The coronavirus pandemic has put a lot of strain on consumers due to salary cuts and job losses.
As the earnings and cash flow of individuals take a hit during the COVID-19 pandemic, gold financers look poised to gain out of it.
In a report, brokerage firm Motilal Oswal Financial Services said that gold are currently in a "sweet spot" because customers whose cash flows were disrupted during the pandemic are looking to leverage their gold holdings.
"With more than 80 percent of the business coming from repeat customers and loan-to-value ratio (LTV) declining below about 55 percent, there is significant headroom for growth," the brokerage said.
The brokerage does not see any major impact of the RBI’s allowance of a higher LTV cap of 90 percent to banks on the growth of gold financing NBFCs.
Rusmik Oza, Executive Vice President and Head of Fundamental Research at Kotak Securities is of the view that the outlook for gold finance companies remains positive, given the fact that the GDP is likely to de-grow by -11.5 percent in this fiscal year.
Besides, Oza added that the rising cases of COVID-19 in smaller towns, semi-rural areas and rural areas would increase the stress levels in many parts of the country. In these circumstances, many micro businessmen and households would resort to gold finance to tide over the difficult times.
"With rising gold prices the asset under management (AUM) of the two leading gold finance companies has grown consistently for the last ten quarters when other NBFCs are struggling to grow their book," Oza said
Oza highlighted gold Finance companies have an advantage over banks because of their expertise in this field and quicker turnaround time. Gold Finance companies also face a lesser risk of NPAs because of liquid asset and lower LTVs.
The volatility of gold prices too is not expected to impact gold financers significantly.
"While the gross non-performing loan (GNPL) ratio for specialised gold financiers has fluctuated over time, eventual credit losses have been minimal (sub-10 bps) due to low LTVs and short loan-repayment cycles. In addition, with an outstanding LTV of about 55 percent, gold financiers are adequately cushioned in the event of gold price volatility," said Motilal Oswal.
The brokerage firm also underscored that the specialised gold loan NBFCs have inherent advantages over NBFCs operating in other product segments such as less competition from banks given the niche expertise required, low asset quality risk due to the 75 percent LTV cap and highly liquid collateral, strong asset-liability management (ALM) position with short-loan tenures and low balance sheet leverage.
"Given the high margins and negligible credit costs, specialised gold financiers generate return ratios superior to NBFC peers. Even during the past two years of turmoil, these companies delivered an average nearly 25 percent RoE, which highlights the strength of their business model," Motilal Oswal said.
Oza of Kotak Securities expects the gold finance business to grow at a CAGR of 15 percent for the next two years.
"RoA and RoE profile of Gold Finance companies is very healthy which makes them attractive investment proposition for institutional investors," Oza said.
Stocks in focus
Motilal Oswal has a buy call on Muthoot Finance with a target price of Rs 1,300 (3 times FY22E BVPS).
"In our view, Muthoot Finance has strong moats with reasonably high entry barriers. Thus, it has generated superior return ratios consistently over the past decade. The threat of competition from banks as well as alternative products (like personal loans) is modest in today’s scenario," Motilal Oswal said.
"The company has almost nil asset quality, ALM, or leverage risk. Muthoot Finance is likely to deliver an average of 6.8 percent RoA and 25 percent RoE over the medium-term, driven by high margins and negligible credit costs. This makes the company’s return ratios the best in our coverage universe," said Motilal Oswal.
Manappuram Finance is also a buy for Motilal Oswal, with a target price of Rs 185 (1.8 times FY22E BVPS).
Motilal expects over FY20-23E, Manappuram Finance's loan CAGR at nearly 18 percent helped by healthy gold loan growth in FY21 and expected to pick up in non-gold loan growth from FY22 onwards.
Margins are likely to remain largely stable at 15-15.5 percent. Operating leverage and focus on digital initiatives should help in reducing the expense ratio, Motilal pointed out.
While gold loan asset quality should be comfortable, Motilal expects the GNPL ratio in other lending segments to rise in FY21.
"We have factored in higher consolidated credit cost of about 2 percent over FY21-23E (against an average of about 0.9 percent over FY16-20), due to the higher credit cost for its subsidiaries. Yet, consolidated RoA and RoE is likely to remain healthy at 5.4 percent and 24 percent, respectively," said Motilal Oswal.
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