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The Equitymaster Research Digest

Tale of Three Financers, Blockbuster Pharma and More...
Oct 19, 2015

Three stocks from the financial sector have kept us busy over the past month. One is a case of 50% crash, another is at lifetime highs, and the other's in the midst of demerger.

Lending businesses might seem similar in nature, but each is as different from the other as chalk is to cheese.

Since they figured in our earlier recommendations, it is important to explain why stocks of seemingly identical businesses in the same sector have behaved so differently over the past few months.

Muthoot Capital

Let's first look at the stock of Muthoot Capital. The south-based entity dabbled in gold loans, but in 2008, it found its true calling in the two-wheeler financing space. This was when many other players were exiting the space owing to high non-performing assets (NPAs). Over the years, the company expanded its presence across seven states but could achieve the rank of second largest two-wheeler financer in Kerala.

So while the company's moats were its brand recall and strong presence in southern states, we had to bear in mind two primary risks - the first being that the two-wheeler business is extremely susceptible to changes in disposable income. During periods of low income growth, customers prefer to forfeit the vehicle rather than service the loan. Second, Muthoot Capital did not demand post-dated cheques from its customers. It instead allowed them to make multiple cash payments at any of its centres before the due date.

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