Jefferies Recommends Buying Muthoot Fin and Manappuram as Gold Prices Soar, Predicts 20% Upside

Gold prices in India have hit record highs, boosting the outlook for gold-focused NBFCs (Non-Banking Financial Companies) like Muthoot Finance and Manappuram Finance, according to Jefferies, a foreign brokerage firm.

Jefferies has started coverage on both Muthoot Finance and Manappuram Finance with a ‘Buy’ rating. They have set a target price of ₹2,220 per share for Muthoot Finance and ₹270 per share for Manappuram Finance, suggesting a potential upside of up to 20%.

Here are the key points:

• Gold NBFC Advantage: These companies benefit from higher gold prices, less competition, and diversification into non-gold segments, which should lead to stronger loan growth compared to the past three years.
• Loan Growth Estimates: Jefferies expects loan growth at Muthoot Finance and Manappuram Finance to be around 17-18% annually from FY24 to FY27.
• Gold Prices Impact: Gold prices have risen by 15% this year, supported by central bank purchases, US fiscal concerns, and geopolitical uncertainty, which could drive further increases.
• Loan-to-Value (LTV): With LTVs at 54-59%, there is still room for growth even if gold prices stabilize.
• Asset Quality and Return on Equity (RoE): Gold loans have low asset quality risk and superior RoEs compared to most NBFCs. Despite recent share price rallies of 22-23%, valuations are still below their five-year average.
• Earnings Growth: Jefferies expects earnings growth for gold financiers to improve.

Muthoot Finance Preferred

Jefferies prefers Muthoot Finance over Manappuram Finance due to better leverage to gold prices. Muthoot is the largest gold NBFC with an Asset Under Management (AUM) of ₹758 billion and strong operating metrics. With 82% of its AUM in gold loans, Muthoot is well-positioned to benefit from improving gold financing fundamentals. Jefferies expects a 17% annual growth in loans and a 19% annual growth in earnings per share (EPS) from FY24 to FY27, with a return on equity (ROE) above 19%.

Manappuram Finance, while more diversified, has less leverage to gold prices but is expected to grow its gold loans by 16% in FY25. This should lead to an 18% annual growth in consolidated loans and a 17% annual growth in EPS over the same period.