Muthoot Fin, Manappuram shares get ‘Buy’ tag from Jefferies as gold prices hit record; sees upto 20% upside

Gold prices in India have escalated significantly, hitting record levels, which is expected to support further growth for gold NBFCs such as Muthoot Finance and Manappuram Finance, according to foreign brokerage firm Jefferies.

Jefferies has initiated coverage on Muthoot Finance and Manappuram Finance with a ‘Buy’ rating. It has Muthoot Finance share price target of ₹2,220 apiece and Manappuram Finance share price target of ₹270 apiece. The target prices indicate an upside potential of up to 20%.

According to Jefferies, gold NBFCs offer leverage to higher gold prices and should also gain from stabilizing competition and diversification. This should support stronger loan growth versus past 3 years.

Loan growth at gold NBFCs are estimated to improve due to higher gold prices, stabilising competition from banks and temporary ban on IIFL Finance’s gold loan business and diversification into non-gold segments.

Jefferies estimates loans at Muthoot Finance (standalone) and Manappuram Finance (consolidate) should grow at 17-18% CAGR over FY24-FY27.

Gold rates have rallied 15% so far this year, while continued central bank purchases, US fiscal concerns and ongoing geopolitical uncertainty is likely to further support gold prices despite real rate tailwinds getting pushed out. Eventual rebound in ETF demand from western countries can drive more upsides.

With gold loan LTVs (Loan-to-Value) at Manappuram Finance and Muthoot Finance at 54% - 59% at spot prices, Jefferies sees headroom for growth even if prices are range-bound.

Meanwhile, asset quality risk in gold is low and Return on Equity (RoEs) are superior in gold financing versus most NBFCs. Moreover, despite 22-23% rally in share prices, P/B valuations are at a discount to five-year average P/B, Jefferies noted.

It expects earnings growth of gold financiers to improve.

Muthoot Finance Preferred Pick

Among Muthoot Finance and Manappuram Finance, Jefferies prefer Muthoot Finance due to better gold price leverage. 

Muthoot is the largest gold NBFC with an Asset Under Management (AUM) ₹758 billion, a strong franchise and healthy operating metrics. With gold loan mix at 82% of consolidated AUM, it offers better leverage to improving gold financing fundamentals, Jefferies said as it expects a stronger loan CAGR of 17% to drive 19% EPS CAGR and 19%+ ROE over FY24-27.

Manappuram finance being more diversified has growth drivers beyond gold prices due to thrust on diversification, but its leverage to gold prices is lower versus Muthoot. We expect gold loans to grow at 16% in FY25. This should drive 18% CAGR in consolidated loans and 17% EPS CAGR over FY24–27, Jefferies said.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.