The rising gold prices have been positive for gold loan growth, domestic brokerage house Motilal Oswal said in a recent report. The yellow metal recently hit its all-time high of ₹56,245 per 10 grams on the MCX. In international markets as well, gold has crossed the important psychological mark of $1,900 per ounce. The surge in gold prices has been aided by the wedding season demand, the slowdown in the pace of rate hikes, recession fears, and buying by central banks
According to the brokerage, the higher gold prices over the last three months have led to a higher off-take of gold loans. The bigger beneficiaries have been banks and gold loan fintechs, which offer relatively lower-priced gold loans, it noted.
MOSL believes that the strength in gold prices will sustain in CY23 because of the expected deterioration in the broader macroeconomic indicators both in India as well as globally.
The brokerage further pointed out that there have not been any significant changes in gold loan rates and schemes between the last quarter and now. "What we found positive is that gold loan NBFCs are unlikely to offer any teaser-rate schemes to accelerate loan growth since they are all now prioritizing profitability over growth," it said.
Also, given that gold loan growth is not easy in such a competitive landscape, NBFCs have prioritized asset quality through schemes to keep NPAs in check and minimize auctions, it added.
Amid the rise in gold prices, the brokerage retained its Neutral rating on Muthoot Finance with a target price of ₹1,150, indicating an upside of just 9 percent. Meanwhile, for Manappuram, the brokerage has a Buy rating with a target price of ₹150, implying an upside of 27 percent. Both Muthoot and Manappuram have shed 30 percent each in the last 1 year.
The brokerage noted that both Muthoot and MGFL have not reported any significant increase in borrowing costs until September 2022 aided by the maturity of higher-cost borrowings.
"While some of that advantage could sustain over the next two quarters, we expect the increase in borrowing costs to become more pronounced in FY24. This would also curb any notable improvement in margins given limited ability to affect pricing increases," it noted.
Muthoot
The brokerage continues to believe that Muthoot is the best franchise among gold-loan NBFCs in the country in terms of distribution strength, brand recall and the ability to inspire customer confidence. However, it is facing stiff competition from banks as well as select NBFCs who have recently become aggressive in the sector, it added.
Given the strong correlation between gold prices and gold loan growth, it expects Muthoot's gold loan growth to benefit from higher gold prices. “Spreads/margins, in our view, have little scope for further organic improvement because of the reasons we attributed earlier,” said MOSL.
It sees Muthoot delivering standalone assets under management (AUM) growth of 9 percent and 10 percent in FY24 and FY25, respectively, with an RoA and RoE of 4.9 percent and 17 percent in FY24E, respectively.
RoA stands for Return on Asset and RoE stands for Return on Equity.
Manappuram
MGFL trades at 1.0x FY24E P/BV and the brokerage believes that there is still a re-rating scope in valuation multiples for a franchise that can deliver an RoE of 16-17 percent. Having said that, it also believes for MGFL, the trade-off between loan growth and margins is the most pronounced and it will continue to see a moderation in its gold loan book because of its current focus on margins and profitability.
One of the reasons why MGFL has traded at a steep discount to Muthoot is the lack of succession planning. However, MGFL recently disclosed that it has appointed Dr. Sumitha Jayasankar (daughter of MD VP Nandakumar) as an Additional Director (Executive) on the Board as part of the succession strategy. Between 2015 and 2018, she served as the CEO-Online Gold Loans, MGFL, informed MOSL.
It expects MGFL to deliver an 8 percent gold loan growth each in FY24/FY25, model consolidated AUM growth of 15-16 percent with a consolidated RoA/RoE of 4.1 percent/17 percent in FY24E.
