Gold finance cos enter FY25 with a bang

While sentiment is positive, the benefits on earnings can accrue with some lag. Manappuram Finance Ltd’s gold loan book is likely to strengthen to 3% sequentially in Q4FY24, estimate analysts at Dolat Capital Market. In Q3, Manappuram’s gold loan book was flat sequentially.

For peer Muthoot Finance Ltd, the gold loan book is expected to grow at a higher rate versus assumed earlier in Q4FY24, at 5% sequentially. Between the two, the latter has relatively higher exposure to the gold lending segment.

“With elevated gold price, superior collections from Asset Reconstruction Company of India sale done in Q2 could benefit Muthoot’s profit after tax,” added the Dolat Capital report. Moreover, peer IIFL Finance has been curbed from providing gold loans.

This could mean migration of IIFL’s customers to other gold loan financiers such as Muthoot and Manappuram. The IIFL debacle amid rising gold prices has translated into higher footfall and increased enquires for gold loans at some branches, showed a recent channel check by Yes Securities.

The interaction was conducted at branches of Muthoot Finance, Manappuram Finance and Muthoot Fincorp in the outskirts of Mumbai. To tap the potential demand surge, marketing activities have also increased. Branches have stepped up the marketing of top-up loans (through messaging/calling) to customers having higher loan-to-value cushion, said the Yes Securities report.

Typically, top-up loans are offered at a higher rate of interest. Among other tailwinds, competition from banks, who were aggressive and competitive on gold loans lately, is expected to have slowed down. Growth in loan against gold jewellery of banks has fallen to 15.4% year-on-year in February from 20.1% a year ago, showed Reserve Bank of India data. As such, the pace of diversification is also crucial for the stocks.

The gold lending business is cyclical in nature and to counter that, both companies have been expanding into various non-gold lending segments. But Manappuram seems to be moving at a faster pace. Here, the timely listing of MFI subsidiary Asirvad Microfinance will be among the key re-rating triggers for the Manappuram stock. Asset quality trends in the non-gold segments also need to be monitored.

“Consolidated advances to grow by 7% sequentially and 22% year-on-year (in Q4FY24), driven by non-gold portfolios,” according to Dolat Capital.

Meanwhile, shares of both companies hit their respective new 52-week highs earlier in April. In the last six months, these shares have rallied over 30% each.

In Q4FY24, margins are likely to get cushion from higher gold prices and asset quality remains stable for gold lending business for both companies. Branch additions for the core gold loan business and AUM growth guidance for FY25 will be closely monitored by investors.

However, in the near term, the gold rush could keep Muthoot on a better footing than Manappuram. Analysts at Nirmal Bang Institutional Equities expect 16.8% CAGR in gold loans AUM for Muthoot and 14.9% for Manappuram between Q3FY24 and FY26.

Further, regulatory tightening on unsecured loans and rising capital costs could also be a sentiment positive for gold-backed lenders. Investors may prefer taking exposure to these companies given the secured nature of gold loans with relatively lower default risks. However, on the flipside, increased competition from fintechs acts as a threat.