More than Rs 80 bn cash ready to take care of loan demand – Muthoot Finance

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Excerpts from an interview with Mr George Alexander Muthoot, MD, Muthoot Finance with ET Now on 20th August 2020:
• The past two months have been good and the going is great now as well. They are on track to reach or surpass the AUM estimate of about 15% growth. They are seeing good demand for gold loans since gold has been the buzzword recently. People are interested to associate with gold and gold financing is a part of it.
• Mr Muthoot believes it might be a little difficult for people to get credit via personal or housing loan, as lenders and NBFCs are not comfortable with fresh lending. Hence, for the next three-four quarters, there will be a good demand for gold loans.
• All their branches are open and people are able to come to the branches. The past two months has been a good growth period for their business and the momentum is likely to sustain. People are using gold to finance their requirements. Small businesses, small traders, and business people and individuals are using this.
• Gold price has also helped as people with lesser quantities of gold can have more gold loans in their hands. Unfortunately, the tonnage has not grown in line with the growth in AUM because newer loans need to bring only lesser quantities of gold.
• About 89-90% of the portfolio consists of gold loans which don’t have NPAs. NPAs are just loans which have crossed the threshold time limit. Auctioning the gold which is in NPAs is not beneficial as they have to refund money to the customer. Instead, they would give more time to the customer and pay it back and hold it as NPA in the books. None of the NPAs result in loan loss as the full interest and principal is recovered in time. This also keeps customers happy that their gold is not being auctioned off.
• For about 10% of the loan book which is in vehicle finance, housing finance, they have given moratorium to customers.
• Standard provisioning and loan loss provisioning is applicable to them just as to NBFCs. There are about Rs 10 bn provisions in terms of standard assets or loan loss provisions. This is just a technical provision and he never sees it converting into loan loss.
• There is no plan of acquiring any gold loan company since the average tenure is four months only. By the time negotiation with the company is done the loan would have gone off their books.
• The regular growth through 5,000 branches is sufficient for them because the average branch business is about Rs 10 crore and any branch can cater to double that. So an average of Rs 20 crore per branch is easily sustainable for them.
• In South India, both the public and private sector banks are advertising about giving gold loans. Banks coming into this space is good as it gives more credibility and visibility to this business. There are about 25,000 tons of gold in the market with the public and only about 3,000 tons is in the organised gold loan sector. Since there is a lot of gold which has not come into the gold loan market, there is a place for everybody.
Consensus Estimate: (Source: market screener and investing.com websites)
• The closing price of Muthoot Finance was ₹1,181/- as of 21-August-2020. It traded at 3.4x/ 2.7x the consensus book value estimate of ₹ 352/438 for FY21E/ FY22E respectively.
• The consensus target price of ₹ 1,195/- implies a PB multiple of 2.8x on FY22E BV of ₹ 428/-.
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