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Author: Don Obrien

Gold finance stocks could be a less risky way to play formalisation theme


MUMBAI: Shares of gold finance companies like and have largely underperformed the broader market in 2021 because of weak gold price and rich valuations. So far in 2021, Muthoot Finance and Manappuram Finance are up 25 per cent and 8 per cent, respectively, against Nifty500’s over 30 per cent gains.

The space has lost much of the momentum it had gathered in 2020 when business was booming owing to Indians resorting to pawning their gold jewellery to tide through the economic distress caused by the national lockdown to contain the spread of the Covid-19 pandemic.

Analysts believe with industry-beating return on assets and return on equity on offer, shares of gold finance companies can perhaps be long-term bets for investors looking to get a bite of the increasing formalisation of the gold-lending business in India.



Traditionally, gold loan companies do not suffer through volatility in asset quality like banks and other non-bank lenders, thanks to the sentimental value attached to the collateral of Indian households.

Organised gold loans market is merely 35 per cent of the total gold loan market in India. While banks control 75 per cent of the formal gold loan market, Muthoot Finance is the single-largest company followed by Manappuram Finance.

“While competition has intensified in the past year, we believe there is room for Muthoot Finance and Manappuram Finance to grow at 10-12% CAGR in the next five years, regardless of gold prices,” brokerage firm CLSA Global Markets said in a note last week.

CLSA initiated coverage on both Muthoot Finance and Manappuram Finance with ‘buy’ ratings and projected 24 per cent and 33 per cent upside, respectively, over the next 12 months. “Such high profitability with low balance sheet risk justifies a high PB multiple,” CLSA said.

Manappuram Finance, unlike Muthoot Finance, has underperformed the market by a wide margin thanks to concerns surrounding the company’s micro-lending business. Micro-lenders have been the worst affected players in the financing industry due to the impact of the Covid-19 pandemic on collections and asset quality.

Brokerage firm Equirus Securities says Manappuram Finance’s pristine asset quality in the core gold finance business makes it a rerating candidate as it stands to benefit from the increased formalisation of the gold lending business in India.

Gold finance companies because of negligible costs and high asset quality have regularly managed to provide industry-beating return on equity of 25 per cent coupled with return on asset of 6-7 per cent. “While we expect medium-term ROE compression, the ROE should still be higher versus other NBFCs. The business has low risk related to asset quality, asset liability mismatch, interest rates and leverage,” CLSA said.



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