The surge in gold prices in India has reached unprecedented levels, which is anticipated to provide further momentum for gold non-banking financial companies (NBFCs) like Muthoot Finance and Manappuram Finance, as per foreign brokerage firm Jefferies.
Jefferies has recently initiated coverage on Muthoot Finance and Manappuram Finance with a ‘Buy’ rating, setting Muthoot Finance’s share price target at ₹2,220 per share and Manappuram Finance’s share price target at ₹270 per share. These targets suggest a potential upside of up to 20%.
Jefferies points out that gold NBFCs offer a leverage advantage with higher gold prices and are likely to benefit from stabilizing competition and diversification. This is expected to drive stronger loan growth compared to the last three years.
The growth of loans in gold NBFCs is projected to improve due to factors such as rising gold prices, competition stabilization from banks, a temporary ban on IIFL Finance’s gold loan business, and diversification into non-gold segments.
Jefferies estimates that loans at Muthoot Finance (standalone) and Manappuram Finance (consolidated) could grow at a compound annual growth rate (CAGR) of 17-18% over the period from FY24 to FY27.
Furthermore, gold prices have surged by 15% this year, and factors like ongoing central bank purchases, US fiscal concerns, and geopolitical uncertainties are expected to maintain the upward momentum in gold prices. Despite challenges like delayed real rate tailwinds, a potential increase in demand from ETFs in western countries could drive additional gains.
Given that the Loan-to-Value ratios in gold loan LTVs are at 54%-59% at spot prices for Manappuram Finance and Muthoot Finance, Jefferies sees room for growth even if prices remain stable.
In addition, the risk to asset quality in gold is minimal, and the Return on Equity (RoE) in gold financing is superior to that of most NBFCs. Despite a 22-23% increase in share prices, the Price-to-Book (P/B) valuations are currently below the five-year average P/B, as highlighted by Jefferies.
Jefferies also anticipates an enhancement in the earnings growth of gold financiers.
Muthoot Finance Preferred Pick
When comparing Muthoot Finance and Manappuram Finance, Jefferies favors Muthoot Finance due to its stronger leverage to gold prices.
Muthoot Finance, being the largest gold NBFC with assets worth ₹758 billion under management, possesses a robust franchise and healthy operational metrics. With 82% of consolidated AUM attributed to gold loans, it is well-positioned to benefit from the improving fundamentals of gold financing, as Jefferies notes a projected 17% loan CAGR driving a 19% EPS CAGR and over 19% ROE from FY24 to FY27.
On the other hand, Manappuram Finance’s diversification strategy provides growth drivers beyond gold prices, but its exposure to gold prices is lower compared to Muthoot. Jefferies anticipates a 16% growth in gold loans for FY25, resulting in an 18% CAGR in consolidated loans and a 17% EPS CAGR over FY24–27.
Disclaimer: The views and recommendations mentioned are sourced from individual analysts or brokerage firms, and not representative of Mint. Investors are advised to consult with certified experts before making investment decisions.
**Increased Gold Prices Benefiting NBFCs**
The surge in gold prices in India has significantly benefited gold non-banking financial companies (NBFCs) like Muthoot Finance and Manappuram Finance, leading to a positive outlook from foreign brokerage firm Jefferies.
**Key Factors Driving Loan Growth**
Factors such as rising gold prices, competition stabilization, diversification, and temporary bans on certain gold loan businesses are driving the growth of loans in gold NBFCs. This trend is expected to continue over the coming years.
**Market Outlook for Gold Prices**
The ongoing rally in gold prices, coupled with central bank purchases and geopolitical uncertainties, is likely to sustain the upward trajectory of gold prices. Additionally, a potential rebound in ETF demand from western countries could further bolster prices.
**Favorable Position of Muthoot Finance**
Jefferies favors Muthoot Finance over Manappuram Finance due to its stronger leverage to gold prices and robust operational performance. With a substantial portion of its assets dedicated to gold loans, Muthoot Finance is well-positioned to benefit from the current market dynamics.
**Diversification Strategy of Manappuram Finance**
While Manappuram Finance has a more diversified business model, its exposure to gold prices is relatively lower compared to Muthoot Finance. The company’s focus on diversification beyond gold loans provides additional growth opportunities.
**Investment Advisory**
Investors are advised to consider the insights provided by individual analysts or brokerage firms and consult with financial experts before making any investment decisions.
