Introduction
The company is into the business of providing retail loans against gold jewellery. It also engages in other enterprises like remittances, lockers and so on but 99% of the revenues are derived from lending against gold. The company is a family run business headquartered in Kerela.
Investment Thesis
In a lending business, the key to success depends on the following factors:
- NIM: Net Interest Margin is the difference between the lending and borrowing rate for a company. Manappuram's NIM have always been north of 9%. For long it has enjoyed the lower cost of capital because "gold lending" was considered a priority sector. This has now been reversed.
- Quality of Loan Book: 90% of the loans are disbursed to individuals with maximum ticket sizes capped. Loans exceeding Rs 50,000 are closely monitored. Secondly, Manappuram only lends against gold jewellery. This provides twin benefits - borrower has an emotional connect with the pawned jewelery and the company gets the highest quality collateral.
- Funding: As per RBI norms, any lending institution needs to ober certain liquidity requirements. This implies that a firm cannot blindly grow without augmenting its equity base. Manappuram has consistently done that since 2007. It has done 3 QIP - the latest being done in 2010 with which it raised Rs. 10 bn.
In a nutshell, it is a wonderful business to own with high barriers to entry - like capital, brand equity and trust of the customers coupled with distribution and reach. Manappuram scores high on all these counts.
Valuation
I have finished my valuation but before I publish the same, I would invite the authors and readers (if any) to explore this business and discuss the same under this post.
Agree with the analysis of the business,specially with the vast customer base that it has access to and the surging gold prices of late. On the same lines, I was also thinking of Muthoot Finance which went IPO early this year and has a more diversified lending portfolio. Plan to employ value investing approach this weekend...Shivam, will call for help on assumptions et all :)
ReplyDeleteAnal you are right about the business model. It is a wonderful opportunity. Muthoot Fin is in similar business and is 5 times the size of Manappuram. They are a bit low on corporate governance. I will later also take a look at them.
ReplyDeleteLet us keep the discussions rolling guys!!
Two points
ReplyDelete1. Price of gold has risen from 21000 to 26000 since April 1. This is majorly on overbuying of gold with money moving out of stock markets. But Muthoot and Mannapuram are only paying out something close to 18000 for the mortgage. (90 day average price of the gold - 15% as the making charge - 10% on price volatility. This is making it unattractive. LTV is maintained at .71
2. Once the markets go up the price of gold has to come down; then the loans which are majority in value less than 50,000 default ratio will increase and NPA would increase
What I see is that other banks like HDFC etc are entering the space. I would say space is good, but no visibility on future. Also yesterday they raised interest rate to 21%
I somehow don't see value in this business as a long term investment.
Here are my 2 bits on the business questions:
ReplyDelete1. Manappuram values the jewellery at 3 months moving average price. So your calculation of 18,000 is pretty much right. However, for an Rs.100 loan the customer pawns jewelery worth approximately Rs.178 (including making charges and LTV of 70%). This means that the gold prices must correct by 78% for the borrower to consider a default. I have still not considered the emotional appeal of the jewelery to the borrower.
2. People generally take these loans for periods ranging from three to six months. So again the gold prices must move by more than 70% in this short span of time to warrant a default. This is a difficult scenario.
3. The entry of other players is certainly not a credible threat. HDFC or other banks don't put big resources behind gold lending. How many bank ads have you seen advertising gold loans?? Think about it.
Guys, these are very good discussion points.... We can choose scrips and keep discussing... I have already put a post on ITC...
I’ll simply play the devil’s advocate to help us figure if its indeed a good business to own
ReplyDeleteAgainst -
• The company is raising money through NCD, implies banks are skeptical about the business model. Rating is AA-, tata and other NCDs were AA+.
• NBFC's have grown alrarmingly fast, hence there is a noose of regulations waiting to strangle growth.
• ESOP friendly policy - During the year, the Company had also issued 3,755,120 shares to its employees under the ESOP 2009 scheme of the Company
• Stock price has hardly moved in the last 1 year despite solid results consistently.
In favor –
• They have big plans for current year - INR 1 billion is budgeted for marketing activities, outlook is good.
I have an xls file with the key ratios of muthoot and manappuram, how can i upload it?
Here is my take on these valid concerns:
ReplyDelete1. The rating that TATA will command would obviously be higher. They have 100 years of excellent corporate history behind them. So that comparison may not be valid. Secondly, banks are reluctant to lend for two reasons:
a). Gold Loans no longer fall under priority sector lending.
b). Banks themselves are now moving in this space.
So, a company will now look at alternative sources for financing - namely QIP, NCD and even ESOPs. But your point is taken that going forward, the NIM for these companies will come down.
2). Regarding the stock price - you are right that it has pretty much traced Nifty. But just compare it with those of banks. They have fared worse.
But still, there is definitely weight in the fact that the path forward is tougher.
P.S.: Uploading a file...I'll see if we can do it here. Guys, plz help here yaar!!!
Take a screenshot and post it.... or I can add a gadget that will allow to upload powerpoint slides
ReplyDeletetry the instructions here and see if you suceed
ReplyDeletehttp://www.wchingya.com/2009/01/how-to-add-excel-files-to-blogger.html
Guys, as you may have read - Manappuram on 18 Aug opened its NCD issue. These are secured Non Convertible Debentures. So, it is like lending debt against secured assets.
ReplyDeleteOur category of investors fall in Cat III that have 35% of the 750cr issue allotted. I am very excited to consider this option. It is rare that so early we have got an opportunity to compare equity and debt instrument of a quality company simultaneously.
I am running some numbers and will come back with a post soon....
https://docs.google.com/spreadsheet/pub?hl=en_US&hl=en_US&key=0AlK1N4SO-BF7dFQ5QW9LMXdzOU5RSHlvdHlOYi1TVlE&single=true&gid=0&output=html
ReplyDeletewhat is the route to purchase NCD?
ReplyDeleteSo here are my 2 bits on the Manappuram NCD:
ReplyDelete1). We will qualify as the Cat III investors who have 35% of the issue allocation - 250 cr.
2). There are 2 series - Cat 1 and cat 2. Cat 1 is a zero coupon bond for 400 days that give you a yield of 12.02%. Cat 2 is a semi annual coupon bond that gives you a yield of 12.56%.
3). The bonds are selling at par and post issue will trade on BSE. Forget about gaining from capital gains since there is no liquidity in Indian bond market.
4). If somebody wants to invest to lock in a high rate of interest, he can certainly pick the issue. The company is of high quality.
5). The bonds are way more attractive that the equity of the company. Manappuram stock trades at 12.3 PE. This translates into a yield of 5.02%. Compared to that the bond is giving you a yield of 12.56%. Note, that I have not accounted for an increase in earnings. But even at that rate, bonds will be superior.
6). You can buy the bonds through your demat account. Check with your trading account company.
7). In the end, this NCD is nothing but a way to protect against inflation.PERIOD.
@Viaks Sheet: great doc man!! that clearly brings out the business characteristics. I have only once concern. Why is Muthoot so heavily leveraged. Can somebody plz see if they are doing good on mandatory ratios like CAR and so on.
Keep the discussions rolling man....
Hi, are the discussion still alive? Post all the turmoil, clarity is emerging now for gold finance companies. P.S : Manappuram is trading at dividend yield of 7.5% (dividend of Rs. 1.8 and stock price of Rs. 24) :)
ReplyDelete