Indian gold loan company raises $225 million from QIP

Indian lender Manappuram General Finance & Leasing has raised Rs10 billion ($225 million) from a qualified institutional placement to improve its tier-1 capital. The deal, which was launched late Tuesday and completed before the Indian market opened yesterday, came after the benchmark Sensex index closed above 21,000 points for the first time last Friday. Manappuram is expected to be the first in a new wave of QIPs as companies are seeing their market prices rise above the regulatory floor prices. This will allow issuers to sell new shares at more attractive discounts.

Manappuram offered its shares at a discount between 0.4% and 3.4% versus Tuesday’s close of Rs168.65 on the Bombay Stock Exchange, and at a slightly narrower discount versus the Rs168.20 close on the National Stock Exchange of India. This may not sound much, but at the wide end it was significantly greater than the usual QIP discount. And the company could have gone even wider, had it felt the need, as the floor price was only Rs158.70.

However, the decision to cap the discount proved the right one as virtually all the orders came in at strike, according to sources. The deal was also almost two times covered, which meant the issuer was able to both price at the top and use the upsize option in full to increase the size from an initial Rs6.75 billion ($152 million).

The interest in Manappuram is not surprising given that its business plan is linked both to the rising price of gold and India’s consumer spending story. The company makes small-scale loans that are exclusively secured against gold jewellery. The typical borrower is a husband who is putting up his wife’s jewellery as security to get cash and the loans are most often repaid within three months as the wife needs to wear the pieces again. This pressure within the family to get the jewellery back makes Manappuram’s default risk quite low. Indeed, with an average loan size of $600, the borrowers essentially use their gold jewellery as a credit card.

To reduce the risks even further, the company lends only 60% of the gold value, which is determined by weight. Even if the gold price would reverse course and turn lower again, it is unlikely to fall more than 40% in the three months that the average loan is outstanding.

Interest rates charged by these types of gold loan companies are typically between 22% and 25%, which puts them in between banks, which charge 14% to 16%, and local money lenders, which are charging 30% to 40%. According to sources familiar with the industry, the total value of gold jewellery in India is estimated at about $800 billion and at present only $33 billion of that is collateralised through the lending market, suggesting significant growth potential. However, one has to assume that these types of money lenders cater primarily to the low end of the consumer market.

Manappuram is the second largest gold loan company in India and is said to deal with some 25,000 clients a day.

The shares on offer accounted for 16% of the existing share capital, or about 19 days worth of trading. The company sold approximately 59.5 million new shares at a price of Rs168 apiece with the help of Bank of America Merrill Lynch, CLSA, Enam and UBS. The shares were initially offered in a range between Rs163 and Rs168.

The deal attracted a solid mix of long-only and hedge funds with most of the demand coming from international investors. Being a QIP, the number of accounts had to be kept below 49.

The market responded well to the sale with the stock gaining 3.4% to Rs171.55 on the NSE yesterday. This left the share price within Rs2 of the all-time high close of Rs173.40 that it reached on Monday this week.