Surging gold prices and the rising appetite of consumers to borrow money with family jewels as a collateral, have helped Manappuram General Finance to clock 36 per cent rise in net profit for the fourth quarter ended March, 2011, its highest sequential quarter earnings growth last fiscal, to Rs 101.8 crore, even as revenue growth slipped marginally to 27 per cent over Q3 FY’11.

This helped the country’s second largest gold loan firm, which is backed by equity investor Kedar Mankekar (who is also the son of academician and veteran value investor Shivanand Mankekar) among various institutional investors, to close the year with 136 per cent jump in profit to Rs 282 crore, compared to the previous fiscal ended March, 2010. Annual revenues rose 147 per cent to Rs 1,178 crore.

The company that has also recommended bonus shares in the ratio of 1:1 for its shareholders, will, however, need to ramp up its operations to handle competition from Muthoot Finance which has just gone public and flush with cash, will be even more aggressive to defend its turf.

Manappuram General Finance scrip was trading 3 per cent higher at Rs 135.85 at mid-day trade on Friday, valuing the company at Rs 5,659 crore ($1.28 billion) or 20x its trailing net profit and 7.7x its EBITDA.

This should set the right benchmark for investors who bet on the IPO of the larger peer Muthoot Finance to expect a listing gain.

"Muthoot is a much bigger player. Its total income for the first eight months of the year ended November, 2010, stood at Rs 1,301 crore with net profit of Rs 291.5 crore. And its full-year earnings may easily be over Rs 400 crore. At the upper end of the IPO price band of Rs 175 per share, Muthoot will be able to generate a valuation of around Rs 6,500 crore or $1.47 billion, giving it a valuation multiple of just around 16x net profit or even lower, thus making it cheaper stock than Manappuram."

Although Manappuram and Muthoot heavily depend on southern Indian for their gold-backed lending business, they are also trying to make themselves more pan-national in operations. How they win other markets may well decide who is able to maintain its growth momentum, at least in the short-to-medium term.

But investors in both the firms also need to factor in an inherent risk profile of the two companies. Rising gold prices allow them to lend more to consumers but in case there is a sudden decline in gold prices, the value of the collateral may drop suddenly, threatening many loans to turn bad. Also, these two firms are more ‘gold geared’, compared to other financial institutions like Shriram City Union Finance who also lend against gold deposits but derive a large part of the business through the traditional lending means.

Although their business model makes them more flexible in lending to a vast number of those who need immediate cash against minimal paperwork, compared to banks and other lenders such as consumer finance firms, they can face challenges in growth in the long term when formal banking services expand. But for now, the gold party continues.

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