Shares of gold loan companies including Muthoot Finance and Manappuram Finance jumped nearly 5 percent on March 21 after the precious metal surged to a new high following dovish commentary from the US Federal Reserve.
Gold hit a fresh high of Rs 66,778 on MCX. In the international market, spot gold surged as markets heaved a sigh of relief as the Fed remained to track to three rate cuts this year.
Muthoot Finance gained nearly 5 percent to hit an intraday high of Rs 1,404.60 on NSE, while Manappuram Finance shares gained over 3 percent to Rs 172.30.
Gold loan companies tend to benefit from the increase in the price of the metal, as the value of the collateral held by them also rises. This boosts the confidence of investors in the company's asset quality and lending business.
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These companies typically charge interest rates on the loans they provide, and the difference between the interest earned on loans and the cost of funds represents their profit margin. When gold prices rise, the value of the collateral goes up, allowing them to maintain or even increase profit margins while lending against the same amount of gold.
The loan-to-value ratio (LTV), representing the ratio of the loan amount to the value of the collateral (in this case, gold), also increases with a rise in price, allowing borrowers to access a higher percentage of the value of their gold as a loan, leading to loan growth for gold financiers.
Higher prices also enable these companies to expand their loan book by attracting more borrowers.
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Recently, ICICI Securities upgraded Muthoot Finance to “buy” from “add” earlier with a target price of Rs 1,605 a share.
It stuck to its “buy” call on Manappuram Finance but raised the target price to Rs 220 from Rs 190.
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