Monday, September 6, 2010

Manappuram’s Gold Loan Business - Risky or Rewarding?

The problem Manappuram (BSE: 531213, NSE: MANAPPURAM) faces is that many analysts don’t understand the dynamics of gold loan business, which is only well-understood in India’s southern states. Together with it comes the doomsday predictions of gold reversing to a bearish trend, and how it would affect the fortunes of India’s only listed gold loan company. At the same time, gold continues to make new highs, and riding on the response from a mega campaign to promote the cost-effectiveness, convenience, flexibility, & safety of gold loans, Manappuram Group is all set to double its loan book this fiscal and again in next fiscal. Powering the rapid growth will be a Rs. 1200 crore QIP that will be backed by Citi, UBS, Enam, & Religare, and likely to witness US based PE funds who exited the stock with 5X returns re-entering the company as anchor investors. The Manappuram scrip continues to make new 52-Week Highs, with the latest being today's Rs. 136 in BSE during morning trade. Manappuram Group Chairman VP Nandakumar answers Seasonal Magazine’s queries regarding the difference in perceptions and realities when it comes to gold loans.

Also Read on Manappuram:
Manappuram at All Time High - How to Invest Here Now?
Manappuram Improves Further on Higher Growth, Lower Expenses
Manappuram’s Gold Loan Business - Risky or Rewarding?
Manappuram - Overrated or Underrated?  
Can Manappuram Keep Growing at 60%?

If you look at the NBFC sector today, four businesses are booming viz. microfinance, housing finance, gold loans, and of course, the fourth is the prospects in starting banking operations. Though Manappuram is only involved in gold loans, you have been involved with each of these sectors as a co-promoter in certain companies and as a former banker too. How do you asses the potentialities of each?

As you have rightly pointed out, these are NBFC sectors that are booming, and I would also add auto finance into it. If you assess each of them, there is no doubt microfinance is in momentum, and I would say it is fully deserved if you take into consideration the good work they do. Still, the risks are high and we should carefully watch how this pans out in the long run. Housing finance, again is booming, and for a housing finance company it is a good thing that each of their accounts will stay with them for 15 or 20 years. However, there is a flipside too in that profit generation is a long-drawn process. Gold loans on the other hand is a very dynamic business with immense possibilities as not only are the risks negligibly small, but also the ticket-sizes and repayment periods are small, making them suitable for a wider customer base. That is why you hear about so many NBFCs / Banks planning to enter gold loans, even if they don’t eventually due to a lack of core competency in this line.

What about NBFCs considering conversion into banks?

Here the question is different as banks have a dynamics of their own which is not comparable with NBFCs. There are upsides like access to low-cost funds, but what I am wary about is losing one’s core competence. Today, if you look at any successful NBFC, be it Shriram Transport or Manappuram, what works is the sharp focus on a single business on which the organization has built up a formidable core competence. So, if there is a way to get converted into a bank without losing one’s core competence, that is well and good. In fact, an earlier proposal to encourage specialized banks like auto loan banks or housing loan banks or gold loan banks was a good proposal, we think. It is the norm in many countries.

Since the announcement of your preferential issue of Rs. 100 crore, the Manappuram scrip has zoomed. Now, going forward, do you subscribe to the view that for NBFCs, market cap can continue to move in tandem with assets under management?

The preferential issue by promoters was taken well by the market as being done at almost all-time high levels, it conveyed the message that we were fully confident of our growth projections. When this happens to a currently underrated scrip, the prices can correct, and that is all that happened. Coming to your second question, well, this AUM / market cap co-relation has been exhibited in the past by some strong NBFCs including Manappuram. I shouldn’t say whether this will continue to be so in our case, but one thing is sure, we will be reaching our annual AUM target by the second quarter itself, and that means we will hopefully double our loan-book by the end of this fiscal.

You have indicated plans for a QIP which we learn is going to be on a larger scale than you have attempted before. Can you provide more details, as also the dilution it will involve?

