INSTITUTIONAL EQUITY RESEARCH Gold Finance ?· INSTITUTIONAL EQUITY RESEARCH ... gold‐loan NBFC have…

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  • INSTITUTIONALEQUITYRESEARCH

    Page|1|PHILLIPCAPITALINDIARESEARCH

    GoldFinanceNBFCsAllthatglittersisgold;goldNBFCsadirectplayonupcycleINDIA|NBFCSector&InitiatingCoverage

    17October2016

    LargegoldholdingswithhouseholdsmakeIndiathebiggestgoldloanmarketIndiahas the largestgold stock in theworld Indianhouseholdsholdmore than22,000metrictonnesofgold,whichismorethan10%oftheworldstotalgoldstock.Overthepasttenyears,thevalueofgoldinIndiahasseena13%CAGR,outpacingthecountrysrealGDP,inflation,andpopulationgrowthby612%. Its largehouseholdholdingsmake Indiaoneofthelargestgoldmarkets,offeringhugepotentialforgoldfinancierssuchasMuthootFinanceandManappuramFinance.Hugeuntappedpotentialastheorganisedsegmentpenetrationremainssub4%Industryestimatessuggestthataround1012%ofthecountryshouseholdgoldholdingsarepledged. Of this, around 7075% is with the unorganised segment and the rest is withorganisedplayerssuchasspecialisedgoldloanNBFCsandbanks;thelatterssharehasbeenincreasingrapidlyduetotheirincreasedfocusongoldloans.ThegoldloanmarketinIndiaisgrosslyunderpenetrated(

  • Page|2|PHILLIPCAPITALINDIARESEARCH

    NBFC SECTOR

    TableofContents

    Industry 3

    LargehouseholdholdingsmakeIndiaabigmarketforgoldloanfinanciers 3

    Hugeuntappedpotentialasorganisedsegmentpenetrationremainsbelow4% 3

    GoldfinanceNBFCsarebetterpositionedthanbanks 4

    StablegoldpricesbodewellforgoldNBFCsadirectplayonthegoldupcycle 4

    Regulatoryoverhangbehind;goldloanNBFChavestartedgaininglostground 4

    Valuationstotrackbalancesheetgrowth 5

    CompaniesSection

    ManapuramFinance 9

    MuthootFinance 17

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    NBFC SECTOR

    IndustryLargehouseholdholdingsmakeIndiaabigmarketforgoldloanfinanciersIndiahasthelargestgoldstockintheworld,withmorethan22,000metrictonnesofgoldheldbyIndianhouseholdsmorethan10%oftheworldstotalgoldstock.Overthepasttenyears,thevalueofgoldinIndiahasseenaCAGRof13%,outpacingthecountrysrealgrossdomesticproduct (GDP), inflation,andpopulationgrowthby612%.Indiahasoneofthehighestsavingsratesintheworld(32.3%ofGDP),ofwhicharoundonefourthisinvestedingold.AlargepartofruralIndiassavings(whichholdsaround65%of Indias totalgoldstock), is in the formofgoldas it isagoodhedgeagainstinflationandisfairlyliquid.Indias largehousehold goldholdingsmake the countryoneof theworlds largestgoldmarkets,offeringhugepotential forgold financiers likeMuthootFinanceandManappuram Finance. Demand for gold has remained buoyant due to thesentimental value attached to themetal. During 20022012, annual gold demandremained relatively stable at around700900 tonnes,despite the rise inprices. InIndia,risingpriceshavenotadverselyaffectedgolddemand.Globally,Indiaisat11thpositionintermsofofficialgoldreserves JewellerydemandinIndiaremainbuoyant(Tonnes)

