Gold financial stocks could be a less risky way to play the theme of formalization
Space has lost much of the momentum it took in 2020 when business was booming due to Indians resorting to pledging their gold jewelry to overcome the economic distress caused by national lockdown to contain the spread of the Covid-19 pandemic.
Analysts believe that with a return on assets and return on equity unmatched in the industry, stocks of gold finance companies may be long-term bets for investors looking to profit from. the increasing formalization of gold lending activity in India.
Traditionally, gold lending companies have not suffered from asset quality volatility like banks and other non-bank lenders, thanks to the sentimental value attached to Indian household guarantees.
The organized gold lending market represents only 35 percent of the total gold lending market in India. While banks control 75 percent of the formal gold lending market, Muthoot Finance is the largest company, followed by Manappuram Finance.
“As the competition has intensified over the past year, we believe it is possible for Muthoot Finance and Manappuram Finance to grow at 10-12% CAGR over the next five years regardless of the prices of gold, ”brokerage firm CLSA Global Markets said in a note. Last week.
CLSA launched a hedge on both Muthoot Finance and Manappuram Finance with “buy” ratings and projected a rise of 24% and 33%, respectively, over the next 12 months. “Such high profitability with low balance sheet risk justifies a high PB multiple,” said CLSA.
Manappuram Finance, unlike Muthoot Finance, has significantly underperformed the market due to concerns surrounding the company’s micro-credit activity. Micro-lenders have been the most affected players in the finance industry due to the impact of the Covid-19 pandemic on collections and asset quality.
The brokerage firm Equirus Securities claims that the impeccable quality of Manappuram Finance’s assets in the main gold financing sector make it a candidate for reclassification as it should benefit from the increased formalization of the gold lending activity in India.
Gold finance companies, due to their negligible costs and high asset quality, have consistently been able to deliver a 25% higher return on equity than the industry, coupled with a 6-7% return on assets. “While we expect ROE compression in the medium term, ROE should still be higher than other NBFCs. The business presents low risk related to asset quality, asset-liability mismatch, interest rates and leverage, ”said CLSA.