This Gold Loan Company Shares Are Soaring, What’s The Trigger?

Shares in Muthoot Finance are soaring. In trade on Thursday, the stock was up a solid 8.21 per cent in trade.

The biggest trigger for the stock was the solid numbers the gold loan company reported for the quarter ending March 31, 2021. Net profits at the company were up a robust 22 per cent, while the assets under management at Muthoot Finance also surprised positively.

Broking firm Motilal Oswal was swift in increasing its FY22E/23E EPS estimate by 3-4%. "We maintain our Buy rating on Muthoot Finance shares with a target price of Rs 1,725 per share (3x FY23E BVPS), the broking firm has said.

The shares of Muthoot Finance were last seen trading at Rs 1,525, up around 8.50 per cent in comparison to the previous days closing.

Strong loan growth, despite falling gold prices, was the key surprise in the last quarter of FY 2021. Gold loan assets under management at Muthoot Finance grew 4% QoQ to Rs 526 billion (v/s Motilal Oswal's estimate of a 3% QoQ decline), driven by 3% growth in tonnage to 171 metric tonnes.

The management has guided at 15% assets under management growth in FY22. Interestingly, Muthoot Finance's credit rating also got upgraded to AA+.

The company is expected to continue to maintain excess liquidity on its Balance Sheet.

Why gold loan companies are in a sweet spot?

Gold loan companies are in a very sweet spot, as the Covid-19 wave seems to have helped some of these companies. Those who have been rendered jobless on account of the wave, have pledged gold for easy financing. In fact, gold loans can be availed in 30-minutes flat, by just pledging the gold and carrying your aadhaar card with you.

The interest rates are much better than personal loans. This has helped companies like Muthoot Finance to grow at a scorching pace in the last few years. Interest rates are also low at the moment, which is another boon for investors.

So, low interest rates, absolute security in the form of pledged gold and a select population that is cash strapped due to covid-19, has put some of these companies in a sweet spot.

While we have highlighted the fact that the stock is up, we are in no way suggesting to buy. It is just the facts that have led to the stock soaring, that we have pointed out. At the moment with several stocks hitting the roof, it would not be advisable to buy at any and every price point.