Why stocks of gold loan firms are losing sheen

Remember, to beat rising competition and retain high-value customers, companies had launched teaser loans in December 2021, which weighed on the net interest margin (NIM). Teaser loans offer lower interest rates for a fixed duration of time. While the loans were discontinued in April, subdued earnings performance in recent quarters has failed to revive sentiments towards these stocks. In Q2FY23, the assets under management of Muthoot’s gold loan business was flat sequentially, and declined 6.3% quarter-on-quarter for Manappuram.

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Despite gold prices expected to rise on safe haven demand, a quick turnaround in their key earnings metrics is unlikely. The companies fear losing customers to banks and NBFCs that may offer loans at competitive rates.

“Teaser loans have already hampered the earnings growth of these companies in the past quarters. Further, as things stand, the outlook for both these companies is somewhat negative since they are struggling to grow their key gold loan portfolio due to high competition,” said an analyst requesting anonymity.

That said, between the two, Manappuram is said to be better placed than Muthoot. The former is not solely dependent on gold loans and has already diversified into verticals of home loans, vehicle finance and microfinance. Muthoot has also forayed into some of these segments, but its portfolio is largely skewed towards gold loans, with over 90% share. Manappuram expects its diversification strategy to start yielding results in a couple of years, aided by normalisation of credit cost in its microfinance business.

But for now, the road ahead looks bumpy with elevated competition and rising costs of borrowing. In the near-term, their NIM is likely to remain under pressure unless yields on gold loans improve significantly.

The emerging trends in the gold loan NBFC business point to competition intensifying, which is likely to translate into relatively lower return ratio and growth, said analysts at Systematix Shares and Stocks (India). However, significant under penetration of the formal sector, and higher focus on low-ticket customers, is likely to restore growth of gold loan finance NBFCs towards normalised levels by FY24-25, it said in a report.

A sharp correction in gold prices and falling demand for small-ticket gold loans are key downside risks that investors should watch out for.