Risk-reward favourable for Muthoot, Manappuram

Weakness in loan growth will be offset partly by market share gains from unorganised players

Demonetisation of old high-value notes has impacted gold financiers Muthoot Finance (Muthoot) and Manappuram Finance (Manappuram), which witnessed a sharp fall in their share prices.

However, analysts believe these companies could gain from the demonetisation move in the long run. For one, these companies stand to gain market share from unorganised gold financiers, a segment which is thrice the size of organised gold financiers' market. Experts believe the small, unorganised lenders will struggle following the cash crunch created by demonetisation, thereby hastening the shift in favour of organised gold lenders.

Even as Muthoot and Manappuram are also be impacted by the note ban, analysts say they will bounce back in a few quarters. Analysts say lower economic activity, particularly in small businesses, will reduce the near-term demand for gold loans. Disbursements in the month of November stood at 70 per cent of pre-demonetisation levels for these companies, estimate analysts. The risk for these companies could also emanate from falling gold prices. The prices of the yellow metal have fallen eight per cent in rupee terms since demonetisation. Lower gold prices reduce the value of the gold pledged with these companies and, in turn, can impact their financial performance in terms of asset quality, profitability and so on. However, here too, companies can reduce the loan to value and duration of their loans and also conduct auctions at an early stage to reduce the impact of falling gold prices on their business. Most analysts believe both Muthoot and Manappuram are better placed now to deal with falling gold prices.

“Our stress case analysis suggests that gold loan companies will still be able to deliver return on asset ratio in excess of 3.5 per cent over FY16-19,” says Digant Haria, analyst at Antique Stock Broking. He believes investors could start accumulating these stocks at current levels. Rajiv Mehta of IIFL Wealth believes Manappuram is better placed than peers in a falling gold prices environment due to the short three-month duration of its gold loan products and higher management focus on improving interest collection from borrowers.

Meanwhile, the stocks of Muthoot and Manappuram have fallen 20 per cent and 32 per cent, respectively, since demonetisation against a 3.2 per cent drop in the S&P BSE Sensex and seem to factor in most of the concerns. In this backdrop, risk-reward appears favourable in both these stocks. Analysts believe long-term investors can use this opportunity to enter these stocks.