fast and convenient service and relatively more flexible products
than banks.
Outlook and valuation: While gold loan NBFCs such as MFL have seen highly profitable
growth so far, this has occurred in an environment of consistently rising gold prices. Any
sharp decline in gold prices could pose downside risks to growth and asset quality.
Moreover, recent developments regarding lending to relatively low-income segments have
highlighted regulatory risks to MFL’s business from any regulatory capping of its currently
high yields (~19% in 8MFY2011). That said, post-correction, MFL’s closest competitor
Manappuram (MGF) is trading at 1.8x FY2013 BV (Bloomberg consensus) and MFL has
been priced equivalent to MGF’s valuations at the upper end of the price band.
Considering reasonably high growth potential and profitability of both MFL and MGF
along with MFL’s higher market share than MGF, better operating efficiency, higher
leverage and a more extensive pan India branch network, we expect moderate upsides at
the upper band. Hence, we recommend a Subscribe to the issue at the upper end of the
price band.
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