23 September 2020

Gold Finance

Sector update | Sector: NBFCs

Gold Finance

The Gold Rush!

Research Analyst: Alpesh Mehta

(Alpesh.Mehta@MotilalOswal.com) |

Piran Engineer

(Piran.Engineer@MotilalOswal.com)

Nitin Aggarwal

(Nitin.Aggarwal@MotilalOswal.com) |

Divya Maheshwari

(Divya.Maheshwari@motilaloswal.com)

Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.

Investors are

2020

23 September

advised to refer through important disclosures made at the last page of the Research Report.

1

Gold Finance

Contents | Gold Finance: The Gold Rush!

The Gold Rush!....................................................................................................... 3

Snapshot – MUTH and MGFL .................................................................................. 5

Gold demand steady over past two decades .......................................................... 6

Gold finance an underpenetrated segment ............................................................ 8

Macro tailwinds to growth ................................................................................... 13

Diversifying the liability mix ................................................................................. 16

Asset quality pristine ........................................................................................... 20

Diversifying into other segments .......................................................................... 23

Key risks............................................................................................................... 27

Valuation and view .............................................................................................. 28

Annexure – History of the ‘LTV’ ............................................................................ 30

Muthoot Finance

Best in class return ratios ..................................................................................... 31

Story in charts ...................................................................................................... 32

Financials and Valuation ...................................................................................... 34

Manappuram Finance

Well positioned to cash in on industry tailwinds .................................................. 36

High-RoE business ................................................................................................ 38

Diversification underway ..................................................................................... 42

Financials and Valuation ...................................................................................... 44

23 September 2020

2

Sector Update | 23 September 2020

Gold Finance

Gold Finance

Technology

The Gold Rush!

High return ratios | Least asset quality risk | Tailwinds to growth







Gold Financiers have consistently

delivered ROEs superior to peers

Segments

FY18 FY19 FY20

Gold

MUTH

24.8 23.2 29.0

MGFL

18.8 22.8 28.8

Housing

HDFC

12.6 13.0 13.1

LICHF

15.4 16.4 14.3

PNBHF

13.6 16.9

8.3

Vehicle

STF

20.0 17.6 14.9

CIFC

20.1 21.5 15.0

MMFS

12.7 15.8

8.3

Diversified

BAF

20.0 22.5 20.2

LTFH

13.3 18.0 15.6

SCUF

12.6 16.6 14.7

Note: Consol. numbers for MGFL







Share of AUM from Non-Gold

Segments is higher in the case of

MGFL (33%) v/s MUTH (11%)

FY20, %

MUTH

MGFL

Housing

4.2

2.5

MFI

5.6

21.8

Vehicle

1.1

5.3

Others

0.3

3.1

MUTH has a higher share of AUM

from West and North India

FY20, %

MUTH

MGFL

East

9

12

West

19

16

North

23

14

South

49

58



The organized non-agricultural gold finance industry has grown over the past 12 years

from a small base of INR250b in 2009 to ~INR2t currently. Unique aspects of this

industry – (a) only ~35% of the industry is formal; of this, ~ 40% is with NBFCs, and (b)

three specialized Gold Financiers – Muthoot Finance, Manappuram Finance and

Muthoot Fincorp account for 75%+ of the NBFC pie in the gold loan segment.

Specialized gold loan NBFCs have inherent advantages over NBFCs operating in other

product segments. These include (a) less competition from banks given the niche

expertise required, (b) low asset quality risk due to the 75% LTV cap and highly liquid

collateral, (c) strong ALM position with short loan tenures, and (d) low balance sheet

leverage.

Gold loan financiers have created a strong proposition v/s banks with quicker

turnaround time, niche customer base, easy accessibility of a large branch network

focused only on gold loans and flexible repayment schedules. Despite the higher

interest rate charged, gold financiers managed to gain 300bp+ market share over the

last five years in the organized segment due to these advantages.

We believe gold financiers are currently in a sweet spot. This is because customers

whose cash flows were disrupted during the pandemic are looking to leverage their

gold holdings. With more than 80% of the business coming from repeat customers

and LTV declining below ~55%, there is significant headroom for growth. We do not

see any major impact of the RBI’s allowance of higher LTV cap of 90% to banks on

growth of gold financing NBFCs.

While the GNPL ratio for specialized gold financiers has fluctuated over time, eventual

credit losses have been minimal (sub-10bp) due to low LTVs and short loan

repayment cycles. In addition, with an outstanding LTV of ~55%, gold financiers are

adequately cushioned in the event of gold price volatility.

Given the high margins and negligible credit costs, specialized gold financiers

generate return ratios superior to NBFC peers. Even during the past two years of

turmoil, these companies delivered an average ~25% RoE, which highlights the

strength of their business model. We expect MUTH/MGFL to generate 6.8%/5.4% RoA

and 25%/24% RoE over the medium term.

We have upgraded MUTH to ‘Buy’ with a TP of INR1,300 (3.0x FY22E BVPS). Our

target multiple is predicated on its consistent profitability (lowest RoE of 15% over

the past decade) and sectoral tailwinds. We are also initiating coverage on MGFL with

a ‘Buy’ rating and TP of INR185 (1.8x FY22E BVPS). Our lower multiple for MGFL is

based on lower RoA as well as higher share of its business coming from non-gold

lending, which was affected by the pandemic.

Demand for gold loans to be healthy in the current environment

Over the past five years, specialized gold financiers delivered 6-7% CAGR in gold

tonnage with largely similar CAGR in customer addition. Pricing also stood at 6-7%

CAGR over the same time period, resulting in ~13% AUM CAGR over FY15-20. In the

current scenario, we believe gold financiers would benefit as

(a) in the current

pandemic situation, their customers would look to raise cash by leveraging their

gold holdings, and (b) the increase in gold prices would give a modest impetus to

23 September 2020

3

Gold Finance

Business model enables high

share of CP borrowings due to

short loan tenure

MUTH – Borrowing mix (%)

growth.

Other contributing factors are (a) an inability of customers to get personal

loans due to lack of formal documentation, (b) untapped opportunities, especially

in the non-South regions, (c) higher share of the rural business, which is doing well,

and (d) flexi-lending terms. Overall, we expect these players to deliver ~15% gold

loan CAGR over FY20-23E.

Hit due to regulatory arbitrage temporary

Recently, the RBI increased the cap on gold loan LTV for banks from 75% to 90%

for loans disbursed until 31

st

Mar’21, post which, it would revert to 75%.

However, the cap remains at 75% for NBFCs. In our view, this would result in only a

modest hit as (a) several customers were taking loans at 60-65% LTV despite the

75% LTV cap, (b) banks may not be willing to lend up to 90% LTV from a risk-

management perspective, and (c) NBFCs’ branch network is deeper and their TAT

much quicker than that of banks.

MGFL – Borrowing mix (%)

Asset quality risk minimal; Key differentiator v/s other NBFCs

One key differentiator between specialized gold financiers and other NBFCs is the

asset quality performance.

While GNPL ratios have fluctuated in the past, eventual

credit losses have been sub-10bp despite the volatility in gold prices.

This is due to

the 75% LTV cap, the short-loan tenure, high emotive value of the ornament and

easily ‘liquidatable’ collateral.

Over the past decade, both MUTH/MGFL have

barely written off 1%/3% of their cumulative operating profits earned.

The

portfolio LTV of ~55% is comforting and provides adequate cushion against gold

price volatility.

We believe this factor makes MUTH/MGFL stand apart from other

NBFCs that are likely to face asset quality issues in the near term due to the

pandemic.

Note: Standalone

Credit costs minimal due to value

of collateral and short loan tenure

Low leverage; Positive ALM gap; Muted subsidiary performance

Other advantages of gold financiers include (a)

low BS gearing (3-4x), and (b)

positive ALM.

Over the past few years, both MUTH/MGFL have diversified into

other lending segments like MFI, Affordable Housing Finance and Vehicle Finance.

These subsidiaries contribute 11%/33% of consolidated AUM for MUTH/MGFL as

at FY20.

Given the tough scenario, we believe growth and profitability of

subsidiaries would be subdued in the near term. However, over the long term,

these segments should become more meaningful contributors to profits.

Valuation and view

Gold financiers, led by their strong performance, have outperformed their NBFC

peers over the past 1-2 years. This is expected to continue in the near-to-medium

term with low asset quality risk, high return ratios and tailwinds to growth. We

expect MUTH/MGFL to generate 6.8%/5.4% RoA and 25%/24% RoE over the

medium term. We have upgraded MUTH to ‘Buy’ with TP of INR1,300 (3.0x FY22E

BVPS).

Our target multiple is based on consistent performance on profitability

over the past decade (lowest RoE of 15% and average RoE of 27% over the past

decade).

We are also initiating coverage on MGFL with a ‘Buy’ rating and TP of

INR185 (1.8x FY22E BVPS).

Our lower multiple for MGFL is on account of lower

average RoA of 5.4% (v/s 6.8% for MUTH), and higher share of its business coming

from non-gold lending at 33% (v/s 11% for MUTH in FY20), which is facing

headwinds due to the pandemic.