    Source:WorldGoldCouncil,Company,PhillipCapitalIndiaResearch

    Hugeuntappedpotentialasorganisedsegmentpenetrationremainsbelow4%Itisestimatedthataround1012%ofIndiashouseholdgoldholdingsarepledged,ofwhicharound7075%arewiththeunorganisedsegmentwhileonly2530%arewithorganised players like banks and NBFCs. However, 67 years ago, the organisedmarketsshareusedtobejust1020%thissharehasincreasedrapidlyduetobetterfocusongoldloansbyspecialisedgoldloanNBFCsandbanks.Goldloan demand has picked upwell in the last 810 years due to lower rate ofinterest charged by organised players as compared to moneylenders and pawnbrokers,higher LTVs (loantovalue ratios),quickdisbursement, flexible terms, andperceivedsafetyoftheornaments.Moreover,highruralindebtedness,ineligibilitytoget loans from banks, and changing attitude of customers to gold loans, havecontributedtothesharpgrowthinthegoldloans.Withjustlessthan4%penetration,thegold loanmarket in India isgrosslyunderpenetrated,consideringthe largegoldholdingswithhouseholds.Thispresentsasignificantscopeforgrowthfororganisedgoldloan financiers. Just1%additionalpenetrationcoulddriveabout~25%growthfortheentireorganisedsegment.

    01,0002,0003,0004,0005,0006,0007,0008,0009,000

    UnitedStates

    Germany

    IMF

    Italy

    France

    China

    Russia

    Switzerland

    Japan

    Nethe

    rland

    s

    India

    ECB

    Turkey6)

    Taiwan

    Portugal

    480

    500

    520

    540

    560

    580

    600

    620

    640

    660

    680

    2012 2013 2014 2015

    Indiahasoneofthehighestsavingsratesintheworld(32.3%ofGDP),ofwhicharoundonefourthisinvestedingold.

    During20022012,annualgolddemandremainedrelativelystableataround700900tonnes,despitetheriseinprices

    Withjustlessthan4%penetration,thegoldloanmarketinIndiaisgrosslyunderpenetrated,consideringthelargegoldholdingswithhouseholds.Thispresentsasignificantscopeforgrowth

  • Page|4|PHILLIPCAPITALINDIARESEARCH

    NBFC SECTOR

    GoldfinanceNBFCsarebetterpositionedthanbanksWhilebankshold largermarket share ingold financingascompared toNBFCs, thelatterarebetterplacedon thecompetition front.Competitive intensitywithbanksandothernonspecialisedNBFCshassubsidedoverlastcoupleofyears,aslotofnonserious players have either exited or slowed down considerably due to adversemarket conditions. Goldfinance NBFCs have used this respite to improve theirproductstructureandbusinessmodels.The operating dynamics of banks and NBFCs are also very different specialisedNBFCs focus on customer convenience, quick disbursement, and flexibility, whilebanksfocuslargelyonlowerinterestrates.WhileNBFCschargehigherinterestratesof1824%, bankscharge1215%.However,eventhoughbanksoffer lesser interestrate, target customers prefer NBFCs, as gold loans have largely become aconvenienceproduct.ComparisonamongvariousmarketplayersParameter GoldloanNBFC's Banks MoneylendersLTV Upto75% LowerLTVthanNBFC's Higherthan75%ProcessingFees No/minimalprocessingfees Processingchargesaremuchhigher

    comparedtoNBFCsNoprocessingfees

    InterestCharges ~18%to24%p.a ~12%to15%p.a Usuallyintherangeof36%to60%p.a.Penetration Highlypenetrated Nothighlypenetrated.Selective

    branchesHighlypenetrated

    ModeofDisbursal Cash/cheque(disbursalsmorethanRs0.1mnincheque)

    Cheque Cash

    WorkingHours Openbeyondbankinghours Typicalbankinghours OpenbeyondbankinghoursRegulated RegulatedbyRBI RegulatedbyRBI NotregulatedFixedOfficeplaceforconductingtransactions

    Properbranchwithdedicatedstaffforgoldloans

    Properbranch Nofixedplaceforconductingbusiness

    CustomerService Highgoldloanisacorefocus Noncore CorefocusDocumentationRequirement Minimaldocumentation,IDproof EntireKYCcompliance MinimaldocumentationRepaymentStructure/Flexibility Flexiblerepaymentoptions.Borrowers

    canpayboththeinterestandprincipalattheclosure.Noprepaymentcharges.

