Higher gold prices keep the shine intact for major gold financiers

The average gold price in the September 2019 quarter, so far, is now up 11.5% from the June quarter

The stocks of two major gold financiers, Muthoot Finance and Manappuram Finance, shed 2-3 per cent in the last five trading sessions, underperforming the Nifty Financial Services. The latter gained about 1 per cent during the same period. Temporary disruptions with an indefinite strike called by a trade union outfit in Kerala is impacting investors’ sentiment, mainly for Muthoot. The latter decided to shut down the affected branches in Kerala.

However, there is little to worry even if the Kerala business of these two companies gets impacted given the small share of the state in assets under management (AUM, indicates loan book size), say analysts. According to the June 2019 quarter data, Kerala accounts for 5-6 per cent of their respective AUM.

In fact, the recent upward trend in gold prices bodes well for these companies. According to G Chokkalingam, founder of Equinomics Research & Advisory: “Higher gold prices directly increase the loan book value as the companies can now give more amount as loans to borrowers (higher loan to value ratio), even though growth in the number of loan accounts lags.”

The average gold price in the September 2019 quarter, so far, is now up 11.5 per cent from the June quarter and 20 per cent higher than the September 2018 quarter. While Manappuram has about a 66 per cent share of gold loans in total AUM as of June 2019, it is over 98 per cent in case of Muthoot. This indicates the potential upsides in the balance sheet size of gold financiers.

For instance, analysts at Kotak Institutional Equities forecast 18 per cent growth in Muthoot’s AUM during the current financial year due to the rally in gold prices and expansion efforts. The expected AUM growth is also better than 16 per cent growth clocked in the June quarter.

However, in the case of Manappuram, non-gold business drove overall loan book growth in Q1, making analysts sceptical. “While we appreciate the fact that Manappuram has a strong balance sheet and is unscathed by the liquidity crisis, we remain watchful of its non-gold portfolio, especially due to a tough macro environment,” analysts at Antique Stock Broking said in a note post Q1 results.

This is because microfinance, which is typically unsecured and vehicle funding, which is currently under massive stress, drove Manappuram’s non-gold portfolio. These two segments have 27 per cent share in Manappuram’s overall AUM as of June 2019. Besides, loan book, higher gold prices improves the valuation of pledged gold.

However, given the shorter asset tenure of up to one year, pricing power, and expected lower cost of bank financing the gold financiers are a preferred bet in the non-banking finance space.

Muthoot is analysts’ top bet in gold finance pack.