23 September 2020

4

Gold Finance

Snapshot – MUTH and MGFL

Exhibit 1: Comparative analysis of Muthoot Finance and Manappuram Finance

Snapshot

Gold AUM (INR b)

Consol. AUM (INR b)

Consol. AUM mix (%)

Gold

HF

MFI

Others

Geographic mix – Gold loans (%)

East

West

North

South

Total borrowings (INR b)

Borrowing Mix (%)

Debentures

CPs

Term loans

Others (includes ECBs)

Key Financials (%)

PAT (INR b)

NIM (Calculated)

Cost to income

RoA

RoE

GNPL ratio

NNPL ratio

Loans/Equity (x)

CAR (Standalone)

Other details

Total branches (x)

Gold loan branches (x)

FY18

291

322

90.6

4.5

3.5

1.3

8

19

23

50

213

26.5

13.3

52.6

7.6

17.8

15.0

29.9

5.8

24.8

4.4

3.8

3.8

26.6

4,596

4,325

MUTH

FY19

342

383

89.4

5.0

4.8

0.8

8

20

23

49

269

31.3

17.7

48.7

2.3

19.7

14.0

33.2

5.7

23.2

2.7

2.4

3.8

26.1

5,020

4,480

FY20

416

469

88.8

4.2

5.6

1.4

9

19

23

49

372

27.7

9.7

39.1

23.5

30.2

14.9

30.0

6.8

29.0

2.2

1.9

3.9

25.5

5,330

4,567

MGFL (Consolidated)

FY18

FY19

117

130

158

194

74.4

2.4

15.5

7.7

10

17

13

60

126

20.0

23.1

56.0

1.0

6.8

16.2

50.4

4.2

18.8

0.5

0.3

4.0

27.0

4,199

3,330

66.7

2.7

19.8

10.9

11

17

13

59

153

15.2

21.4

62.6

0.8

9.5

16.3

47.8

5.1

22.8

0.6

0.3

4.0

23.9

4,351

3,372

FY20

170

252

67.3

2.5

21.8

8.4

12

16

14

58

218

17.0

9.0

63.1

11.0

14.8

16.5

39.6

6.0

28.8

0.9

0.5

4.0

22.9

4,622

3,529

Numbers for Muthoot Finance are on a standalone basis; Source: MOFSL, Company

23 September 2020

5

Gold Finance

Gold demand steady over past two decades

Significant gold loan opportunity as penetration levels less than 5%







According to the World Gold Council (WGC), India and China account for nearly half of

the global gold demand. In 2019, India accounted for 16% of the global gold demand.

Over the past two decades, gold demand has been steady, mostly ranging between

700-900 tons per year. While gold demand has been healthy, gold finance penetration

has remained low at only 3.5% of gold owned.

While gold prices may fluctuate in the medium term, they have been on a steady

uptrend in the long term (refer Exhibit 5). Over the past 5/10/15 years, gold prices

have delivered 14%/10%/14% CAGR.

Organized gold loan

penetration is less

than 5% of

outstanding gold

holdings

India a large gold consumer, but monetization levels low







Over the past decade, gold demand in India has been range-bound between

700-900 tons per year.

Roughly two-thirds of gold holdings are primarily concentrated in the rural

pockets of the country.

According to a KPMG analysis report, the total gold loans outstanding in the

organized sector was less than 5% of the total household gold holdings in

India, indicating significantly low penetration.

Exhibit 2: India gold demand trend

Gold demand (tonne)

1,006

710

480 510

800

730 740 720

580 550

635

740 720 760 720

620

933

919

835

844 836

781

768

701 722

166

Source: World Gold Council, Muthoottu Mini Financiers

Exhibit 3: Gold loan customer segmentation

Source: MOFSL, KPMG

23 September 2020

6

Gold Finance



Gold loan penetration (gold pledged with organized gold lenders as % of total

gold stock in India) has hovered around the 3.5-4% for the past few years.

Exhibit 4: Gold loan penetration stable over the past few years

Gold Loan Pentration %*

3.9%

3.4%

2.7%

1.5%

4.1%

3.8%

3.5%

3.5%

3.5%

1.3%

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

Source: MOFSL, Muthoot Fincorp, *Gold pledged with organized gold lenders as a % of total gold stock in India.

Gold prices up

35% YoY

Gold prices on an uptrend over the long term







Being a global commodity, while gold prices have been cyclical, they have

largely been on an uptrend. Gold prices rallied at 24% CAGR during 2005-08 up

to the GFC, followed by a period of slower, yet healthy CAGR of 18% up to

2012.

Between 2012 and 2017, they were largely flat. Gold prices picked up again

over 2017-19 at a healthy 15% CAGR. However, since the inception of the

pandemic in 2020, gold prices are up 26% YoY.

Over the past 5/10/15 years, gold prices have delivered 14%/10%/14% CAGR.

Exhibit 5: Long-term gold price chart (INR/gm)

Gold prices flat in INR

terms despite ~25%

decline in USD terms

15% CAGR

up to Covid-

19 outbreak

5,142

24% CAGR due

to high global

liquidity

4,500

18% CAGR post GFC up

to Taper Tantrum

2,500

26% post

Covid-19

outbreak

500

Oct-05

Dec-06

Feb-08

Mar-09 May-10

Jun-11

Aug-12

Sep-13

Nov-14

Jan-16

Feb-17

Apr-18

May-19

Jul-20

Source: MOFSL, Bloomberg

23 September 2020

7

Gold Finance

Gold finance an underpenetrated segment

NBFCs gaining share over banks; Top 3 NBFCs account for 75%+ of NBFC pie







Gold finance has evolved over the past 12 years in 4 phases. The first phase (FY09-12)

was characterized by robust loan growth and high LTVs (with no regulatory cap). This

was followed by the second phase of AUM decline (over FY12-14) and heightened

interest reversals, driven by regulatory headwinds (LTV cap) and declining gold prices.

In the third phase (FY14-18), there was regulatory parity between banks and NBFCs,

as a result of which, gold financiers got back on their feet. In the fourth phase (FY18-

date), we are seeing gold financiers expand their balance sheets on the back of

branch network expansion and rising gold prices.

The gold financing business is largely dominated by the informal segment, which

accounts for ~65% of gold loans in India. Within the formal financing space,

specialized gold NBFCs have been gaining market share from banks. This is due to

certain advantages on TAT, repayment flexibility, documentation flexibility, etc.

In addition, we note a trend of consolidation in this space – the market share of the

top-5 players increased ~400bp over FY16-19 to 58%.

Low share of formal financing; Banks/NBFCs follow different approaches

Only ~35% of total

gold financing is

done by organized

lenders.









In India, unorganized gold financiers comprise ~65% of the total gold loan

market, according to a KPMG report.

This is due to such players having deep

rural reach coupled with higher LTVs, flexibility, high convenience and lower

documentation demand from customers.

However, over the past few years, organized lenders have consolidated the

market by capturing a large proportion of the new-to-market customers, led by

marketing initiatives to create trust, improve brand and expand.

Important factors that work in favor of specialized gold lending NBFCs as

compared to banks are (a) faster loan processing, (b) a customer’s ability to

secure a loan despite being part of the informal segment and without any

track record as a borrower, (c) repayment flexibility, and (e) deeper

geographical reach.

On the other hand, banks have traditionally considered gold lending as a means

to meet their priority sector lending (PSL) requirements. Even in the case of

non-agricultural gold loans, they mostly target the organized segment or their

existing customers as they are unable to offer flexible and rapid disbursal. Most

banks with deep presence in southern India are aggressive in this segment.

Loan Amount

INR 1500-No Limit

Min INR.3000

INR.10,000 (In rural market),

INR50,000 (others)

INR10,000-INR1.5m

INR.10,000-INR.1m

INR.25,001-INR.2m

INR 5,000-INR.15m

INR 1000-INR 15m

Up to INR.2.5m

INR 20,000-INR 2m

Loan Tenure

7D-12 m (normal schemes)/36m (EMI

based Scheme)

3m -11m

3m -24 m

3m-12m

12m (Borrower needs to pay in lump-

sum)

6m-3Y

90D-1YR

NA

12m

Max:3YR

Exhibit 6: Snapshot of some of key gold financiers in the country

S.NO

1

2

3

4

5

6

7

8

9

10

Bank/NBFC

Muthoot Finance

IIFL

HDFC Bank

ICICI Bank

Canara Bank

Axis Bank

Manappuram Finance

Federal Bank

Bank of Baroda

SBI Bank

Interest Rate

12%-26%

9.24%-24%

11%-16%

11%-19.76%

Up to INR0.5m:9.85% (9.95% above

INRO.5m)

14% (1 YR MCLR+ Spread over 1 YR MCLR-

8.15%+5.85%)

12-29%

9.50%

Depends upon MCLR

9.15%

Source: MOFSL, Paisa Bazaar

23 September 2020

8

Gold Finance

NBFCs smaller than banks, but gaining share…





PSU Banks and Specialized NBFCs are the leaders in this segment comprising

44%/ 34% of the total loans outstanding.

However, while the share of PSU

Banks has been stable over FY15-18, that of specialized NBFCs has increased

300bp over the same time period. We believe these NBFCs would have

further gained market share over the past two years too.

Muthoot Finance is the market leader with ~18% market share in the organized

gold loan segment. It is followed by Indian Bank, Indian Overseas Bank,

Manappuram Finance (MGFL) and Muthoot Fincorp.

