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Muthoot Fin: Gold financiers take hard knock; stay put for now, say experts

Despite pressures mounting on the yellow metal, analysts believe Muthoot and Manappuram Finance are in a good space and will not see any impact on their balance sheets.
For the past one month, equity and commodity markets have been butchered at the bourses due to uncertainties posed by the outbreak of coronavirus (Covid-19). As investors scramble for cash, safe haven like gold, too, has slipped from record high of Rs 44,961 per 10 grams to Rs 42,150/10 grams on March 20. 

Since February 20 till Thursday, spot gold price has tumbled 9.1 per cent, while that of one-month gold future has declined 8.7 per cent, Bloomberg Metal index show. The decline, analysts say, is similar to the mad rush seen during the global financial crisis of 2008 when investors wanted to hoard cash.

Gold has corrected sharply from highs of $1690 to $1450. Investors are preferring to sit on cash and, in a mad dash to raise cash, they are liquidating even the safest of safe haven assets,” says Aasif Hirani, director at Tradebulls Securities, who feels breach below $1,450-mark could see gold testing $1,385 levels.

Tracking losses in metals, coupled with panic-selling in the equities market, stocks of companies extending gold loans, such as Manappuram Finance and Muthoot Finance, have tumbled at the bourses. Between February 20 and March 19, their stock prices have plunged 51 per cent and 33 per cent, respectively compared to 31 per cent fall in the S&P BSE Sensex. 

Despite pressures mounting on the yellow metal, analysts believe Muthoot and Manappuram Finance are in a good space and will not see any impact on their balance sheets.

“Gold loan financers give loans at 90-day average gold prices. i.e. they were giving loans at Rs 39,000 at loan-to-value (LTV) of 70 per cent. Therefore, there is no risk in their books of bad debts. Additionally, their earnings won't have an impact as they have adopted de-risking measures,” says Nirali Shah, senior research analyst at Samco Securities.

While marginal fall in gold prices may not impact companies if adequate LTV cushion is maintained, Kajal Gandhi, an analyst tracking the stocks at ICICI Direct, cautions that growth may partially get impacted and same collateral may fetch lower value, if gold price continues its downtrend.

During the December quarter, Muthoot Finance reported a 66 per cent year-on-year jump in consolidated net profit at Rs 803 crore, as against a profit of Rs 485 crore in Q3FY19. During the quarter, it’s gold loan assets increased by Rs 2,783 crore.

Manappuram Finance, on the other hand, reported a 63 per cent rise in consolidated net profit to Rs 397.84 crore in Q3FY20. The gold loan AUM increased 29.69 per cent to Rs 16,242.95 crore.

Investment strategy

With the near-term outlook for the bullion being weak due to strength in the dollar index, analysts expect the precious metal to drift lower towards Rs 37,500-37,000 per 10 grams before staging a recovery.

“Once the worst part of coronavirus-related panic becomes diminished, we expect gold resuming its bull market. We are waiting for investors to resume buying gold as a hedge against any negative economic events, such as a recession or a slowdown. We believe gold may start bottoming out in the next 3 months and then start its recovery,” says Hirani of Tradebulls Securities.

Given the uncertainties in the market, analysts suggest incumbent investors to stay put in the stock, even as new investors may buy on further dip.

“Economic slowdown, as well as decline in gold prices, may impact the demand for loans against gold. Further, given the weak market sentiment and rising sell-off in banks/NBFCs, further downside cannot be ruled out. Therefore, the best strategy would be to accumulate these stocks on further dips and in a phased manner,” says Ajit Mishra, vice-president – research at Religare Broking.

Shah of Samco Securities advises existing investors to hold the stocks and patiently wait for a rebound.

“There will be high volatility due to the near term pandemic panic but investors should treat this as an opportunity for accumulating these two stocks at the current levels,” she adds.  

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