RBI's loan-to-value norm to hit gold loan cos: Espirito

The Reserve Bank of India (RBI) has released a new set of reforms that requires appropriate infrastructure for storage of gold ornaments. This had led to some correction in gold loan companies like Manappuram Finance and Muthoot Finance. The new reforms are more like a code of conduct

Santosh Singh of Espirito Santo Securities in an interview to CNBC-TV18 spoke says in the near-term gold loan companies will be impacted. Also read: Here's what the latest RBI norms mean for gold loan cos Below is the verbatim transcript of his interview on CNBC-TV18 Q: Is this 60 percent loan-to-value (LTV) and its calculations a bit of a shocker? Will it make life difficult for the gold companies?
A: In the near-term yes. If one looks at yesterday’s price, what the use is something that they have got on Gold Loan Association and the prices which is declared by them.
If one looks at yesterday’s price the highest price they could have offered was Rs 1950 per gram. If I go in accordance to RBI’s calculation it will come to around Rs 1750 to 1800 so that is clear reduction in LTV by more than 10 percent. 
These companies were using the value of jewellery other than value of gold. That is clearly negative for those companies. Q: This is not the first time that Reserve Bank has said value of gold - it was always intended maybe it was clearer at this juncture?
A: From the beginning we were saying that the intention of RBI is clearly that they want the value of gold and not the value of jewellery. Eventually, whatever security one has, one can sell it in the market, one can’t sell jewellery at the jewellery rate, and one can only sell it at the gold rate.
I think it is a clarification and clarification has an impact because earlier they were using value of gold as value of jewellery and they were pricing their product in that way. So, it is a bit of negative for them. Q: How would you rework your estimates for Muthoot Finance and Manappuram?
A: Initially from the beginning we said that we believe it is a value of gold and not value of jewellery. From the beginning, our valuations, all our calculations were based on 60 percent scrap value of gold and based on tonnage assumptions.
For us the valuations and the value changes in accordance with the gold prices but whatever assumptions that we use around 5-6 months back, the gold prices were again back to where they were. So there was no change in estimates.
However, sentimentally as well as functionally, for gold loan companies it was incrementally negative. Although not negative from the numbers point of view but from sentimental point of view, definitely. Q: What are you expecting in terms of earnings growth for Muthoot and Mannappuram and what is a justifiable price?
A: For this year we do not expect any earnings growth. For Mannappuram we are expecting RoEs to be in the range of 8.5-9%. Q: What is your view on L&T Finance holdings?
A: We have been sellers for the longest period of time in L&T Finance holdings. The valuation it is trading on is clearly on expectations that they will get a banking license. However, at 1.5-1.6 times I can get lot of banks that have already got a franchise but L&T Fin will have to create that franchise, so there is no reason for it to trade at those valuations.
Q: Which are the NBFCs that you like? Do you like M&M Financial?
A: M&M Financial's has a niche segment. It is exceptionally better in rural whereas L&T has no niche segment. M&M Financial will indeed deliver 20-25% earnings growth which L&T Finance cannot. Q: What are your other picks?
A: Max India has been one of our pick and it is one one of the best insurance business available in the market with high quality management and high quality business. With similar return on embedded value, global business trade at around 3 times book. These companies trade at discount to book. So we don’t see an argument for this company to trade at these valuations. Q: Your view on IDFC?
A: We are still buyers in IDFC.