Exhibit 7: Specialized NBFCs gaining market share (%)

6

16

35

7

36

FY12

Specialised NBFCs

5

16

41

7

31

FY13

Non-Specialised

5

16

45

5

29

FY14

PSU banks

5

15

44

5

31

FY15

Pvt. banks

5

12

47

5

31

FY16

Co-op banks (urban)

5

13

44

5

34

FY17

5

12

44

5

34

FY18

Source: MOFSL, Muthoot Fincorp

…as NBFCs enjoy several advantages over banks

Advantage of NBFCs

includes quicker

TAT, lesser

documentation,

repayment

flexibility and longer

working hours.



NBFCs enjoy several structural advantages over banks in gold finance such as



Quicker TAT:

Specialized NBFCs disburse loans within 10 minutes while

banks take a few hours to a day to disburse loans. Certain NBFCs have also

started digital disbursements for existing customers.



Availability of valuers and specialized infrastructure at each branch:

Each

gold loan NBFC branch has an independent valuer placed in the branch as

well as adequate security infrastructure to store the gold. On the other

hand, banks consider loans against gold only from a few branches. In

addition, these branches may not have independent valuers and may rely

on third parties like jewelers for gold quality verification and valuation.



Documentation:

NBFCs require a valid government ID, while banks require

complete KYC compliance.



Repayment flexibility:

NBFCs typically grant bullet loans with pre-payment

facility. Banks typically grant EMI-based loans and charge penalties on pre-

payments.



Working hours:

NBFC branches are open beyond banking hours, unlike

bank branches.



Depth of reach:

NBFCs typically have a large branch network, with deep

penetration in semi-urban and rural areas too. Branches in such areas are

typically smaller with average employee strength of 5-6 per branch.

23 September 2020

9

Gold Finance

The Top-5 players’

market share was up

400bp over FY16-19.

Rising market share of the top-5 players





Muthoot Finance and Indian Bank are the largest gold financiers in India with

a market share of 19%/17% as at FY19.

Over the past 3 years, these players

have increased their market share by 180bp/350bp.

In this segment, we note a trend of gradual consolidation of market share

among the large players.

The market share of the top-5 players increased

~400bp over FY16-19 to 58%.

Exhibit 8: Market share trend of top-5 players (%)

18.8 18.0 19.2

17.4

13.2 12.9

14.7

10.9

7.9

7.9

7.6

7.2

7.7

7.3

7.4

4.9

6.2

7.2

7.0

FY16

16.7

FY17

FY18

FY19

MUTH

Indian Bank

IOB

MGFL

Muthoot Fincorp

Source: MOFSL, Muthoot Fincorp

Four phases of gold

loan industry

evolution over the

past 12 years.

The Evolution of Gold Financing over the past decade

The non- agricultural Gold Finance industry (banks and NBFCs) grew from INR250b

in FY09 to ~INR2t in FY20. The past 12 years can broadly be categorized into four

phases for the gold loan industry:



Phase 1 (FY09-12) – Loan book up 5x:

Post the Global Financial Crisis, gold

finance took off in a big way as lenders turned cautious on unsecured lending.

FY09-12 was a period of strong growth for the industry. According to industry

reports, the gross loan portfolio of gold lenders increased nearly 5x from

INR250b in FY09 to INR1.2T in FY12.

During this period, gold financiers got

access to growth capital via private equity players, which helped them to

expand aggressively.



Phase 2 (FY12-14) – Adverse regulations; Gold prices decline:

The previous

period of rapid growth made the RBI uncomfortable, especially in the case of

monoline financiers. During this period, India also faced higher capital account

deficit and one of the key factors was the significant import of gold. Thus, the

RBI introduced several strict regulations such as:



60% LTV cap for NBFCs (v/s no cap earlier),



Removal of PSL status for lending to gold loan companies, resulting in

sharp rise in the cost of funds (CoF) for NBFCs,



Reduction in cap on a single gold NBFC exposure by a bank from 10% of net

worth to 7.5% of net worth, and



Prohibition of loans against bullion and gold coins.

In addition, global gold prices corrected 20-25% over 2012-13. However, this

was partly offset by the INR depreciation (10-15%) and hike in import duty from

2% to 10%. Nevertheless, this led to rising defaults by customers.



Phase 3 (FY14-18) – Regulatory parity:

In 2014, the RBI revised the LTV cap to

75%, bringing it in line with banks.

Meanwhile, gold loan NBFCs tweaked their

Adverse regulations

for NBFCs in 2012

with LTV capped at

60%.

Regulatory parity

was brought about in

2014.

23 September 2020

10

Gold Finance



Branch expansion

and pick-up in

growth over the past

2-3 years.

business models (described below). This helped them to start growing again.

However, growth was modest during FY14-18, unlike Phase 1 (strong growth).

This was also partly due to largely flat gold prices over the years.

Phase 4 (FY18-YTD) – Pick-up in growth:

Post the IL&FS crisis in 2018, gold

financiers stood out v/s peers given the quality of collateral, healthy ALM and

low leverage.

Branch expansion picked up over the past 2-3 years. In addition,

gold prices started rising in FY20, which has continued even in FY21.

During

this period, gold financiers stepped up their diversification plans too – largely in

segments such as microfinance, vehicle finance and affordable housing finance.

We believe their experience in Phase 2 is keeping them in good shape right now

with lower LTV and loan tenures.

Exhibit 9: The gold loan market has witnessed a pick-up in growth in FY18 and FY19

Gold Loan Market (INR b)

Growth (%)

87%

71%

50%

Regulatory headwinds

Strong growth

250

FY09

375

FY10

700

FY11

1,200

FY12

Pick-up in growth

Rejigging the business model

1,350

21%

1,350

1,450

FY13

0%

4%

1,400

4%

1,450

FY17

10%

1,600

FY18

9%

1,750

FY19

-7%

FY14

FY15

FY16

Source: MOFSL,

Gold Council, IMaCS Analysis, Muthoot Fincorp

FY13-15 was a

period characterized

by a spike in GNPLs

accompanied by

large interest

reversals.

Spike in GNPLs and heightened interest reversals…

Over 2013-15, with declining gold prices and temporary regulatory headwinds, gold

NBFCs faced the following issues:



Spike in GNPLs:

GNPLs jumped 2-4x YoY in FY13 as customers defaulted on

their loan repayments.



Large interest reversals due to interest under-recoveries:

With rising default

on account of declining gold prices, gold financiers faced huge interest reversals

in FY13.

For example, MUTH’s yield on loans declined 500bp while MGFL’s

yield declined nearly 1,000bp in FY13, driven by interest reversals.

Business model was

then rejigged with

NBFCs incentivizing

regular repayments

and auctions being

conducted in a

timely manner.

…prompted a business model rejig

As a result, gold financiers rejigged their business models.



NBFCs incentivized monthly repayments as compared to bullet repayments by

offering lower yields.



They reduced the tenure of loans to 3-6 months from 12 months in some cases.



Auctions were also conducted in a timely manner, in accordance with the

guidelines laid down by the RBI.

23 September 2020

11

Gold Finance

Temporary increase in gold loan LTV cap by banks to 90%

Minimal impact of

higher LTV allowed

for banks







In the RBI’s most recent Monetary Policy meeting, it was decided to increase

LTV cap on gold loans for banks from 75% to 90%.

This window is available

only till 31

st

Mar’21. Post that, every disbursement by banks would again be at

a cap of 75% LTV.

The RBI has not done the same for NBFCs. However, we do not foresee a major

impact on NBFCs as (a) several customers were taking loans at 60-65% despite

the LTV cap, (b) banks may not be willing to lend up to 90% LTV from a risk-

management perspective, and (c) the branch network of NBFCs is much deeper

and their TAT is quicker than that of banks.

80% of AUM typically comes from repeat customers, which reflects strong

customer loyalty and convenience offered by gold loan companies despite

lower interest rates from banks.

23 September 2020

12

Gold Finance

Macro tailwinds to growth

Customer addition and gold prices key to AUM growth







In the near term, gold loan AUM growth is more a function of vibrancy of the

economy and competitive intensity (v/s other products). However, over a medium-to-

long term, we note that the AUM of gold financiers is largely a function of customer

addition and gold prices (refer exhibits 10 and 11).

Strong linkage to gold prices is largely on account of (a) gold financiers typically give

loans in proportion to the value of the ornament, and (b) given the low duration of

the product, the loan value gets reset to the underlying collateral value very quickly.

Over the past 5 years, both MUTH/MGFL have delivered 6-7% tonnage CAGR. Around

80% of customers of gold financiers are repeat customers. When gold prices rise

sharply in the short term, the finance requirement of these players does not rise

proportionately. Hence, in the past quarter, we witnessed tonnage and LTV declining

for gold financiers. Nevertheless, over the medium term, tonnage growth is likely to

pick up and both players should deliver ~15% AUM growth over FY20-23E.

Correlation between

gold price

appreciation and

AUM growth in the

medium term.

Correlation between AUM growth and gold prices over the medium term





Analyzing the trend of loan growth for Gold Financiers vis-à-vis gold price

appreciation, we note of a correlation between the two. Loan growth typically

tends to follow gold price growth over the medium term with a lag.

While gold prices have increased 35% YoY, this may not translate into

equivalent loan growth as financiers have reduced incremental LTVs.

