Gold loan upcycle to lift Muthoot and Manappuram: BofA

Bank of America (BofA) Securities has initiated coverage on and with buy recommendations on expectations of the gold loan industry expanding in the coming years thanks to rising penetration and a cyclical uplift in credit demand.

Shares of Manappuram Finance surged close to 4% to Rs 168.8 on Wednesday, while Muthoot Finance gained 0.8% at Rs 1,480.9. These stocks have a 27-38% potential upside, the bank said. BofA Securities said there is scope for valuation re-rating of leading gold nonbanking finance companies due to their industry-leading growth. “We expect the organised gold loan industry to deliver around an average 15% per annum growth in the next 4-5 years driven
by market share gains from informal lenders...better acceptability among customers...and potential for a sustained increase in ticket sizes,” the brokerage said.

Muthoot Finance
CMP: Rs 1,480.90
Target Price: Rs 1,890
Year-To-Date Returns: 22.36%
India's largest gold loans NBFC, Muthoot Finance is wellplaced to benefit from the rising demand for gold loans as underbanked borrowers see it as an easy and relatively cheap source of personal and business loans, said BofA Securities. Muthoot’s valuation has scope to further re-rate as it continues to deliver industry-leading growth, said the brokerage.

Manappuram Finance
CMP: Rs 168.80
Target Price: Rs 225
Year-To-Date Returns: 1.84%
Looking past the nearterm stress in the company’s microfinance portfolio, the brokerage sees a business that is well-placed to post a 20% earnings per share growth and 24% return on equity through FY24. It said Manappuram’s gold loan book is likely to resume steady growth from Q2 of FY22 and credit costs are likely to peak in the first half of FY22.