Manappuram can be termed as a modern and a corporate pawn broking house. Yes, that’s’ what they are into. 90% of the current revenues come from Gold loans and other loans. As the title says, risk takers can consider an investment in this company and it is a high risk – high reward story. We will discuss what the company does, how they do it and some pros and cons of the investment.
MAGFIL is a kerala based NBFC having interests in Gold Loans, Security / Vehicle Loans, Foreign Exchange, Chits and deposits. Gold loans vertical is the money spinner for the company and it accounts for 80% of the revenues. This is the vertical where the company will also concentrate in the future. MAGFIL had a license to sell insurance products of almost all reputed insurance companies to its gold loan customers. However, that vertical has been sold in FY 09 to one of it’s directors and that will not contribute to the numbers going forward.
For the financial year FY09, the company reported net sales of of 165 crore against 80 crore in FY 08. The net profits reported were at 29 crore as against 21 crore in FY08. The company derived around 90% of the revenues from Gold and other loans while the rest were from Asset Finance and other Fee based activities (Insurance products). Asset finance dropped from 23% of revenues to around 8% of revenues in FY 09, while the Gold and other loans portfolio improved from around 72% of revenues to 90% of revenues. This is a clear indication saying where the interests of the company lies.
The business fundamental - As many of you might know, the company looks to raise money on one hand and lend it on the other hand (against Gold). Well, money is not free and it comes at an interest. The source of the money could be a bank credit, money raised by selling bonds, issuing shares, non convertible bonds….. The Gold loan that the company disburses will also give interest returns to the company. The difference between the interest of raising money and the interest at which the company gives the loan is effectively what the company earns. The lower the interest of raising money and the higher the interest of lending, the more profitable the company is.
The following are some of the pros and cons of this 400 odd crore market company. Clearly, the rewards seem to be outweighing the risks –
1) During the start of FY 09, the company had an ambitious plan to disburse around 10,000 crore worth Gold loans by 2014. At the end of FY 08, the company had disbursed around 1090 worth gold loans and for FY 09 it almost tripled to around 3000 crore. Hence, the target of 10,000 crore now looks smaller and could be much higher.
2) Unlike any vehicle loan or a personal loan, the gold loans are given mostly against house hold jewelry. This works positively for the company in many ways – i) House hold jewelry is considered more important to a family and there is a true urge behind the customer to repay the loan amount and get the jewelry back. ii) Since the security that the company gets for the loan is physical gold, the loan is considered to be a safer one when compared to a personal loan or a auto loan. iii) We all know how robust the gold prices have been and if the experts are to be believed the gold prices are expected to continue to quote at higher levels due to various reasons.
So, if there is a loan default, the company seems to be making more profits since the gold prices may have gone up and the company would have loaned for only 75% or 80% of the Security’s worth.
3) The addressable market is so huge. I guess Indian households are believed to hold around 15,000 tonnes of Gold. Leaving out those with no houses, almost all the households contain at least few grams of gold and that is where they turn to in case of immediate financial needs.
4) More than 80% of the gold loans have values of less than 50,000 and the average gold loan is at around 20,000 rupees only. Hence the chances of big ticket defaults may be low.
5) The interest being charged is mostly 24% PA and the loan durations are shorter at 3 months.
1) The company needs constant cash inflows to grow. No new cash inflow = no growth. Leaving out the cash from operations that is already negative due to the huge expansion that is being done, new cash inflows may come from bank credits, sale of shares and bonds.
2) The company has been growing so far, mainly due the money inflow that has been coming from various US and UK based PE funds. Eventually these funds gets converted into equity shares and hence the dilution takes place. The future growth will also be predominantly be based on PE funding and hence further dilution. More dilution, lesser EPS and hence lesser share price growth. For ex – The company clocked growth of around 100% in revenues and 50% in profits in FY 09, but the EPS growth is only 21%.
3) The revenues have increased by 100% in FY 09. This is on the back of almost a three fold jump in Gold and other loans. However, the provision for bad debts have increased by more than 5 times. Any chance of this kind of growth in the bad debts will distort the bottom line greatly.
To contact the equity analyst on this story: Arun Gopalan in Chennai at Arun@hbjcapital.com