Exhibit 10: Loan growth has moved in tandem with gold prices over the medium term for MUTH…

MUTH - AUM growth (%)

34

21

30

12

5

11

3

-4

-3

-5

-12 -17 -17 -11

-8

9

-11

-2

7

20

14 14 13

11 16

11

-3 -7

4

6 10 8

-2

12 8 1

5

7

7

15 18

11 17

5

2

8

3

Gold price appreciation (%)

16

23 24 30

12

19 22 15

42

13 12

7

-13

-8 -6

-6 -5

5

11

Source: MOFSL, Company

Exhibit 11: …as well as for MGFL

Gold price appreciation (%)

34

21

20

2

12

5

-16 -14

-13

-15 -14

-18 -18

-4

-5 -3

9

-11

-7

-11 -8 -8

-6

-3

-7

3

18

13 17 12 10 9

16

11

20

11

-2

-13

30 27

10

-5

-6

-8

16 17

-5

5

5 7

5

11 10

3

2

7

8

MGFL - AUM growth (%)

30 31

12

20

23

24

30

33

42

Source: MOFSL, Company; Note: MGFL’s gold loan only

23 September 2020

13

Gold Finance

Volume growth for

gold financiers has

been 6-7% over the

past five years.

Customers may utilize gold holding to tide over temporary liquidity crunch

in pandemic





Over the past 5 years, gold tonnage growth for MUTH and MGFL has been

moderate at 6-7%. This was attributable to a largely stagnant branch network

expansion (1% CAGR for both) coupled with aggression from other NBFCs in

unsecured lending.

However, in the current environment, we expect volume growth to pick up

meaningfully. This is because (a)

the typical customer base of Gold financiers

are expected to have been impacted by current economic situation and would

need some working capital for their families/businesses,

and (b) as other

NBFCs get cautious on lending, customers are likely to turn to gold financiers

for their borrowing requirements.

Exhibit 12: 6-7% gold tonnage CAGR for MUTH and MGFL over FY15-20

16.6

12.2

8.4

4.9

2.5

4.0

2.3

8.0

9.0

7.3

4.1

MUTH

MGFL

11.0

FY15

FY16

FY17

FY18

FY19

FY20

Source: MOFSL, Company

Exhibit 13: Tonnage has been range-bound in the past 7-8 quarters

MUTH

MGFL

168 166 169 176 171 173 176 165

155 161

146 150 147 149 152 152 153

63

66

65

61

59

60

62

64

66

67

66

68

68

72

74

72

69

Source: MOFSL, Company

Ticket sizes up sharply over the past two years

MGFL/MUTH –

Ticket size up

28%/36%

cumulatively over

the past two years.





We have observed a consistent increase in the average ticket size of both

MUTH and MGFL.

Over the past two years, the average ticket size of MUTH

has increased 36% to INR53k, while that of MGFL has grown 28% to INR43k.

We expect the ticket size to increase marginally over the next few quarters.

23 September 2020

14

Gold Finance

Exhibit 14: Average ticket size (INR ‘000)

MUTH

36.8

37.1

38.0

39.2

39.3

39.5

41.7

MGFL

42.7

43.0

47.0

50.8

53.4

32.2

32.3

32.6

33.2

32.1

32.1

32.9

32.7

35.3

36.5

38.5

42.6

Source: MOFSL, Company

Expect 14%/18%

gold loan CAGR for

MUTH/MGFL over

FY20-23E.

Expect healthy growth over medium term





We believe there are two tailwinds for growth in the near-to-medium term: (a)

rising gold prices, and (b) customer addition. This would be partially offset by

lower LTVs on incremental loans.

We expect MUTH/MGFL to report ~15/18% loan CAGR.

Exhibit 16: MGFL’s gold loan growth trend

Loans (INR b)

31

15

15

10

5

117

130

170

210

242

278

24

15

9

10

111

15

13

Exhibit 15: MUTH’s gold loan growth trend

Loans (INR b)

22

18

12

8

4

245

274

295

349

426

479

551

634

Growth (%)

Growth (%)

101

Source: MOFSL, Company

Source: MOFSL, Company

23 September 2020

15

Gold Finance

Diversifying the liability mix

Significant improvement in margins over FY17-20









Given the short tenure of loans, gold financiers have high positive ALM. Therefore,

unlike other NBFCs, they can sustain a large quantum of commercial paper (CP) on

their balance sheet. MUTH/MGFL typically maintain 10-15% share of their total

borrowings in CPs.

Over the past five years, MUTH’s CoF declined ~200bp to 8.7%, driven by (a) refinance

of high-cost bonds and (b) lower incremental cost of funding from banks and CPs.

Additionally, MUTH tapped offshore markets for borrowings in FY20 – these

borrowings now comprise 20% of its total borrowings.

On the other hand, MGFL still relies on banks, which account for 57% of its

consolidated borrowings. Similar to MUTH, MGFL too raised ECBs in FY20, which now

account for ~10% of its consolidated borrowings.

Gold loan business has high degree of operating leverage given the high share of fixed

costs. Due to MUTH’s already low-cost model, we expect only a modest dip in its

expense ratio. However, MGFL should witness 160bp reduction in its expense ratio to

5% over FY20-23E with scale-up in its non-gold loan business and higher productivity

from gold loan branches.

ECBs became a key

borrowing source in

FY20, accounting for

15%/20% of total

standalone

borrowings for

MGFL/MUTH.

Tapping foreign funding sources; Share of CP high due to short-loan tenure







Unlike other NBFCs that had to reduce the share of CPs over the past 18

months, Gold Financiers have been able to maintain a high share of CPs (10-

15% of total borrowings).

Additionally, players like MUTH have run-down the gold bonds they had

issued at interest rates of 11-12% over FY13-15. Incrementally, bonds are

raised at 8.5-9%, resulting in significant savings in the CoF. Likewise, the

company had meaningful share of subordinate bonds 5 years back (12%) –

these bonds, which were at a higher cost, have also run down.

Moreover, MUTH also tapped offshore markets for borrowings – it raised

USD1b in two separate deals in FY20. Likewise, MGFL also raised USD300m in

ECBs in 4QFY20. We expect this to be a recurring phenomenon hereon as both

companies are looking to diversify their liability mix going forward.

Exhibit 18: MGFL’s borrowing mix (%)

CP

2

18

ECB

Others

3

20

10

6

10

10

Bank loans

6

21

23

75

50

53

56

57

NCD

4

23

20

CP

ECB

7

21

15

Others

6

9

17

Exhibit 17: MUTH’s borrowing mix (%)

Gold bonds

16

0

41

44

21

19

22

FY16

12

FY17

22

4

FY18

29

2

FY19

27

1

FY20

53

NCDs

10

15

Term loans

8

13

49

39

FY16

FY17

FY18

FY19

FY20

Source: MOFSL, Company

Source: MOFSL, Company; Note: Consolidated

23 September 2020

16

Gold Finance

CoF declined by ~100-

200bp over past 5 years

due to refinance of

high-cost bonds.

~100-200bp CoF decline over the past 5 years





Given the refinance of high-cost NCDs and declining interest rates, CoF for Gold

Financiers have declined ~100-200bp over the past 5 years.

These gains on CoF have been retained by the companies, resulting in an

improvement in NIMs.

Exhibit 20: …resulting in a sharp improvement in NIMs (%)

MUTH

17.8

16.2

16.3

16.5

MGFL

Exhibit 19: Cost of funds down ~100-200bp (%)…

MUTH

11.9

10.8

11.3

10.7

10.4

8.7

FY15

FY16

FY17

FY18

FY19

9.2

9.3

9.6

8.7

FY20

9.9

11.6

MGFL

12.2

13.4

15.0

12.9

14.0

14.9

9.5

FY15

10.6

FY16

FY17

FY18

FY19

FY20

Source: MOFSL, Company; Consolidated number for MGFL

Source: MOFSL, Company; Consolidated number for MGFL

Incremental cost of

funds has declined

over the past few

months; able to

raise money at

~8.5% now.

Raising long-term money at ~8.5% currently







Given the strong asset quality and healthy ALM, raising money from banks and

other institutions for Gold Financiers has been relatively easy. Banks are

sanctioning incremental loans at 8.5-9%.

These companies have also been able to raise money from capital markets at

attractive rates.

For example, MUTH recently raised a CP at ~4% and a 3-year

NCD at 8.4%. Incremental borrowing rates for MGFL have declined and are in

line with those of MUTH.

Moreover, these companies have also been able to raise money via the recent

TLTROs, indicating bank preference for this segment of NBFCs.

Month of issue

May

June

June

June

July

July

June

July

July

July

Tenure of instrument

3YR

5YR

3YR

2YR

2YR

3YR

3.0YR

1.5YR

10YR

2.0YR

Interest rate (%)

8.90

9.50

9.05

8.50

8.30

8.40

9.10

8.75

9.50

8.50

Exhibit 21: Able to borrow money via NCDs at ~8.5%

Corporate

MUTH

MUTH

MUTH

MUTH

MUTH

MUTH

MGFL

MGFL

MGFL

MGFL

Source: MOFSL, Company

Both players have

20%+ liquidity on the

balance sheet.

