Will Gold NBFCs Muthoot and Manappuram Finance Regain their Lustre?

It's a dichotomy that just can't be overlooked.

Gold non-banking financial companies (NBFCs) like Muthoot Finance and Manappuram Finance have witnessed sharp underperformance on Dalal Street at a time when the benchmark index Sensex is trading close to lifetime highs.

In contrast, PSU banks and private bank stocks are trading close to their respective 52-week highs.

The underperformance of gold NBFCs is in contrast to public sector banks (PSBs) and private sector banks. Banks have made rapid strides in loans against the gold loan segment in the September 2022 quarter.

In addition, a turnaround in PSU banks and a reduction in their non-performing assets (NPA) resulted in investors showing strong interest in stocks from this sector.

At the end of Wednesday's trade, Muthoot Finance ended at Rs 1,108. Its 52-week low was Rs 950 reached on 26 September 2022.

Similarly, in the case of Manappuram Finance, the stock ended Wednesday's trade at Rs 118. Its 52-week low was Rs 81.5 reached on 20 June 2022.

The bullish sentiment for PSU stocks is reflected with State Bank of India (SBI) ending Wednesday trade at Rs 625 vis-a-vis its 52-week high of Rs 629, while Punjab National Bank (PNB) traded at Rs 59 vis-a-vis its 52-week high of Rs 62.

Private peer HDFC Bank ended Wednesday's trade at Rs 1,661 vis-a-vis its 52-week high of Rs 1,721.9.

Performance of Public Sector Banks

	1 Month Change (%)
Punjab & Sind Bank	122%
UCO Bank	96%
Central Bank Of India	76%
Indian Overseas Bank	52%
Union Bank Of India	45%
Bank Of Maharashtra	41%
Punjab National Bank	36%
Bank Of India	36%
Bank Of Baroda	18%
Indian Bank	12%
Canara Bank	7%
State Bank Of India	4%

Source: Equitymaster

Lacklustre September 2022 quarter for gold NBFCs

In the case of Muthoot Finance, one of the leading players in gold loans, its loan assets amounted to Rs 565 billion (bn) at the end of the September 2022 quarter on a standalone basis. This is a growth of merely 3% year on year (YoY).

The return on average loan assets on a standalone basis was 6.09% in the September 2022 quarter vis-a-vis 7.38% a year earlier. This resulted in standalone net profit declining 13% YoY to Rs 8.7 bn.

Manappuram Finance's gold loans asset under management (AUM) amounted to Rs 186.9 bn in the September 2022 quarter, broadly flat on a YoY basis.

The slack loan disbursements at gold loan NBFCs comes at a time when PSU and private banks have shown strong growth. In the case of Bank of Baroda, agriculture gold loans amounted to Rs 316.6 bn at the end of September 2022 quarter, a rise of 27.1% YoY.

In the case of HDFC Bank, gold loans amounted to Rs 94.3 bn in the September 2022 quarter, a rise of 16.3% on a YoY basis.

Gold NBFC performance during earlier cycle

Gold NBFC companies benefit when gold prices rise internationally. Consumers, especially in rural areas, in need of funds for emergency / consumption purposes pledge their gold with NBFCs and take a loan.

Gold prices averaged Rs 26,343 per 10 grams in 2015 and the average price reached Rs 48,651 per 10 grams during 2020. The benefits were visible for gold NBFCs.

Muthoot Finance gold loans amounted to Rs 519.3 bn at the end of March 2021, a compounded growth (CAGR) of 14.3% from the end of March 2015.

The standalone net profit of Muthoot Finance amounted to Rs 37.2 bn at the end of financial year March 2021, a CAGR of 33% from the end of financial year March 2015.

In the case of Manappuram Finance, its gold loan assets under management (AUM) amounted to Rs 191 bn at the end of March 2021, a CAGR of 14% from the end of March 2017.

Manappuram Finance had launched short tenure gold loans in 2014. Its standalone net profit amounted to Rs 17 bn for year ended March 2021, a CAGR of 15.2% since the end of financial year 2017.

Gold prices have averaged Rs 52,670 per 10 grams during calendar year 2022 and the benefits for gold NBFCs, is expected to be visible over the next few years, in terms of increased borrowing against this precious metal.

Valuations

Muthoot Finance has traded in a price to earnings (PE) multiple between 8 and 13 times over the last 5 years, while Manappuram Finance has traded in a range between 7 and 13.5.

Muthoot Finance currently trades at a consolidated PE of 13 times estimated earnings for year ended March 2023.

And Manappuram Finance, trades at a consolidated PE multiple of 7.5 times.

In the short run there may not be much upside in both the above stocks, given their historical PEs.

However, investors who have a long-term horizon and are willing to bet on high gold prices helping to revive gold NBFCs performance could think about investing in this sector after checking valuations and fundamentals.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...