We are planning for a Rs. 1000 - 1200 crore QIP so that our capital adequacy ratio will remain comfortable even if we double our loan book. It is planned on a larger scale, supported by Enam & Religare, as also international majors like Citi & UBS. You will be surprised to know that even some international PE funds who exited Manappuram with 5X profits have shown interest to come back through this QIP as anchor investors. The dilution won’t be much, likely to be around only 20%, and weighed against our growth it should be a non-issue.

Gold loan companies tend to perform well in downturns, and plateau during periods of economic growth. Now, as the country is in an economic recovery, do you foresee a slowdown for Manappuram?

Not at all. In fact this idea that gold loans is a downturn business is a misnomer. Many loans tend to do better in downturns and gold loans is no exception. But the reverse is not true for gold loans. This business thrives amidst economic recovery and amidst strong growth phases. The reason for this is simple. Today, if you look at Manappuram’s customer base, around 52% is made up of small & micro enterprises. They expand their businesses seasonally - one small example being the school reopening period - as also when there is strong economic growth.

That brings us to Manappuram’s new ad campaign with celebrity endorsements. How far is it delivering - quantitatively and qualitatively?

It is delivering quite good, but that is not the crux of the issue. Our objective in that campaign is to educate the customer regarding the flexibility, convenience, & cost-effectiveness of gold loans as against other kinds of personal and business loans. In other words, the stigma associated with gold loans should stop. As you can see, we are focussing on growing and professionalising the gold loan segment through this campaign, and not only looking at our own returns. I think we are all set to succeed in bringing respectability to this segment.

When you say growing the gold loan segment, you know it is a long-drawn process. What about immediate returns?

I would say you cannot segregate it as long-term and short-term objectives. But as you say, immediate gains are also quite there. The current gold loan segment is not small as such. Some 2000 tons of gold have been pledged in this country, of which banks account for only 400 tons, and the organized sector including us accounting for another 100 tons approximately. But what about the remaining 1500 tons? That lies with the unorganized sector where you can’t expect proper documentation or security, let alone reasonable interest rates. So, when you convey the message that here is a fully professional gold loan operation with safety and reliability, customers are likely to be converted. We have a Rs. 4000 crore loan book on 35 tons of gold, and so you can imagine the potential when we tap into this 1500 tons in the unorganized sector. That is the short-term potential we are aiming from this campaign. The long-term prospects are mind-boggling - the household gold reserves is 20,000 tons, that is ten times the currently pledged gold.

How do you assess the risks to this business from gold thefts?

Such instances are a miniscule percentage compared with the kind of gold we handle, and even then we are fully insured so that neither the borrowers, investors, or the company is affected. And our experience is that the stolen gold is often recovered by the prompt action of the authorities.

On a personal capacity, you have also entered the gold retailing business. What are the strategies here?

First and foremost, Manappuram is selling only 100% BIS Hallmarked gold. This is quite unlike other jewellers who advertise hallmarked gold, and push non-hallmarked 91.6 gold in the showrooms, ostensibly for offering better prices. On our side, we have taken up the challenge to offer hallmarked 91.6 gold at non-hallmarked price points from other jewellers. Secondly, we do fully transparent accounting, with payment of 100% applicable taxes. We also offer free insurance against theft for gold purchased from Manappuram.

Do you think you can storm the gold retailing bastions as much as you have been successful in outperforming family-run gold loan companies?

I am more than confident, because we will not be targeting the customer segments of other branded jewellery chains, which is largely made up of HNIs. Our target population would be the volume segments for whom gold is also an investment or enabler, and as such, purity and price are of utmost importance. Our shops won’t be mega or large format ones, but more accessible to local communities. We have done an India-wide study on the subject and found out that the volume segment still buys from smaller shops, goldsmiths, and jeweller cum pawn shop setups. We are aiming to be the volume leader and will have to our credit redefining gold purity and price transparency standards.

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