Higher liquidity and lower yields to drive moderation in NIMs





In FY20, Gold Financiers witnessed meaningful improvement in loan yields,

primarily driven by high penal and collection charges. This is expected to

normalize in the coming days.

In addition, both players have increased liquidity on their balance sheets.

MUTH’s liquidity on the balance sheet increased from INR9b (3% of

borrowings) to INR85b (22% of borrowings) over the past year. Likewise,

MGFL’s liquidity increased from INR37b (17% of borrowings) to INR55b (23%

of borrowings) over the same time period.

23 September 2020

17

Gold Finance



The two factors combined are likely to result in moderation in margins over the

medium term.

Exhibit 22: Modest NIM compression from FY20 levels for both players (calculated)

MUTH

17.8

16.2

12.2

13.4

15.0

12.9

9.5

10.6

14.0

14.9

14.0

14.3

14.5

16.3

MGFL

16.5

15.0

15.1

15.4

Source: MOFSL, Company; Note: Consolidated numbers for MGFL

Average loan tenure

of sub-6 months

ensures positive

ALM.

Short-loan tenure ensures positive ALM







Given that most borrowers avail gold loans for their near-term working capital

needs, gold loan tenors are typically up to 12 months.

MGFL gives loans for

three months, while MUTH gives loans for 12 months.

However, regardless of the contractual tenor of the loans, borrowers repay as

and when they can. Hence, for MUTH, around 40% of loans are repaid in the

first 3 months and 60% are repaid in the first 6 months.

As a result, these players have positive ALM across buckets.

Exhibit 23: 50%+ of MUTH’s outstanding loans get repaid within a quarter

69

53

58

50

68

1QFY20

2QFY20

3QFY20

4QFY20

1QFY21

Source: MOFSL, Company

Significant operating leverage in this business model

60-70% of opex is on

employees and rent,

indicating significant

operating leverage.









Gold finance is typically a high fixed-cost business. This is due to heavy

investment in branch infrastructure and manpower.

For MUTH/MGFL,

employees and rental expenses comprise 70%/60% of total operating

expenses, implying a high share of fixed costs.

As a result, in times of low growth, expense ratios shoot up and vice-versa.

Over the past 2 years, AUM per branch has increased meaningfully for both

players – from INR68m to INR93m for MUTH and from INR35m to INR48m for

MGFL.

As a result, expense ratio for both players has declined 50-100bp.

In addition to the above, MGFL’s expense ratio has also declined due to

reduction in security costs from a run-rate of INR1.4-1.5b annually two years

back to INR0.4-0.5b now.

23 September 2020

18

Gold Finance

Exhibit 24: Trend in employee and rental expenses as % of total expenses

MUTH

69

59

69

60

71

63

76

63

MGFL

74

59

71

61

70

62

FY14

FY15

FY16

FY17

FY18

FY19

FY20

Source: MOFSL, Company; Note: FY20 numbers include depreciation of ‘right to use’ assets; MGFL

numbers consolidated

Exhibit 25: Branch productivity increasing for MUTH…

5.1

AUM/ Branch

4.8

4.6

Expense ratio

Exhibit 26: …as well as for MGFL (Gold loans)

Avg AUM/ Branch

8.7

7.7

4.6

8.0

7.7

7.1

Expense ratio

8.4

4.8

4.8

55

FY15

57

FY16

64

FY17

68

FY18

78

FY19

93

FY20

28

FY15

31

FY16

34

FY17

35

FY18

38

FY19

48

FY20

Source: MOFSL, Company

Source: MOFSL, Company

Cost-cutting

measures include

reduction in

promotional

expenses and

discounts on branch

rentals.

Focus on cost-cutting in the current environment





In FY21, both players undertook steps to reduce certain fixed costs such as

advertising and promotion. Additionally, both companies availed

waivers/discounts on branch rentals for a few months.

In our view, this frugality should sustain even when business returns to normal.

While we expect ~50bp expense ratio reduction for MUTH, we expect ~150bp

reduction for MGFL, largely on account of its higher opex base and faster AUM

growth.

Exhibit 28: …but meaningfully for MGFL over FY20-23E

Expense ratio

60.4

58.6

43.1

50.4

47.8

39.6

27.8

27.5

27.0

33.6

33.7

33.6

C/I ratio

Exhibit 27: Expense ratio to decline modestly for MUTH…

Expense ratio

52.0

43.5

36.2

29.9

33.2

30.0

C/I ratio

5.1

4.8

4.8

4.6

4.8

4.6

4.0

4.1

4.1

7.6

7.9

7.7

8.4

7.9

6.6

4.9

5.0

5.0

Source: MOFSL, Company

Source: MOFSL, Company; Note: Consolidated

23 September 2020

19

Gold Finance

Asset quality pristine

Eventual credit losses near zero; LTV of portfolio at ~55%







While GNPL ratio has fluctuated in the past, eventual credit losses have been almost

zero despite gold price volatility. This is due to the 75% LTV cap as well as the fact

that gold ornaments are highly ‘liquid’ and the collateral has customer sentiment

value.

Hence, over the past decade, MUTH/MGFL has written off barely 1%/3% of

cumulative operating profit earned. We have also observed lower trend in auctions

over the past three years, for both players, implying lower slippages.

Outstanding LTV of the portfolio is ~55%. This gives us asset quality comfort in the

event of any gold price volatility.

GNPL ratio fluctuates…

GNPL ratio for

MUTH has been

higher than that for

MGFL, mainly due

to the longer loan

tenure; however,

credit losses were

minimal in both

cases.





While NPLs of Gold Financiers have fluctuated due to repayment delays by

customers, there have rarely been eventual credit losses.

This is due to (a) LTV

cap of 75%, (b) short loan tenures leading to lower risk from gold price

fluctuation, (c) gold ornaments being easily liquidated and (d) higher emotive

value associated with gold ornaments.

MUTH’s GNPL ratio doubled from 2.2% in FY16 to 4.4% in FY18, driven by

migration to 90dpd NPL reporting and higher GNPLs in its new 6-month loan

product. However, post discontinuation of the product and recovery of existing

GNPLs, the GNPL ratio declined back to 2.2% by FY20.

Exhibit 29: GNPL ratio has fluctuated over the past several years

MUTH

MGFL

4.4

2.8

2.0

0.6

0.5

1.9

2.2

2.2

2.0

1.4

1.2

1.2

1.0

0.7

2.7

2.2

0.9

0.5

MGFL – GNPA % on a standalone basis; Source: MOFSL, Company

…but write-offs minimal

Write-offs

amounted to only

1-3% of cumulative

operating profit

over the past

decade.







Unlike other lending segments, gold finance typically has minimal write-offs

despite elevated (and cyclical) NPLs. This is largely attributed to capping of LTV

at 75%. Hence, even with interest accrual for one year, LTVs have remained at

sub-100%.

Over the past decade, MUTH has written off less than INR2b, amounting to

merely 1% of cumulative operating profit. Likewise, MGFL has written off only

INR2.6b over the past decade on a standalone basis, amounting to less than

3% of cumulative operating profit.

Hence, bulk of the credit costs typically go into standard asset provisions, rather

than in NPL provisions or in write-offs.

23 September 2020

20

Gold Finance

Value of gold

auctioned has been

on a secular decline

for both players.

Declining trend in gold auctions a key positive





Auction trends are rarely steady. Over the past few years, auctions by MUTH

have varied from INR9b to INR47b. However, there has been a meaningful

decline in auctions compared to pre-FY16 levels. In addition, recoveries are

typically high (90%+ of outstanding dues).

MGFL also witnessed a sharp decline in volume of auctions – from INR9b+ in

FY17 to ~INR1b in FY20.

A key factor for the same was the migration to a

shorter-tenure product, which resulted in regular payments by customers.

Exhibit 31: ..as well as for MGFL

Value of gold auctioned (INR b)

38.4

24.0

9.2

17.3

4.3

27.2

FY18

15.2

FY19

9.7

2.1

9.1

FY20

31.3

FY14

16.0

FY15

24.2

FY16

10.8

FY17

8.7

3.7

10.2

FY18

4.8

FY19

0.8

1.4

FY20

% of loans

Exhibit 30: Auctions volumes have declined for MUTH…

Value of gold auctioned (INR b)

19.1

13.6

% of loans

17.0

4.7

37.3

FY14

32.0

FY15

46.9

FY16

13.0

FY17

Source: MOFSL, Company

Source: MOFSL, Company

Employee and

customer fraud

account for sub-5bp

of AUM on an

annual basis.

Frauds miniscule at less than 5bp of AUM







Given the tight underwriting processes, frauds in a year are typically negligible,

ranging from 1bp to 5bp of AUM.

Cumulatively, over the past five years, frauds by employees and customers of

MUTH amounted to only INR135m while that for MGFL amounted to

INR285m.

Moreover, most of these frauds are insured, leading to even lower eventual

credit losses for the companies.

Exhibit 32: Trend in frauds committed by employees and customers (INR m)

MUTH

72.2

60.1

35.1

12.0

16.3

15.4

63.3

38.3

25.9

10.0

MGFL

78.3

69.2

FY15

FY16

FY17

FY18

FY19

FY20

Source: MOFSL, Company

23 September 2020

21

Gold Finance

MGFL’s credit cost to

rise 100bp YoY to

2.2% in FY21

Credit costs to remain muted for MUTH, may rise for MGFL due to higher

share of non-gold finance exposure





MUTH’s credit costs are likely to remain muted due to high gold prices and low

LTVs.

