Gold Glitters but gold loans......
Gold loan companies have had their share of limelight in the last 1-2 years. It had to happen with 50% RoEs and similar growth numbers.
But I am just wondering if these are actually such good businesses.
They charge an exorbitant interest rate on what is essentially AAA rated loan since it backed by gold with sufficient margin of safety in case of default.Agreed that gold loans are typically for people those who do not have access to formal sources of funds, but even then, the extraordinary levels of profitability in this business are little hard to digest.
I will try to give some food for thought for the two listed companies in the domain.
Manappuram:
- Gold loans typically have a duration of around 4 months on an average.Interest payment happens monthly. In that scenario Manappuram reports "Interest Accrued but not Due" entry in the "Current Asset" side of slightly more than 4 months. That is almost equal to the average tenure of the loans.Maybe Manappuram collects all the interest together. Highy unlikely though.
- It is only after 2006 that the company started to report such high RoEs. Almost as if they had figured out a magic formula. Numbers before 2006 were not flattering, to say the least. RoEs jumped for 2 years, lot of money was raised and now RoEs are down significantly from what they were at the point of making money. Some bit of it maybe due to the fact the leveraging process is still continuing and may improve later. Money raised in QIPs and placements now form 80% of the networth.I do not find it surprising that the "Accrued interest" entry that I discussed above came about only when the RoEs started to jump in 2006 and not before that.
Muthoot:
- I could not see anything interesting in the balance sheet of Muthoot that can be reported. But I have a more broader question on the business model itself.
They will probably end up roughly 22000 cr of AUMs FY12….
They claim to have an avg tenure of 4 months….lets take it to be 6 months….
That would basically mean they will disburse roughly around 40000 cr in FY12….since they practically end up with a new book every 6 months….that disbursement figure is bigger than quite a few reasonable sized banks….and its all cash..
And of course similar quantum of collections as well…..
So they would roughly manage 80000 cr of cash in the year…
Just to get a perspective….
For M&M fin/Magma/Shriram…the tenure is roughly somewhere between 2-3 years…..
If we do a similar calculation for these three….the approx cash circulation they are managing is around 40-45K cr all the three added together….
So Muthoot alone does roughly twice the cash volume handling as all the above 3 put together…..when the avg ticket size of each of the three above is roughly 8-10 times that of Muthoot…
The challenge in this type of growth with this model is the same as what SKS Microfinance would have faced…..of course that Muthoot does secured lending is a big difference…..
And in all this to maintain margins….RoEs…..in the face of competition…..(In kerala every village junction has probably 3-4 gold lending shops within a radius of half a kilometre…excluding banks)
Gold prices have helped…value goes up without incurring any additional cost….
The physical enormity of the tasks to be performed boggles my mind....and as I said it is very "SKS-ish".
If Muthoot is managing all this, then they deserve their RoEs.
With the new RBI regulations on securitisation, these companies will probably out of that market. That should hurt RoEs substantially.
Their businesses are leveraged on gold prices. But since it is difficult to predict gold prices, I have not ventured into analysing effects of gold prices on the model. Broadly, rising gold prices favour the business.
A discussion on gold loans businesses should bring the colour "golden" to the mind....but I am more reminded of the colour (ever)"Green"!! :)
Gold loan companies have had their share of limelight in the last 1-2 years. It had to happen with 50% RoEs and similar growth numbers.
But I am just wondering if these are actually such good businesses.
They charge an exorbitant interest rate on what is essentially AAA rated loan since it backed by gold with sufficient margin of safety in case of default.Agreed that gold loans are typically for people those who do not have access to formal sources of funds, but even then, the extraordinary levels of profitability in this business are little hard to digest.
I will try to give some food for thought for the two listed companies in the domain.
Manappuram:
- Gold loans typically have a duration of around 4 months on an average.Interest payment happens monthly. In that scenario Manappuram reports "Interest Accrued but not Due" entry in the "Current Asset" side of slightly more than 4 months. That is almost equal to the average tenure of the loans.Maybe Manappuram collects all the interest together. Highy unlikely though.
- It is only after 2006 that the company started to report such high RoEs. Almost as if they had figured out a magic formula. Numbers before 2006 were not flattering, to say the least. RoEs jumped for 2 years, lot of money was raised and now RoEs are down significantly from what they were at the point of making money. Some bit of it maybe due to the fact the leveraging process is still continuing and may improve later. Money raised in QIPs and placements now form 80% of the networth.I do not find it surprising that the "Accrued interest" entry that I discussed above came about only when the RoEs started to jump in 2006 and not before that.
Muthoot:
- I could not see anything interesting in the balance sheet of Muthoot that can be reported. But I have a more broader question on the business model itself.
They will probably end up roughly 22000 cr of AUMs FY12….
They claim to have an avg tenure of 4 months….lets take it to be 6 months….
That would basically mean they will disburse roughly around 40000 cr in FY12….since they practically end up with a new book every 6 months….that disbursement figure is bigger than quite a few reasonable sized banks….and its all cash..
And of course similar quantum of collections as well…..
So they would roughly manage 80000 cr of cash in the year…
Just to get a perspective….
For M&M fin/Magma/Shriram…the tenure is roughly somewhere between 2-3 years…..
If we do a similar calculation for these three….the approx cash circulation they are managing is around 40-45K cr all the three added together….
So Muthoot alone does roughly twice the cash volume handling as all the above 3 put together…..when the avg ticket size of each of the three above is roughly 8-10 times that of Muthoot…
The challenge in this type of growth with this model is the same as what SKS Microfinance would have faced…..of course that Muthoot does secured lending is a big difference…..
And in all this to maintain margins….RoEs…..in the face of competition…..(In kerala every village junction has probably 3-4 gold lending shops within a radius of half a kilometre…excluding banks)
Gold prices have helped…value goes up without incurring any additional cost….
The physical enormity of the tasks to be performed boggles my mind....and as I said it is very "SKS-ish".
If Muthoot is managing all this, then they deserve their RoEs.
With the new RBI regulations on securitisation, these companies will probably out of that market. That should hurt RoEs substantially.
Their businesses are leveraged on gold prices. But since it is difficult to predict gold prices, I have not ventured into analysing effects of gold prices on the model. Broadly, rising gold prices favour the business.
A discussion on gold loans businesses should bring the colour "golden" to the mind....but I am more reminded of the colour (ever)"Green"!! :)
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