Gold financing is our core competency and will stick to it: Mr George Muthoot, MD, Muthoot Finance

Update on the Indian Equity Market:

On Friday, NIFTY ended 1% higher at 12,087. Among the sectoral indices, Nifty PSU Bank (+4%), Nifty Metal (+2.3%) and Nifty Realty (1.7%) were the biggest gainers. None of the indices ended in the red. The stocks rallied on the back of optimism over a trade deal between the US and China. Adding to the sentiment was the victory of the Conservative Party in the UK elections. Among the Nifty50 stocks, Axis Bank (+4.2%), Vedanta (+3.8%) and Hindalco (+3.6%) were the biggest gainers.  Dr Reddy’s Laboratories (-2.8%), Bharti Airtel (-2.0%) and Zee Entertainment Enterprises (-1.6%) were amongst the losers.        

Gold financing is our core competency and will stick to it: Mr George Muthoot, MD, Muthoot Finance

Excerpts from an interview with Mr George Alexander Muthoot, MD, Muthoot Finance published in Economic Times on 10^th December 2019:

• The core strength of the business is gold financing. 90 per cent of the portfolio is only gold loans. Focusing on their core competency is has helped them get good business till date.
• Their business is not dependent on gold prices since the average tenure of the loans is four months. If there was a sudden movement like 50 per cent fall in gold prices in two-three months, it would be a problem. Small up or down movement in the prices does not affect their business.
• Talking about the business opportunity, he said that the market is huge since there are 30,000 tonnes of gold lying as ornaments. The organised gold lending market is just about 100-200 tonnes.
• As the market develops, more and more people are using the opportunity to monetise the idle gold. To attract new customers, they are undertaking a lot of advertising.
• Moving on to the rationale behind purchasing IDBI’s AMC business, he says the company has good customers who have been investing in the company because they relate to the company and are confident of depositing their money with them. The company believes that if they were to start a mutual fund, they will retain their customers.
• Although the company has guided for revenue growth of 15 per cent, they would probably achieve 15-20 per cent growth this year. Gold finance acts as bridge finance for people unable to get loans from the banks. Once people are able to obtain a bank loan, they replace the gold loan with it.
• People have a variety of options to obtain financing. Microfinance or fintech finance has not affected the gold financing market.
• Their focus is on customer convenience. The average ticket size is ₹ 40,000, there is no service charge or pre-payment charges.
• On diversifying the core business, he said the gold loan is their core strength and they will stick to it. Mutual funds are just a service offered to the customers. It is just a way for customers to deposit their excess money.

Consensus Estimate (Source: market screener and investing.com websites)

• The closing price of Muthoot Finance was ₹ 717/-  as of 13-December-19. It traded at 2.5 x/2.1 x/ 1.8 x the consensus book value per share (BVPS) of ₹ 285/ 338/ 397 for FY20E/21E/22E respectively.
• Consensus target price of ₹ 779 implies a PB multiple of 1.9 x on FY22E BVPS of ₹ 397/-.