Manappuram Finance

The gold finance business is highly operationally intensive. While entering the market is relatively easy due to the lack of significant barriers, maintaining and expanding the business on a large scale, as companies like Manappuram and Muthoot have done, is challenging. Bajaj Finance and many others attempted to venture into this sector but failed to keep focus
Similarly, many banks and non-banking financial companies (NBFCs) have tried their hand at gold finance, but often lose interest as it’s a single run business and most banks are intersted in 4s and sixes

The gold finance business is not easy to sustain.

Many triggers will help them
-benefit from an increase in gold prices, which boosts AUM
This advantage, combined with average growth potential, makes companies grow around 20% over long term

non-performing assets (NPAs) are not a major concern in the gold finance industry.
Before the COVID-19 pandemic, there was little competition in this space, but post-COVID, competition surged, which ironically increased the popularity of gold loans.

Despite the influx of competitors, demand remains high. It is estimated that two-thirds of the gold loan market is still in the unorganized sector. There is a gradual shift from unorganized to organized sectors, which is expected to drive further demand and growth.

Several factors act as triggers for the gold finance business: rising gold prices, the migration from unorganized to organized sectors, the perpetual need for loans, increased demand due to inflation, and the advantages NBFCs have over banks in terms of faster processing, better customer care, and longer working hours.

The gold finance industry is here to stay for the long term. Although competition may fluctuate, it is difficult for new entrants to sustain their operations over extended periods.

Only companies with a primary focus on gold loans will likely endure, while those whose main business lies outside of gold finance may struggle to maintain a foothold in this demanding industry.

In summary, while there are no significant barriers to entry, sustaining and growing a gold finance business is fraught with challenges. Over time, I strongly believe that Manappuram will see a significant re-rating from its current price, and this potential will become more apparent in hindsight.