With domestic gold prices hovering near record highs, shares of Manappuram Finance Ltd and Muthoot Finance Ltd, two leading non-bank gold financiers, shined. But one of them sharply surpassed the other. Over the past six months, shares of Manappuram Finance Ltd have gained more than 40%, while its larger peer Muthoot Finance Ltd has seen only a 27% increase.
Manappuram’s focus on diversifying into the non-gold loan segment is a positive move. In the September quarter (Q2FY24), the company saw growth in assets under management (AUM) driven primarily by the non-gold segment. This was largely due to the growth in microfinance lending, which led to non-gold AUM accounting for approximately 47% of the total AUM mix in Q2, compared to 37% in Q2FY23. Manappuram has led for a 50:50 mix between gold and non-gold segments in its portfolio.
Muthoot is slowly expanding its reach while focusing on a carefully planned approach to non-gold loan trading. Their management aims for gradual and calibrated growth in areas such as microfinance, housing finance, vehicle loans, personal loans and corporate loans. They plan to increase the share of non-gold companies from the current 13% to 18% over the next five years.
Although the rise in gold prices could result in an increase in demand for gold loans, the gold loan business is cyclical in nature and faces stiff competition from banks and NBFCs. This competition intensified after the covid-19 pandemic. As a result, gold financiers are venturing into non-gold lending segments. But, Manappuram has to consistently prove success in its non-gold segments.
Microfinance, housing finance and vehicle finance typically have higher slippages in tough economic conditions, HDFC Securities warned in a report dated 28 November.
During the recent analyst meeting, the Manappuram management said that the cost of borrowing is expected to increase due to the new risk weighting norms announced by Reserve Bank of India. However, the management is confident of passing on the increase to customers. The cost of borrowing could increase by 15-25 basis points on both the incremental and existing loans. Despite this, the company’s gold loan under management (AUM) growth guidance for FY24 remains at 7-8%. The consolidated AUM growth guidance is higher by more than 20% and would be led by the non-gold businesses.
To be sure, after the sharp rise in the shares, investors should not ignore the potential concerns. For example, an increase in delinquency in non-gold businesses leading to higher non-performing assets could be a concern. “Higher than expected competition in future impact on profitability would be a key risk to our ratings,” said a report by Nirmal Bang Institutional Equities on 29 November.
(tagsTo Translate)Manappuram Finance
