Shares of India’s top two gold loan companies have declined even as gold prices globally surged to a record. Analysts don’t expect a reversal in their performance as competition squeezes their growth and margins.
Muthoot Finance and Manappuram Finance shares have lost almost 30 percent each in the past one year. Muthoot Finance is down 0.8 percent year to date, while Manappuram Finance has gained 1.3 percent.
Gold prices in India hit an all-time high, tracking the global rally after data showed US inflation is cooling, buoying expectations the Federal Reserve will rein in aggressive interest rate hikes.
According to Vidhi Shah, an analyst at Antique Stock Broking, even though gold prices are higher, it is difficult to recover margins soon amid competition from banks and nonbanking finance companies. She expects margins will improve gradually, but not to historically high levels.
Gold loan companies face competition from banks and fintech companies that offer gold loans at attractive rates and are expanding their presence.
“Even if we consider high gold prices, we cannot compare gold loan providers rates with banks,” Elara Securities analyst Shweta Daptardar said. “Overall growth will not be strong as much as it will lead to rerating for the sector.”
Over the longer duration, shares of gold loan companies have rewarded investors handsomely. The Muthoot Finance stock has jumped 500 percent while Manappuram shares have jumped by about 300 percent since 2015.
However, after a record high of Rs 1,712 in November 2021, Muthoot Finance shares fell almost 37 percent. In 2022 alone, the share fell 29 percent. The Manappuram Finance stock hit an all-time high of Rs 168 in November 2021 and since then has dropped 31 percent. The stock lost 29.4 percent in 2022.
Why the fall?
Analysts said the share prices have fallen amid intense competition from stronger rivals. In recent years, banks and new-age fintech companies have actively offered gold loans at attractive rates, putting pressure on legacy gold loan companies.
With a view to getting a bigger pie of the market, banks and fintech firms have been increasing staff strength and infrastructure to expand into new markets.
Did teaser loans backfire?
To handle competition and retain higher value customers, both the gold lenders introduced so-called teaser loans in December 2021, which led to a sharp contraction of yields and margins. Also, this led to single-digit growth in assets under management in the past one year.
Teaser loans are products that offer a lower rate of interest on loans for a fixed time, after which the interest rate adjusts to market levels. Credit cards, adjustable rate mortgages and gold loans are common products that can be counted as teaser loans in India.
Analysts said Muthoot and Manappuram could see a further erosion in their market share to banks, other nonbanking finance companies and fintech firms. This could lead to higher attrition and likely swell employee costs, resulting in lower-than-expected profitability.
Muthoot Finance has a 46 percent share in the gold-financing market, while Manappuram has about 16 percent.
Challenges persist
These lenders are now focusing on small loans that analysts expect may not help to offset losses. That’s because small customers are already impacted by the pandemic and high inflation. Hence, the segment is seeing a slow pick-up.
These companies also face challenges in expanding their physical presence. Under the current rules, NBFCs in the business of lending against collateral of gold jewellery must obtain prior approval of the Reserve Bank of India to open more than 1,000 branches.
On the other hand, banks have been expanding their presence rapidly and have been able to support growth. In July 2022, Muthoot Finance got RBI approval to open 150 branches across India, which analysts said was positive.
What lies ahead?
Analysts said the December quarter numbers for both lenders will likely be muted. Loan growth is expected to be little changed and operational expenditure of gold loan lenders is likely to stay elevated, analysts said.
“Net new customer acquisition will be a key monitorable in the coming quarters and also the most critical determinant of the company’s gold loan growth trajectory as competition intensifies,” Nirmal Bang said in its November report.
Currently, Muthoot Finance and Manappuram Finance are trading at 1.76x and 0.96x the FY24 price to book, respectively, and they had seen highs of 2.8x and 1.8x during pandemic times. Analysts said those valuations are difficult to achieve in the medium term, but with gradual improvement in profitability in the near term and better growth prospects in the medium term, there is room for decent upside for these stocks.
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