 "Muthoot, Manappuram to regain lost sheen")
Gold financiers Muthoot Finance and Manappuram Finance are on the verge of a turnaround. These companies had witnessed pressure on assets under management (AUM) and on profitability, with the sharp fall in gold prices, change in regulations and slowing credit demand.
Gold prices have corrected 15 per cent to Rs 2,800 per 10g since September 2012 and have stabilised recently. The rupee-dollar rate has stabilised. Notably, auctions (due to higher defaults and weaker gold prices) are likely to be much lower in the coming quarters. This will improve the financials of these companies from the September quarter, believe analysts.
"In the past two quarters, Muthoot and Manappuram faced largescale auctions on their legacy portfolio. However, most of the stress is out of their loan books and (AUM) growth could re-start over the second quarter," says Digant Haria of Antique Stock Broking. He believes their strong branch network, coupled with leadership position in gold loans, will enable 10-15 per cent compounded annual growth in AUM over 2013-16.
Both have stepped up efforts to acquire customers and to optimise their cost structures. Manappuram is in the process of reducing underutilised branches and improving staff utilisation. Muthoot has appointed McKinsey and Company to optimise its costs. The companies have also started focusing on local marketing and are offering attractive interest rates or customised products to end-users. All these should aid in driving profitable growth.
As a result, analysts are positive on the two companies and believe the current valuations appear attractive. Their average target price is Rs 224 for Muthoot (upside of 17.8 per cent from the current levels of Rs 190.15) and Rs 29 for Manappuram (upside of seven per cent from Rs 27.10 currently). Muthoot trades at 1.3 times the FY16 estimated book value; Manappuram's FY16 price/book stands at 0.8 times. Overall, analysts expect earnings of both to grow by 15-16 per cent annually over the next two years. Muthoot recently bought a 30 per cent stake in a Sri Lanka based retail financing company, Asia Asset Finance, for $2.1 million. This will help it sell its gold loans in the Lankan market as well.
"We believe achieving AUM per branch north of Rs 6 crore is critical for Muthoot to achieve 18 per cent-plus return on equity (15.8 per cent in the first quarter) and would need asset growth of 20 per cent over the next four quarters. While we feel the balance of probabilities still lie in favour of achieving this goal, the difficulty in turning the tide for disbursement run-rate merits some caution," says Santanu Chakrabarti of ICICI Securities. And, that removal of the size cap for gold loans by banks might raise the competition in this segment.
Gold prices have corrected 15 per cent to Rs 2,800 per 10g since September 2012 and have stabilised recently. The rupee-dollar rate has stabilised. Notably, auctions (due to higher defaults and weaker gold prices) are likely to be much lower in the coming quarters. This will improve the financials of these companies from the September quarter, believe analysts.
"In the past two quarters, Muthoot and Manappuram faced largescale auctions on their legacy portfolio. However, most of the stress is out of their loan books and (AUM) growth could re-start over the second quarter," says Digant Haria of Antique Stock Broking. He believes their strong branch network, coupled with leadership position in gold loans, will enable 10-15 per cent compounded annual growth in AUM over 2013-16.
Both have stepped up efforts to acquire customers and to optimise their cost structures. Manappuram is in the process of reducing underutilised branches and improving staff utilisation. Muthoot has appointed McKinsey and Company to optimise its costs. The companies have also started focusing on local marketing and are offering attractive interest rates or customised products to end-users. All these should aid in driving profitable growth.
As a result, analysts are positive on the two companies and believe the current valuations appear attractive. Their average target price is Rs 224 for Muthoot (upside of 17.8 per cent from the current levels of Rs 190.15) and Rs 29 for Manappuram (upside of seven per cent from Rs 27.10 currently). Muthoot trades at 1.3 times the FY16 estimated book value; Manappuram's FY16 price/book stands at 0.8 times. Overall, analysts expect earnings of both to grow by 15-16 per cent annually over the next two years. Muthoot recently bought a 30 per cent stake in a Sri Lanka based retail financing company, Asia Asset Finance, for $2.1 million. This will help it sell its gold loans in the Lankan market as well.
"We believe achieving AUM per branch north of Rs 6 crore is critical for Muthoot to achieve 18 per cent-plus return on equity (15.8 per cent in the first quarter) and would need asset growth of 20 per cent over the next four quarters. While we feel the balance of probabilities still lie in favour of achieving this goal, the difficulty in turning the tide for disbursement run-rate merits some caution," says Santanu Chakrabarti of ICICI Securities. And, that removal of the size cap for gold loans by banks might raise the competition in this segment.