On the other hand, MGFL is likely to witness elevated credit costs stemming

from the MFI portfolio. We expect consolidated credit costs to rise to 2.2% in

FY21 and gradually moderate to 1.5% by FY23E.

Exhibit 33: Credit costs to be manageable (%)

MUTH

MGFL

2.2

0.7

0.4

1.1

0.9

1.2

0.3

0.8

0.1

0.2

0.4

0.4

0.4

1.2

1.8

1.5

0.3

0.2

FY15

FY16

FY17

FY18

FY19

FY20

FY21E

FY22E

FY23E

Source: MOFSL, Company; Note: Consolidated numbers for MGFL

23 September 2020

22

Gold Finance

Diversifying into other segments

Non-gold AUM share at 11%/33% for MUTH/MGFL







Around 3-4 years back, both players started diversifying into other lending segments.

This was due to (a) excess capital on the balance sheet, and (b) 10-12% long-term gold

loan growth v/s internal accrual of 18-20%. As of now both entities have diversified

into Microfinance, vehicle finance and Affordable Housing Finance.

However, MUTH’s pace of diversification has been slower than MGFL. On a

consolidated AUM basis, MUTH’s share of subsidiaries increased from 9% to 11% over

FY18-20 while for MGFL, it rose from 26% to 33%.

While the diversification strategy is positive in the long term, we expect some near-

term pain, especially in the MFI segment. After years of strong growth, these

segments are likely to be in consolidation phase over the next 12 months.

High capitalization,

lower growth v/s

RoE and ability to

cross-sell to a large

customer base are

key reasons for

diversification into

new products.

Why are gold financiers migrating to other segments?









We believe MUTH and MGFL are diversifying into other lending segments due

to (a) both companies sitting on excess capital, and (b) the gold finance

segment likely to deliver 10-12% loan growth over the medium-to-long term

compared to internal accruals of 18-20%, and (c) significant commodity risk on

the entire portfolio.

Gold Financiers have built a sticky set of customers to whom they can cross-sell

other financial products, which is another key advantage.

Of the two players, MGFL has diversified much more into non-gold lending –

the share of its non-gold loans increased from 26% in FY18 to 33% in FY20. On

the other hand, MUTH saw the share of non-gold loans increased from 9% to

11% over the same time period.

While this could add to MUTH/MGFL’s revenue and profit streams over the

long term, we note that both companies do not have any prior experience in

cash flow backed underwriting. Hence, in our view, growth should be steady

and calibrated

Exhibit 34: Share of non-gold AUM stands at 33% for MGFL compared to 11% for MUTH

FY18

AUM (INR m)

Housing Finance

Microfinance

Vehicle Finance

Others

% of consolidated AUM

Housing Finance

Microfinance

Vehicle Finance

Others

14,589

11,381

4,153

4.5

3.5

0.0

1.3

MUTH

FY19

19,075

18,419

3,107

4,974

5.0

4.8

0.8

1.3

FY20

19,769

26,310

5,090

5,380

4.2

5.6

1.1

0.3

FY18

3,747

24,372

6,254

5,928

2.4

15.5

4.0

3.8

MGFL

FY19

5,188

38,408

11,146

10,023

2.7

19.8

5.7

5.2

FY20

6,296

55,026

13,444

7,814

2.5

21.8

5.3

3.1

Source: MOFSL, Company

23 September 2020

23

Gold Finance

Exhibit 35: Share of AUM coming from non-gold lending higher for MGFL (%)

MUTH

25.6

26.7

29.6

33.3

34.2

MGFL

33.1

32.6

32.7

30.0

25.0

9.4

8.7

9.8

9.7

10.6

11.0

11.5

11.4

11.2

11.2

Source: MOFSL, Company

Microfinance the largest subsidiary of MUTH/MGFL

Microfinance – the

largest non-gold

lending segment for

both players.





MUTH carries out its MFI operations through its subsidiary – Belstar

Microfinance – in which it owns 70% stake. MGFL has a subsidiary – Asirvad

Microfinance – to carry out its MFI business, in which it owns ~94% stake while

the rest is with employees.

Over the past two years, both MUTH/MGFL have more than doubled their

AUM. As at FY20, Belstar’s AUM was INR26b while Asirvad’s AUM stood at

INR55b.

Exhibit 37: Asirvad posted 3x increase in AUM over FY17-20

AUM (INR b)

210

Growth (%)

Exhibit 36: Belstar posted 65% AUM CAGR over FY17-20

AUM (INR b)

118

98

Growth (%)

38

62

43

80

24

36

3

FY16

6

FY17

11

FY18

18

FY19

26

FY20

3

FY15

10

FY16

18

FY17

FY18

FY19

58

55

43

FY20

Source: MOFSL, Company

Source: MOFSL, Company

23 September 2020

24

Gold Finance

Exhibit 38: Belstar and Asirvad – Key Snapshot (FY20)

AUM (INR b)

PAT (INR b)

Net worth (INR b)

No. of branches

No. of employees

No. of states

Regional mix %

South

North

West

East

GNPL ratio %

CRAR %

Belstar

26.5

1.0

5.0

603

4,425

17

Asirvad

55.0

2.4

10.4

1,042

6,206

22

37

21

18

23

2.1

27

Source: MOFSL, Company

Asirvad has ~2x the

AUM of Belstar.

0.9

26

Exhibit 39: Belstar’s PAT has tripled over the past two years

PAT (INR m)

Exhibit 40: Asirvad registered a loss in FY18 due to

demonetization but recovered sharply in FY19

PAT (INR m)

343

104

FY17

337

FY18

737

FY19

990

FY20

FY17

-93

1,516

2,353

FY18

FY19

FY20

Source: MOFSL, Company

Source: MOFSL, Company

~75% collection

efficiency in the

microfinance

segments.

Collection efficiency improving but significantly below pre-COVID levels





Collection efficiency for both MUTH/MGFL has gradually improved.

Asirvad’s

collection efficiency improved from 48% in Jun’20 to 75% in Aug’20. Belstar’s

collection efficiency too stood at 75%+ in Aug’20.

While this is encouraging, it is still much below the pre-COVID levels of 98%+.

Affordable housing finance – Another key focus area for diversification





Apart from microfinance, the affordable housing finance segment is another

area that these two Gold Financiers have ventured into.

While MGFL’s HFC subsidiary operates predominantly in South/West India,

MUTH’s HFC subsidiary is present across several states. Also, the average

ticket size of loans by Muthoot HomeFin (INR0.9m) is higher than that of

Manappuram HFC (INR0.6m). As a result, yields are also lower at 12% (MUTH)

v/s 15% (MGFL HFC).

23 September 2020

25

Gold Finance

Exhibit 41: Details of MUTH/MGFL’s housing finance subsidiaries

AUM (INR b)

PAT (FY20, INR m)

Net worth

Presence

No. of branches

Average ticket size (INR m)

Average yield (%)

RoA (FY20, %)

RoE (FY20, %)

GNPL ratio (%)

CRAR (%)

Credit rating

MUTH

19.8

318

4.3

Pan-India

107

0.9

11.8

1.7

7.8

1.7

52

AA

MGFL

6.3

106

2.0

South and West India

47

0.6

15.2

1.8

5.3

4.9

53

AA-

Source: MOFSL, Company

Exhibit 42: Muthoot HomeFin saw sharp ramp-up in FY18

AUM (INR b)

Exhibit 43: Manappuram HomeFin has seen steady growth

over years

AUM (INR b)

0.3

FY16

4.4

FY17

14.6

FY18

19.1

FY19

19.8

FY20

1.3

FY16

3.1

FY17

3.7

FY18

5.2

FY19

6.3

FY20

Source: MOFSL, Company

Source: MOFSL, Company

Exhibit 44: PAT trend of Muthoot Homefin

PAT (INR m)

Exhibit 45: Manappuram HFC turned profitable in FY19

PAT (INR m)

106

30

29

FY17

223

FY18

363

FY19

318

FY20

-54

FY16

-11

FY17

-45

FY18

FY19

FY20

Source: MOFSL, Company

Source: MOFSL, Company

23 September 2020

26

Gold Finance

Key risks

Geographical concentration

~50%/60% of MUTH/MGFL’s gold loan book is still concentrated in southern India.

In order to deliver healthy growth over the long term, these players would have to

diversify into other geographies too.

Extreme gold price fluctuations

While minor gold price fluctuation may not have any meaningful impact on growth

or asset quality, any extreme fluctuations may dent business outlook and asset

quality performance.

Competition from banks and other NBFCs

Over the past year, some banks have slowly started focusing on this segment.

Banks, typically, offer larger ticket sized loans. Some NBFCs like BAF are also

focusing on this product. The RBI’s recent announcement of increasing the LTV cap

on gold loans for banks from 75% to 90% could result in some customers shifting

from NBFCs to banks.

23 September 2020

27

Gold Finance

Valuation and view

Upgrade MUTH to ‘Buy’; Initiate coverage on MGFL with ‘Buy’











Gold financiers have some inherent advantages over their NBFC counterparts: (a) less

competition from banks given the niche expertise required, (b) low asset quality risk,

(c) positive ALM despite high share of short-term borrowings, and (d) low leverage.

