Why Gold Finance Company Stocks Are In A Sweet Spot?

Gold Finance company stocks have been on a roll ever since the outbreak of Covid. Stocks like Muthoot Finance have rallied almost 200 per cent and has now crossed the Rs 1,000 levels.

Mannapuram Finance too has almost doubled from its March levels.

Advantage of gold loan companies against banks

While banks too lend against gold at attractive interest rates, gold loan companies tend to have an advantage.

"Specialized gold loan NBFCs have inherent advantages over NBFCs operating in other product segments. These include (a) less competition from banks given the niche expertise required, (b) low asset quality risk due to the 75 per cent loan to value cap and highly liquid collateral, (c) strong ALM position with short loan tenures, and (d) low balance sheet leverage," Motilal Oswal has said in its latest research report.

According to the broking firms report Gold loan financiers have created a strong proposition v/s banks with quicker turnaround time, niche customer base, easy accessibility of a large branch network focused only on gold loans and flexible repayment schedules.

"Despite the higher interest rate charged, gold financiers managed to gain 300 basis points plus market share over the last five years in the organized segment due to these advantages.

We believe gold financiers are currently in a sweet spot. This is because customers whose cash flows were disrupted during the pandemic are looking to leverage their gold holdings. With more than 80 per cent of the business coming from repeat customers and LTV declining below 55 per cent, there is significant headroom for growth. We do not see any major impact of the Reserve Bank of India's allowance of higher loan to value cap of 90 per cent to banks on growth of gold financing NBFCs," Motilal Oswal has said in its report.

The firm has upgraded the stock of Muthoot Finance Ltd to a 'Buy' with a target price of Rs 1,300 (3.0x FY22E book value per share).

"Our target multiple is predicated on its consistent profitability (lowest return on equity of 15 per cent over the past decade) and sectoral tailwinds. We are also initiating coverage on MGFL with a 'Buy' rating and target price Rs 185 (1.8x FY22 estimated book value per share ). Our lower multiple for MGFL is based on lower Return On Assets as well as higher share of its business coming from non-gold lending, which was affected by the pandemic," the brokerage firm has stated.