Gold Prices Impact On Gold Loans: Which Dividend Paying NBFC Stocks To Buy, Muthoot Or Manappuram?

Despite recent hiccups in gold prices after the bullion hit new record high levels last week, both 24-carat and 22-carat yellow metal have rallied by more than 12.5% each year-to-date. As per ICICI Securities' latest note, there have been an 8-10% increase on average in daily gold prices

in Q2FY24TD. From higher gold prices, gold loan NBFCs are in a sweeter spot.

According to the brokerage, stable yields and AUM growth have incrementally put the gold loan business on a much better footing. This will potentially further receive support from higher gold prices and some concerns in the unsecured loan segment. Non-gold businesses have also performed well for Gold NBFCs led by MFI which essentially opens up structural growth opportunities beyond gold for these players.

In the gold loan market, Muthoot Finance is the leader followed by Manappuram Finance.

ICICI Securities note highlighted that given the recent surge in gold prices (~8-10% increase on average of daily gold prices in Q2FY24TD), they have analysed the correlation of gold price movement with Muthoot and Manappuram's gold AUM over the years.

The brokerage's analysis revealed that:

Both Muthoot (0.98) and Manappuram's (0.95) AUMs have a strong correlation with gold prices.

- Muthoot had a higher correlation till FY16 whereas Manappuram's correlation was better from FY17 to FY21.

- Correlation in the recent past has slipped a bit. This could be attributed to stiff competition in the gold loan segment and diversification efforts by these companies away from gold.

Hence, the recent ascent in gold prices bodes well for Muthoot/Manappuram's AUM. The brokerage highlighted that both enjoy a strong correlation between gold loan price and AUM; which should help both to attain higher AUM growth in H1CY24. Gold loan demand may also find further support amid some pressure observed in unsecured lending.

Further, the brokerage's note said, "n H2FY23/FY24, yields have demonstrated significant stability - thus far - as opposed to a decline in noted in FY22/H1FY23. Commentary at large remains strong too. Muthoot/Manappuram/IIFL Finance sported average gold loan yields of 18.1%/21.4%/~18.5% in H1FY24."

On the financial outlook, the brokerage's note said, "PAT growth for subsidiary (Consolidated-Standalone) businesses has been 8.7x/3.9x YoY for Manappuram and 1.5x/2x YoY for Muthoot in FY23/H1FY24. Non-gold AUM growth was 56%/29% YoY in FY23 and 16%/27% in H1FY24
(from Apr 23) for Manappuram/Muthoot. We raise our MFI valuation multiple for both companies to 1.2x FY25E P/B, from 1x."

So which stocks to buy, Muthoot or Manappuram?

ICICI Securities has recommended ADD (downgrade from Buy) for Muthoot with a revised target price of Rs 1,605, valuing the stock at 2.1x FY25E P/B. The downgrade is basis valuations post ~48% rally in stock price in FY24TD and limited improvement outlook on gold loan NIMs.

On the contrary, the brokerage recommended BUY (unchanged) for Manappuram with a revised target price of Rs 190, valuing at 1.2x FY25E P/B. The relatively positive outlook on Manappuram is the basis of valuations.

On BSE, Muthoot shares ended at Rs 1446.40 apiece, up by 0.44% with an m-cap of Rs 58,066.89 crore. While Manappuram shares neared its 52-week high to end at Rs 166.10 apiece up by 1.4%.

YTD, Muthoot shares gained by 33%, while Manappuram shares zoomed by 39%. Both gold loan NBFCs are dividend-paying stocks as well.

In FY23, Muthoot paid about 220% dividend amounting to Rs 22 per share, while Manappuram paid a 150% dividend of about Rs 3 per share. Currently, Muthoot has a dividend yield of 1.52% and Manappuram at 1.81%.