While these advantages are structural, we believe gold financiers also have near-term

tailwinds as customers impacted by the pandemic look to leverage on their gold

holdings. Additionally, elevated gold prices provide some impetus to growth.

Gold financiers are much more comfortable on the liability side today as compared to

five years back. With incremental CoF declining, margins are likely to improve/stable.

Also, given the high degree of operating leverage in this business model, strong AUM

growth would result in reduction in the expense ratio.

Moreover, these companies generate the best return ratios in our NBFC coverage

universe. Even during the turmoil of the past two years, these companies delivered an

average ~25% RoE, highlighting the strength of their business models. We expect

MUTH to generate an average 6.8%/25% RoA/RoE over the next 3 years. MGFL should

generate 5.4%/24% RoA/RoE on a consolidated basis over the medium term.

We have upgraded MUTH to ‘Buy’ with a TP of INR1,300 (3.0x FY22E BVPS). Our

target multiple is predicated on its consistent profitability (lowest RoE of 15% over

the past decade) and sectoral tailwinds. We are also initiating coverage on MGFL with

a ‘Buy’ rating and TP of INR185 (1.8x FY22E BVPS). Our lower multiple for MGFL is

based on lower RoA as well as higher share of the business coming from non-gold

lending which is affected by the pandemic.

Exhibit 46: MUTH – DuPont Analysis (%)

Interest Income

Interest Expense

Net Interest Income

Other Income

Net Income

Operating Expenses

Pre Provision Profits

Provisions

PBT

Tax

Reported PAT

Leverage

RoE

FY13

20.2

10.7

9.5

0.2

9.7

3.7

6.1

0.3

5.7

1.9

3.8

7.9

30.2

FY14

17.8

9.6

8.2

0.2

8.4

3.9

4.5

0.2

4.3

1.5

2.8

6.9

19.5

FY15

16.3

8.1

8.2

0.2

8.5

4.4

4.1

0.1

3.9

1.4

2.6

5.6

14.4

FY16

17.8

8.4

9.5

0.3

9.7

4.2

5.5

0.6

4.9

1.9

3

5.0

15.1

FY17

19.5

7.9

11.6

0.4

12

4.3

7.6

1

6.7

2.6

4.1

4.8

19.4

FY18

20.2

6.3

13.9

0.4

14.3

4.3

10

0.8

9.3

3.5

5.8

4.3

24.8

FY19

19.6

6.5

13.1

0.4

13.5

4.5

9

0.1

8.9

3.2

5.7

4.1

23.2

FY20

FY21E

FY22E

FY23E

19.4

18.9

19.2

19.2

6.3

6.9

6.6

6.2

13

12.6

12.7

12.6

0.4

0.4

0.4

0.5

13.4

12.5

13.1

13.4

4

3.5

3.6

3.6

9.4

9

9.5

9.8

0.2

0.3

0.3

0.3

9.2

8.7

9.2

9.5

2.4

2.2

2.3

2.4

6.8

6.5

6.9

7.1

4.3

4.1

3.7

3.4

29.0

26.4

25.2

24.3

Standalone; Source: MOFSL, Company

23 September 2020

28

Gold Finance

Exhibit 47: MGFL – DuPont Analysis (%)

Interest Income

Interest Expense

Net Interest Income

Other Income

Total Income

Operating Expenses

PPoP

Provisions

PBT

Tax

Reported PAT

Leverage

RoE

FY13

18.1

9.6

8.5

0.2

8.7

5.5

3.1

0.7

2.5

0.8

1.7

5.1

8.6

FY14

17.6

8.7

8.9

0.3

9.2

5.9

3.3

0.4

2.9

1.0

1.9

4.8

9.2

FY15

17.5

7.8

9.7

0.2

9.9

6.0

3.9

0.3

3.7

1.3

2.4

4.4

10.6

FY16

19.2

7.7

11.5

0.2

11.7

6.8

4.8

0.3

4.5

1.6

2.9

4.5

13.2

FY17

24.3

8.4

15.9

0.2

16.1

6.9

9.2

0.8

8.4

2.9

5.5

4.5

24.8

FY18

21.0

6.4

14.5

0.8

15.3

7.7

7.6

1.1

6.5

2.3

4.2

4.5

18.8

FY19

21.6

7.2

14.4

1.0

15.5

7.4

8.1

0.3

7.8

2.7

5.1

4.5

22.8

FY20

21.1

7.4

13.7

1.4

15.1

6.0

9.1

1.0

8.1

2.1

6.0

4.8

28.8

FY21E

20.1

7.8

12.4

0.8

13.2

4.4

8.7

1.8

6.9

1.8

5.1

4.8

24.4

FY22E

20.0

7.4

12.6

0.8

13.4

4.5

8.9

1.5

7.4

1.9

5.4

4.4

24.1

FY23E

19.9

7.1

12.8

0.7

13.5

4.6

9.0

1.2

7.7

2.0

5.7

4.2

23.8

Consolidated; Source: MOFSL, Company

Exhibit 48: P/E chart (1-year forward) - MUTH

15.5

13

10.5

8

5.5

3

P/E (x)

Min (x)

Avg (x)

+1SD

Exhibit 49: P/B chart (1-year forward) - MUTH

Max (x)

-1SD

3.6

2.8

P/B (x)

Min (x)

Avg (x)

+1SD

3.3

Max (x)

-1SD

14.1

10.1

2.9

12.3

2.2

2

1.2

8.2

6.2

3.9

1.7

1.2

0.6

0.4

Source: MOFSL, Company

Source: MOFSL, Company

Exhibit 50: P/E chart (1-year forward) - MGFL

24.0

16.0

P/E (x)

Min (x)

Avg (x)

+1SD

Max (x)

-1SD

Exhibit 51: P/B chart (1-year forward) - MGFL

3.0

2.0

P/B (x)

Min (x)

Avg (x)

+1SD

Max (x)

-1SD

17.6

11.6

8.6

8.0

0.0

2.4

2.0

1.4

0.9

0.4

0.0

5.6

3.5

1.0

1.6

7.2

Source: MOFSL, Company

Source: MOFSL, Company

23 September 2020

29

Gold Finance

Annexure – History of the ‘LTV’









Prior to 2012, there was no regulatory cap on LTVs. As a result, gold financiers

would typically lend at 80-85% LTV.

Over FY07-12, these gold financiers grew at a rapid pace. MUTH’s loan book

expanded at a CAGR of 75% from INR18b in FY07 to INR214b in FY12. The

rapid growth in a concentrated portfolio made the RBI uncomfortable with

the risks these lenders were taking.

As a result, the RBI set some restrictive measures, one of which was capping

gold loan LTVs of NBFCs at 60%. Note that banks did not have any LTV cap on

their gold loans.

After the recommendations of the KUB Rao Committee (details below), in 2014,

the RBI decided to have a level-playing field for banks and NBFCs. Both were

given an LTV cap of 75% on their gold loans.

Exhibit 52: Final RBI guidelines in 2014 led to level-playing field for banks and NBFCs

Key parameters

Loan to value ratio

KUB Rao recommendation

Suggested increasing LTVs from 60% to

75% of the scrap value

Suggested level playing field for banks

and NBFCs

30-day average price of 22 carat gold

prevailing in Bombay Bullion Association

Prior approval from RBI for more than

1,000 branches

Not recommended

Disbursements > INR200,000 should be

done in cheque

Final RBI guidelines

After refraining for some time, RBI accepted and increased

the LTV to 75%; LTV capped at 60% of scrap value

RBI takes key steps to ensure level playing field: 1) LTVs

@75% for both banks and NBFCs, 2) allowed banks to offer

bullet products

30-day average price of 22 carat gold prevailing in Bombay

Bullion Association

Prior approval from RBI for more than 1,000 branches

Verification of gold ownership if pledged amount >20gms

Disbursements > INR100,000 should be done in cheque

Source: MOFSL, Company

Level playing field

Valuation techniques

Branch opening licenses

Verification of gold ownership

Cash disbursement

23 September 2020

30

Initiating Coverage | Sector: Financials – NBFC

Gold Finance

Muthoot Finance

BSE Sensex

37,734

S&P CNX

11,154

CMP: INR1,015

TP: INR1,300 (+28%)

Buy

Best in class return ratios

Liability mix overhaul | Tailwinds to growth

Stock info

Bloomberg

Equity Shares (m)

M.Cap.(INRb)/(USDb)

52-Week Range (INR)

1, 6, 12 Rel. Per (%)

MUTH IN

401

407.1 / 5.7

1405 / 478

-12/36/62

2022E

73.7

55.4

40.0

99.8

17.2

435

14.3

27.5

6.9

25.2

17.0

10.2

2.3

1.7

Financial Snapshot (INR b)

Y/E March

2020 2021E

NII

57.7

63.4

PPP

41.5

47.3

PAT

30.2

34.1

EPS (INR)

75.3

85.1

EPS Gr. (%)

52.9

13.1

BV/Sh.(INR)

289

356

Ratios

NIM (%)

14.9

14.0

C/I ratio (%)

30.0

27.8

RoA (%)

6.8

6.5

RoE (%)

29.0

26.4

Payout (%)

19.9

17.0

Valuations

P/E (x)

13.5

11.9

P/BV (x)

3.5

2.8

Div. Yld. (%)

1.5

1.4

After 4 years of muted growth, MUTH’s loan book CAGR picked up to 20% over the

past 2 years. We expect growth to remain healthy at 14-15% over the medium term.

