Four Stocks to Buy, & Hold for (At Least) Five Years

Just four stocks to buy every month for the next 12 months and to hold for at least 48 months there after.

Tata Motors
Tata Steel
HUL
GAIL

Manappuram, Muthoot Stocks - to Buy or Not to Buy

Reserve Bank of India circular dated March 21 required non banking financial companies to cap loan amounts at 60% of the value of gold pledged. Traders responded by selling off both companies.

Manappuram Finance dropped to Rs.38. Muthoot Finance dropped to a new low of 130.30 on the day the news of RBI diktat reached the markets. However, both stocks bounced back on the very next day.

Does investing in these two companies guarantee returns in the future? Will these two companies strive in the future? Can these companies sustain the monstrous growth they have been exhibiting in the past many years? All these questions are well worth the considering. I don't have the answers, really!

Gold Loan Business in India

Rural and urban Indians would pawn their gold jewellery to meet financial emergencies. Almost every Indian bank has counters for gold loans. State Bank of India and its subsidiaries now offer gold loans at interest rates as low as 4% per annum.

There are also thousands of tiny finance companies (micro lenders) offering loan against gold. The interest rates are 12%, 14% or more, depending on where you are doing business.

Muthoot Finance is the first major brand to offer gold loan through a network of offices set up across Kerala and in almost all parts of India. Manappuram also followed suit and they too witnessed some major growth in their gold loan business.

Gold as Security

People can take loan against jewellery only. Coins or bars are not accepted. Traditionally, women would buy gold ornaments, not only as ornaments, but also as an investment. They have few investment options.

Needless to say, these ornaments have more than monetary value for the women who own them. In many cases, the gold ornaments are handed over to daughter from mother. The gold jewellery has deep sentimental value too.

People pledging the gold would try their level best to close the loans and to take the jewellery back. This is why gold loan is very profitable for banks, non-banking finance companies like Muthoot Finance, Manappuram Finance, and for thousands of petty lenders spread across the country.

RBI Diktat

Gold loan companies compete against each other to lend money against security of gold. In some cases, they lend more than the value of gold. I have seen advertisements telling you could get 125% the value of gold as loan. In most cases, you can get 80% to 85% of value as loan. This is where RBI stepped in.

Indian banking is fairly conservative. Being conservative was one reason why Indian banks survived the past decade, which saw hundreds of American banks shutting down.

On the face value, it looks like RBI diktat would cripple the growth of gold loan in the non-banking sector. On closer look, you can see it is about doing business the conservative way. You don't blow the value of gold out of proportions.

There will always be borrowers who can't repay what they have borrowed. While the value of gold could offset any loss, it is prudent to lend only 60% of the value of the gold.

Currently, a borrower can get a loan of more than Rs.12,000 when you pledge 8 grams (one sovereign) of gold. Earlier, they could get more than Rs.17,000. The gold jewellery costs Rs.20,000 for eight grams.

Back to Muthoot and Manappuram

Both the companies were growing at 50%. According to news sources, Muthoot has loans worth Rs.24,000 crore against jewellery worth Rs.40,000 crore. Manappuram has loans of Rs.11,000 crore. On average, both the companies are lending just more than 60% of the value of the gold.

Is it Wise to Buy Muthoot and Manappuram Shares Now?

One point. It is not wise to sell them now. These companies can stay in the business despite the diktats. Both the companies get hundreds of new customers every day from almost all parts of India.

In addition, they are forced to be conservative and to be safe against volatilities of any kind. Now we have two non-banking companies acting almost like a bank.

In addition, these companies have non-lending money business too - money transfer from foreign countries. Money transfer in association with Western Union Money Transfer is a major business, especially in Kerala, from where the youth are packed to the gulf countries, Europe and to around the world for employment.

Is it good to hold to these companies? (NO GUARANTEES): It is good to buy and hold on to these companies. Both of them have big, growing networks, reaching out mainly to the rural people, who don't get enough banking services.

If there are bad signs, we can see them in advance. As of now, the RBI directions only secure them against volatilities that have sank many a banks on the other side of the world.