If you want the definition of a multi-bagger or want to know what a multi-bagger is you just have to look at the current price of Wockhardt. Notwithstanding all the issues it is facing, market apparently believes that the worst is behind it and that it won’t be long before it regains its former glory (at one time, it was touted as the next Ranbaxy or Dr. Reddys and was in the same league before the FCCB issue and ensuing instigation threw the story out of gear). It had gone as low as 75 slightly more than a year or so back and even at the beginning of this year was around 300. Since then irrespective of the direction of the market, its price has been moving in only 1 direction – UP and has nearly doubled.
The above goes to show that it sometimes pays to go contrarian (though not blindly).
In the current scenario, there are a couple of examples which come to mind. Look at all the gold lending companies stocks. They have gone down anywhere between 25-50% in less than a week. Agreed that RBI’s new guidelines on having a reasonable LTV (loan-to value) ratio of 60% will affect them, but the question is how badly? To understand this, look at what the LTV ratio implies. LTV ratio is nothing but the ratio of the amount of loan u can expect to get for a given value. In the current case, it is the value of gold. This also applies to housing loans wherein the lenders give u 75% of the value of the house; thus the LTV in this case is .75 or 75%? Currently gold loan companies are said to be lending as much as 75% of the gold value. In other words if u got Rs. 21000 for 10 gm of gold @28000 earlier, u would now get about 17000 only @60%.
So how does it affect the gold lenders?
Higher the loan as a ratio of the gold pledged, more the interest rate they can charge. Gold loan companies charge anywhere between 18-24% as interest depending on the LTV ratio. So the RBI move could have an impact on the margins of gold finance companies. In addition, these companies will now have to maintain a minimum equity capital of 12% as a proportion of their loan book, if half of their assets are in gold. This rule though is not seen to be as damaging as the one capping LTV, as leading companies like Muthoot and Manappuram are adequately capitalized for now. But with the RBI tightening some of the rules, the days of very high margins may well be past for gold loan companies. But that doesn’t necessarily mean that the margins will be low. A good analogy regarding margins may be what IT went thru in late 90s and early 2000s. From consistently 40+ % margins, at least the biggies have now moderated to mid-20s. However the question to ask is which other industry gives you operating margins in 20s? So from 50+ P/E they have come down to 20s, but still are at a premium to the market.
Gold loan business was a hit with these specialized south-based (especially Kerala, with the gold and money both coming from rich sources of both – the Gulf) firms. The reason was simple. It is usually the low income group which form bulk of the clientele of gold loan firms. These people do not have easy access to bank loans and hence are forced to borrow at the high rates being charged by gold financiers. Also, it must be remembered that it is the family jewelry which is given as collateral in most cases. And this is a very emotional issue for the borrower, especially in the rural areas where the social standing is directly at stake. The person would do all that can be done to ensure that the family gold is not lost, whatever be the cost.
Having said this, it would really surprise me if these companies got hit badly. Definitely there would be an impact on margins but it is not as if the sky will fall and all the loan borrowers would default or would stop taking loans. In a country like India, one of the largest consumers of gold, I certainly don’t see this happening. This knee jerk reaction is overdone. However, nothing would happen soon. With bad news flow not abating in a hurry, these companies would continue to drift in the current range for some time before saner minds would realize that it is not so bad after all. If u need further proof of this theory, just look at home loan lenders. Since 2008 when the real estate market turned belly-up, how many lenders have closed shop or got hit in the margins? When the conventional mid-prized segment dried up, they invented the so-called affordable housing (never mind what the affordable means in Mumbai) and still made money. When nobody was borrowing in the retail segment in 2008-09, did these (real estate as well as gold loan) companies shut shop? What is being said today could also have been asked then. It is truly said that need is the mother of invention. So you can be sure that these companies will bring innovations in their business models with new schemes and other tricks. Besides these companies have not been in the business over the last few years but a few decades and it would be fair to say that the promoters would have built adequate moats around them to survive such taxing times.
The other aspect that I would consider is the reach of these companies. Hitherto, it has primarily been rural and southern parts of India, with recent efforts at urban forays and northwards. So the urban segment is largely untapped by these companies and offers a much better risk reward ratio. They have slowly started to move into these areas and the benefits of these moves are yet to be seen but will likely play out in the coming period.
Another fallout as acknowledged by the promoters of these companies is that these regulations would only serve to strengthen the risk management processes and the regulatory framework which hitherto didn’t exist or was not looked at seriously. The guidelines will also significantly enhance the gold loan companies’ ability to absorb the impact of any sharp decline in gold prices, thereby improving the sector’s asset quality in the long term. Further, slower growth rates will reduce capital requirements over the medium term. They will not be able to grow at super high margins as they did earlier but would still be comfortable going ahead with new ideas in place.
So considering the current scenario it might be a good bet to get into Muthoot and/or Mannapuram and wait it out. I don’t believe that they can go much lower than what they already are and the risk reward ratio does appear promising at this point.
No comments:
Post a Comment