Gold lending cycle to cancel Muthoot and Manappuram: BofA sec

gold

(Representative image)


Essentials

  • The gold lending sector will continue its strong growth
  • Growth is driven by rising penetration and cyclical upswing in credit demand as the economy recovers
  • Gold NBFCs are well positioned to take advantage of low balance sheet gearing and impeccable asset quality

BofA securities initiate coverage from leading gold finance players, Manappuram Finance and Muthoot Finance. It is initiating coverage on Manappuram Finance with a ‘buy’ recommendation and a target price of Rs 225.

It believes the gold lending sector will continue its strong growth trajectory. One of the key drivers for the sector is rising penetration levels coupled with a cyclical rise in credit demand as the economy recovers.

One has to look beyond the short-term stress in the company’s MFI portfolio, which contributes about 22% of the share. BOFA sec sees Manappuram Finance as a well-positioned company to deliver 20% EPS growth and 24% ROE in FY24E.

It believes that the potential listing of its MFI subsidiary, the 4th largest NBFC in the MFI space, could be a future catalyst. It believes that the existing valuation significantly undervalues ​​the gold financing activities and that the valuations could be revised as a result of the improvement in the cost of credit at MFIs.

Expect gold lending to resume its steady growth of 12-15% per annum from Q2FY22E as branches reopen after Covid. A renewed focus on adding customers, LTV at 63% and room for continued ticket upswing provides a positive surprise in AUM growth.

In addition, BofA is launching sec coverage on Muthoot Finance with a ‘BUY’ recommendation and a target price of Rs 1890. It believes the company is best placed to take advantage of strong gold bond demand.

It forecasts a 21% EPS CAGR and 27% ROE through FY24E. It believes the valuation will be reassessed as the dividend payout may be increased and the loan portfolio scaled up.

Gold NBFCs are well positioned to take advantage of the low balance sheet gearing and pristine asset quality. Looking at current market dynamics, he believes that gold loans are a relatively cheaper source of funding compared to bankrupt borrowers.

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