In July, Investec Securities had downgraded its ratings on Muthoot and
to hold from buy, viewing them as value traps in the context of weak volume growth and increased competition, despite valuations being at near five-year lows. Muthoot shares rose 1% to close at ₹1,039 and Manappuram shares gained 2.3% to end at ₹101.45 on Tuesday.
Why are RoEs of gold finance companies under pressure?
RoEs of
and Manappuram are under pressure on account of diversification into other lending segments, said ICICI Securities. The increasing spread between assets under management and profit contribution from subsidiaries will likely further dilute the overall RoEs as seen in the case of Manappuram (more impacted than Muthoot), it said.
Why is RoE relevant?
RoE is a key indicator of how efficiently a company is using shareholders’ equity. When the RoE is higher, it means the company is allocating its capital wisely and vice versa.
Why did gold loan firms diversify into less profitable businesses?
ICICI Securities said Muthoot and Manappuram started diversifying into other lending segments from FY14-FY15 due to regulatory intervention in the gold finance business and to effectively deploy excess capital. “Despite show of promise in FY19-FY20, especially in the MFI business, the subsidiaries have not been able to show a right balance between growth, opex and credit cost since Covid,” the brokerage’s analysts Ansuman Deb, Kunal Shah and Vishal Singh said in the note. “This has led to subdued return ratios, which are less than the cost of funds as also evidenced in the difference between consolidated and standalone RoEs.”
What are the RoEs of Muthoot and Manappuram?
The consolidated RoE of Muthoot was 23.1% and its standalone RoE was 16.9%, said ICICI Securities. In the case of Manappuram, the consolidated RoE was 23.6% and the standalone RoE was 17.6%, it said.
