How many lenders make 20% ROE on 3x leverage? Dividend payout for both Muthoot and Manappuram has been 25-30% for last decade. These companies are cash machines tbh. True that there is cyclicality in gold prices but –
- GL tenures are very short for gold prices to meaningfully affect the asset quality.
- LTV is 60-70% of total collateral. If gold prices fall by 30-40%, company may lose principal but what are the base rates?
On why not Muthoot over Manappuram? A 20% ROE business bought at 4x book earns 5% yield. Similar business bought at 2x book will earn 10% yield. While Muthoot historically has superior network, better profitability, at the end of the day it is cyclical business susceptible to competition and regulatory risk. Both are great brands but at 3x book, its not as attractive. I would prefer to buy at book value or below.
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