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Business News/ Market / Mark-to-market/  Is the rally in gold loan companies overdone?
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Is the rally in gold loan companies overdone?

Manappuram Finance and Muthoot Finance shares have caught the fancy of investors this week, gaining at least 10% each

There is no visible trigger for this move as their June quarter earnings didn’t shine—except, perhaps, their valuations. Photo: Prajakta Patil/MintPremium
There is no visible trigger for this move as their June quarter earnings didn’t shine—except, perhaps, their valuations. Photo: Prajakta Patil/Mint

Manappuram Finance Ltd and Muthoot Finance Ltd shares have caught the fancy of investors this week, gaining at least 10% each. There is no visible trigger for this move as their June quarter earnings didn’t shine—except, perhaps, their valuations. Manappuram Finance trades at 0.9 times its expected book value for this year and Muthoot Finance at 1.4 times. But are these enough to justify such sharp spikes in the shares?

It’s been seven months since the Reserve Bank of India (RBI) allowed gold loan firms to lend up to 75% of the value of the precious metal pawned, in effect rolling back earlier restrictions. But earnings continue to be weak.

Muthoot Finance’s assets under management declined 16.3% from a year ago at the end of June and 1.4% sequentially. For Manappuram Finance, too, assets managed declined 10.5% from a year ago. While auction of gold pawned by defaulters and a drop in the price of gold are also partially responsible for this decline, the plain fact is that growth has been hard to come by. That can be seen from the decline in gold holdings by both firms.

Net profit in the June quarter thus declined 7% from a year ago for Muthoot Finance and 17% for Manappuram Finance. These numbers could have been worse but for measures such as rationalization of distribution network and cutbacks on employee expenses, points out ICICI Securities Ltd.

But cost-cutting can take a firm only so far. Customers have not come back in droves as expected once the RBI norms were eased, and gold assets under management have continuously declined. Yes, gold auctions will likely peter out now, but declining gold prices could act as dampener. Note that in the June quarter, Manappuram Finance reported a 4% decline in disbursements. Moreover, there is increasing competition from banks after the RBI removed a cap on the maximum ticket size on loans.

In that context, the guidance from Muthoot Finance’s management that assets under management will grow 20% in the current fiscal seems ambitious. Manappuram Finance, on the other hand, is looking at 5% growth this fiscal, its managing director V.P. Nandakumar told CNBC-TV18 in a 28 July interview.

With regulatory troubles over and with gold loan companies competing on an even keel with banks, loan growth remains the key yardstick to monitor. Only if it picks up will this rally sustain.

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Published: 20 Aug 2014, 08:24 PM IST
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