Expect gold lenders like Muthoot Finance and Manapparum Finance to grow 25 per cent in FY13 in spite of strict norms

The market might have over reacted to the Reserve Bank of India's decision to tighten norms for gold-based lending NBFCs. Stocks of Muthoot Finance and Manapparum Finance have fallen 19% and 33% since last Wednesday. Though these norms will lower the phenomenal growth these lenders have witnessed in the past quarters, given the strength of their over all business, gold lenders can still be expected to growth at 25% through 2012-13.

On March 21, 2012, RBI decided to cap the LTV or loan-to-value ratio at 60% for loans against gold jewellery for NBFCs and barred them from giving loans against gold bars and coins.

Market leader Muthoot Finance currently has an LTV of 63-64%. Its management is not comfortable with the 60% mandated ratio and plans to approach the central bank regarding the same as this is likely to bring down its growth rate to about 25% by 2012-13. This is significantly lower that its AUM (assets under management) growth of 110% in 2010-11 and 55% expected by the end of this fiscal. Its net interest margin, which stands at 9.5% as on December 2011, is also likely to decline by about 100 basis points over the year.

Manapparum Finance, on the other hand, has an LTV of 66%. Its net interest margin is expected to decline about 200 basis points.

In terms of capital to risk ratio, both lenders are comfortably placed. Muthoot has a capital adequacy ratio of 13%, whereas Manapparum's stands at 18%, both higher than the 12% prescribed by RBI by 2014. The impact of the restriction on loans against bullion is negligible in case of Manapparum Finance and Muthoot does not take loans against gold coins and bars in any case.

The sharp fall has made valuations of these stocks attractive. At 132, Muthoot trades at a price to book value (P/B) of 1.42 times and at a price to earnings (P/E) multiple of seven times. Manappuram Finance, at 30, trades at a P/B of 1.24 times and a P/E of 5 times. This is in comparison to a PB multiple of 2.4 and a PE multiple of 15.6 for the ET NBFC Index and a PB multiple of 3.38 and a PE multiple of 17.44 for the Sensex.