Gold is down 11% so far in 2021; time to exit Muthoot Fin, Manappuram Fin?

Shares of gold financing firms, Muthoot Finance and Manappuram Finance, have traded largely in-line with the benchmark S&P BSE Sensex so far in the calendar year 2021 amid correction in gold prices owing to improving US treasury yields, backed by swift economic recovery.

And while gold experts remain bullish on the yellow metal, analysts tracking the two non-bank finance companies (NBFCs) believe near-term headwinds continue to dampen outlook for the stocks.

So far in CY21, shares of Muthoot Finance have advanced 9 per cent on the BSE while those of Manappuram Finance have gained around 6 per cent. In comparison, the headline S&P BSE Sensex is up 7.7 per cent till March 3, ACE Equity data show.

Over the past six months, however, the stocks underperformed the Sensex by gaining 14 per cent (Manappuram Finance) and 16 per cent (Muthoot Finance) on the BSE relative to a 32 per cent rally in the frontline index.

Gold prices hold the key

Gold futures were trading at Rs 44,849 per 10 grams on the MCX on Thursday, having fallen nearly 11 per cent so far in CY21. Besides, prices have corrected by more than Rs 10,000 per gram from all-time high of Rs 56,200 made in August 2020 as elevated US Treasury yields raised opportunity cost for holding it compared to bonds.

Moreover, projection of positive global growth coupled with improving economic conditions, following the roll-out of coronavirus vaccine, further dampened the safe-haven’s appeal.

“In the short-term, there is expectation that the gold prices may fall to Rs 40,000 levels. Moreover, the margin of safety for gold loans is also decently low nowadays. With gold prices already 20 per cent off highs, and short-term weakness persisting, these NBFCs may have to ask for more collateral or margins which may not come through,” says Ambareesh Baliga, an independent market analyst.

A substantial correction in gold prices may result in lending institutions asking customers to pledge more gold because when gold prices fall, the loan-to-value (LTV) ratio goes up. To bring it to the required level, the lender may ask the borrower to provide additional collateral.

Dr. Joseph Thomas, Head of Research at Emkay Wealth Management also expects gold prices to test lower levels in the coming months in the absence of central bank-purchases of a critical quantity.

“In addition to this, interest rates are set to rise gradually. The bond yields in many of the developed markets have started rising, and the US 10 Year treasury yield is at 1.45 per cent already. This rise in bond yields reflects the higher inflationary expectations, and also the likelihood of gradual normalization of the liquidity conditions as economic recovery is under way,” he cautions.

Investment strategy

Even as Baliga suggests investors to book-profit in Muthoot Finance and Manappuram Finance as near-term gold outlook remains weak, Thomas of Emkay Wealth opines that any hit on these NBFCs’ business could be cushioned by gradual pick up in overall economic activity.

“Since a robust economic recovery is gradually taking place the business of these entities may show an uptick, because many of those entities focus quite a bit on retail business and smaller loans, and also do a large volume of their business in smaller cities and towns. Well managed entities with lower level of NPAs are likely to do well as economic revival gathers further pace in the coming months,” he says.

Sunil Kumar Katke, Head - Commodity and Currency at Axis Securities suggests investors to hold the stocks as expectations that the central banks, globally, will retain accommodative stance with lower interest rates and higher inflation may take the prices of the yellow metal to Rs 50,000 over the next six to eight months.

Mohit Agarwal, commodity and currency analyst at ICICI Securities, meanwhile, sees strong support for MCX Gold prices at around Rs 45,000 level on an immediate basis. As long as it sustains above this level, it may a bounce towards Rs 48,000 in the coming weeks.