    EMIcompulsorilyconsistsofinterestandprincipal.Prepaymentpenaltyischarged.

    TurnaroundTime 10minutes 12hours 10minutes

    Source:Manappuram,PhillipCapitalIndiaResearchStablegoldpricesbodewellforgoldNBFCsadirectplayonthegoldupcycleHistorically, balancesheet growth for goldloan financiers has traced gold pricemovement.MuthootandManappuramsbalancesheetgrowthhashistoricallyshownhighcorrelationtogoldpricemovementswithahighcoefficientofupto0.97xoverFY0712.While gold prices saw a CAGR of 21% over FY1712, aggregate AUM ofMuthoot/ManappuramsawaCAGRof80%.FY1214sawbalancesheeterosion forbothcompaniesduetoregulatorytighteningbytheRBIandasharpfallingoldprices.Withgoldpricesshowingastronguptrendinthelastninemonths,weexpectstrongrebound in gold loanAUMsofbothMuthoot andManappuram 25%CAGRoverFY1619.Regulatoryoverhangbehind;goldloanNBFChavestartedgaininglostgroundGold financing companieshadaphenomenal timeuntil FY12; theirbalance sheetsgrew exponentially with minimal regulation from the RBI. However, a sharpcorrectioningoldpricesin2012andtheRBIintroducingsometoughregulationshadasignificantimpactontheirborrowingcostsandbalancesheetgrowth.In2011,theRBI denied prioritysector status to banks for any loan given to goldloan NBFCs,which,inturn,ledtohigher(byaround2%)borrowingcostsforgoldfinanceNBFCs.

    However,eventhoughbanksofferlesserinterestrate,targetcustomerspreferNBFCs,asgoldloanshavelargelybecomeaconvenienceproduct.

    WeexpectstrongreboundinAUMsofbothMuthootandManappuram25%CAGRoverFY1619.

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    NBFC SECTOR

    Alsoin2012,theRBIreducedthelimitforbankstolendtoasingleNBFCinthegoldloanbusinessto7.5%from10%.AnothermajorblowcameinMarch2012,whentheRBIcappedmaximumLTVat60%.LowerLTVs,alongwithsofteninggoldprices,ledtosignificantportfolioerosion forMuthootandManappuram,ascustomersturnedtobanksandunorganisedsectors,wheretherewerenoLTVlimits.Themarketshareofspecialised goldloanNBFCs fell to 31% in FY13 from ahighof 36.5% in FY12 itdeclinedfurtherto27.6%inFY14.Sharp deterioration in business compelled Gold loan NBFCs to reconsider theirstrategiesandreworktheirbusinessplans.Theyregainedsomeofthelostgroundby FY15, they had clawed back a market share of 29.4%. Today, with a stableregulatoryregimeandgoldpricesholdingfirm,theseNBFCsseempoisedforhealthygrowth.Manappuram expects gold prices to be relatively stable in FY17, at US$1,2001,400pertroyounce.ValuationstotrackbalancesheetgrowthHistoricalevidencesuggeststhatvaluationsofnicheNBFCssuchasCholamandalam,Shriram Transport, Shriram City Union, andMahindra Finance have tracked theirbalancesheetgrowth.WeexpectbothManappuramandMuthoottoseemorethan2535%CAGR inFY1619,aidedbyfirmgoldprices,changedproductstructure,anddiversification.Hence,we believe that despite 23x growth inMAGFILs/Muthootmarketcapitalizationoverthelastoneyear,itisstillaveryattractiveopportunityforlongterminvestment.Whenseeninisolationtoo,MAGFILs/Muthootvaluationsat2.1x/1.9xFY18EBVareextremelyattractivelookingatrobustRoEsof2022%.

    ManappuramandMuthootarelikelytoseemorethan2530%CAGRinFY1619,aidedbyfirmgoldprices,changedproductstructure,anddiversification.

    Themarketshareofspecialisedgoldl