The company’s liability mix has undergone significant diversification in the past five

years. This was mainly due to repayments of most high-cost ‘gold’ bonds and

diversification into offshore borrowings (now 20% of total borrowings). With an

average 6.8% RoA/ 25% RoE, MUTH generates the best return ratios in our coverage

universe. We have upgraded it to ‘Buy’ with a TP of INR1,300 (3.0x FY22E BVPS).

Expect healthy growth to sustain over the medium term

Over the past two years, the company took steps to address balance sheet

growth.

It opened as many branches in FY19 and FY20 cumulatively as it did in

the prior 5 years combined (~240).

As a result, growth picked-up from a run-

rate of 7-8% YoY earlier to ~20% over FY18-20. While branch expansion would

be muted in the current pandemic situation, the company would open 200-250

branches annually once the situation normalizes. In addition to network

expansion, lower competitive intensity would be a key factor driving

incremental growth. We believe MUTH is well-placed to deliver 14-15% loan

CAGR in the medium term.

Overhauled liability mix over the past five years

There has been a meaningful shift in MUTH’s liability mix over the past five

years.

‘Gold’ bonds, which comprised more than 30% of borrowings in FY15,

are negligible today.

Note that these bonds were issued at an interest rate of

up to 12%. Another key change in the liability mix is the diversification into

offshore borrowings –

in FY20, MUTH raised USD1b from dollar-denominated

bonds in two tranches (fully-hedged cost of ~10%).

These borrowings now

comprise 20% of total borrowings and should be a recurring phenomenon.

Shareholding pattern (%)

As On

Jun-20 Mar-20 Jun-19

Promoter

73.4

73.4

73.5

DII

7.3

7.1

8.4

FII

14.6

14.4

13.9

Others

4.7

5.1

4.3

FII Includes depository receipts

Stock Performance (1-year)

Best-in-class return ratios; Upgrade to Buy

In our view, MUTH has strong moats with reasonably high entry barriers.

Thus,

it has generated superior return ratios consistently over the past decade.

The

threat of competition from banks as well as alternative products (like personal

loans) is modest in today’s scenario. The company has almost nil asset quality,

ALM or leverage risk.

MUTH is likely to deliver average 6.8% RoA and 25% RoE

over the medium term, driven by high margins and negligible credit costs.

This

makes the company’s return ratios the best in our coverage universe. Thus, we

have upgraded the stock to ‘Buy’ with a TP of INR1,300 (3.0x FY22E BVPS).

23 September 2020

31

Gold Finance

Story in charts

Exhibit 53: Branch expansion picked up in the last 2 years

188

New Branch Addition

155

87

30

32

4.9

18

131

-25

FY14

FY15

FY16

FY17

FY18

FY19

FY20

FY15

FY16

FY17

FY18

FY19

FY20

Source: MOFSL, Company

Source: MOFSL, Company

142

149

4.0

4.1

11.0

8.4

9.0

Exhibit 54: 6% tonnage CAGR over the past five years

Gold Stock Holding (In tonnes)

Growth (%)

155

169

176

Exhibit 55: Consistent increase in ticket size

Average ticket size (INR '000)

19

10

6

39.5

41.7

9

42.7

10

43.0

47.0

50.8

53.4

Growth (%)

25

22

Exhibit 56: AUM/branch steadily improving

AUM/ branch (INR m)

Growth (%)

20

14

12

8

57.0

3

55.1

63.7

68.2

78.0

93.3

7

7

39.3

Source: MOFSL, Company

Source: MOFSL, Company

Exhibit 57: Pick-up in AUM growth over FY18-20

AUM (INR b)

22

18

15

13

8

4

244

274

295

349

426

479

551

634

13

15

AUM Growth (%)

Exhibit 58: ~300bp decline in cost of funds in last three years

Yield (%)

18.8

20.1

21.8

21.8

21.0

Cost of funds (%)

22.1

22.0

21.8

21.5

10.8

11.9

11.5

9.2

9.3

8.7

9.6

9.5

9.3

Source: MOFSL, Company

Source: MOFSL, Company

23 September 2020

32

Gold Finance

Exhibit 59: Expect stable margins over FY20-23E; NII/Loan CAGR of 14-15%

NII Growth (%)

32

18

12

7

4

8

6

28

18

Loan Growth (%)

28

22

10

13

16 15

17 15

-5

FY15

FY16

FY17

FY18

FY19

FY20

FY21E

FY22E

FY23E

Source: MOFSL, Company

Exhibit 60: Expect improvement in expense ratio

43.5

36.2

Opex/Avg. Loans

29.9

33.2

30.0

27.8

27.5

27.0

C/I ratio

Exhibit 61: GNPL ratio may fluctuate but credit costs minimal

1.1

GNPL ratio

0.8

0.7

2.7

0.2

0.1

0.4

2.1

0.4

2.0

0.4

1.9

Credit costs

4.8

4.8

4.6

4.8

4.6

4.0

4.1

4.1

2.2

2.8

4.4

2.2

Source: MOFSL, Company

Source: MOFSL, Company

Exhibit 62: 16% PAT CAGR over FY20-23E

PAT (INR b)

46

51

53

Growth (%)

Exhibit 63: RoE healthy at ~25% going forward

RoA (%)

29

25

19

23

RoE (%)

26

25

24

21

11

8.1

11.8

17.8

19.7

30.2

13

34.1

17

40.0

17

47.0

15

3.0

4.1

5.8

5.7

6.8

6.5

6.9

7.1

Source: MOFSL, Company

Source: MOFSL, Company

23 September 2020

33

Gold Finance

Financials and Valuation

INCOME STATEMENT

Y/E MARCH

Interest Income

Interest Expense

Net Interest Income

Change (%)

Other income

Net Income

Change (%)

Operating Expenses

Pre Provision Profits

Change (%)

Provisions

PBT

Tax

Tax Rate (%)

PAT

Change (%)

Proposed Dividend

BALANCE SHEET

Y/E MARCH

Equity Share Capital

Reserves & Surplus

Networth

Borrowings

Change (%)

Other liabilities

Change (%)

Total Liabilities

Loans

Change (%)

Investments

Net Fixed Assets

Other assets

Total Assets

E: MOFSL Estimates

2016

47,995

22,577

25,418

17.9

755

26,173

18.0

11,381

14,792

38.9

1,624

13,168

5,072

38.5

8,096

20.7

2,393

2017

56,369

22,938

33,431

31.5

1,098

34,529

31.9

12,503

22,026

48.9

2,816

19,210

7,411

38.6

11,799

45.7

2,397

2018

62,021

19,314

42,707

27.7

1,310

44,017

27.5

13,174

30,843

40.0

2,397

28,447

10,671

37.5

17,776

50.7

4,010

2019

67,570

22,368

45,202

5.8

1,236

46,438

5.5

15,394

31,044

0.6

275

30,768

11,047

35.9

19,721

10.9

4,812

2020

85,644

27,909

57,735

27.7

1,584

59,319

27.7

17,787

41,531

33.8

957

40,574

10,391

25.6

30,183

53.0

6,016

2021E

99,587

36,227

63,360

9.7

2,178

65,538

10.5

18,240

47,298

13.9

1,584

45,714

11,566

25.3

34,148

13.1

5,805

2022E

1,12,066

38,353

73,713

16.3

2,624

76,337

16.5

20,959

55,378

17.1

1,803

53,575

13,554

25.3

40,020

17.2

6,803

(INR M)

2023E

1,27,394

41,326

86,069

16.8

3,028

89,096

16.7

24,077

65,019

17.4

2,074

62,945

15,925

25.3

47,020

17.5

7,993

(INR M)

2023E

4,010

2,07,968

2,11,978

4,69,533

10.7

26,734

15.0

7,08,245

6,33,870

15.0

19,144

2,965

52,266

7,08,245

2016

3,990

52,202

56,192

1,85,670

-4.5

28,625

27.2

2,70,487

2,45,241

4.2

983

2,274

21,990

2,70,487

2017

3,995

61,170

65,164

2,09,855

13.0

32,112

12.2

3,07,131

2,74,242

11.8

2,091

2,182

28,615

3,07,131

2018

4,000

74,120

78,120

2,11,670

0.9

18,132

-43.5

3,07,923

2,95,068

7.6

3,954

1,922

6,978

3,07,923

2019

4,007

88,151

92,158

2,68,332

26.8

20,198

11.4

3,80,687

3,49,329

18.4

9,826

1,867

19,666

3,80,687

2020

4,010

1,11,708

1,15,718

3,71,300

38.4

17,578

-13.0

5,04,597

4,26,042

22.0

14,383

2,227

61,944

5,04,597

2021E

4,010

1,38,832

1,42,842

3,83,438

3.3

20,215

15.0

5,46,494

4,79,297

12.5

15,822

2,450

48,925

5,46,494

2022E

4,010

1,70,620

1,74,630

4,23,993

10.6

23,247

15.0

6,21,870

5,51,191

15.0

17,404

2,695

50,580

6,21,870

23 September 2020

34