22% Upside for Muthoot Fin and Manappuram with Record Gold Prices: Jefferies Predicts

As gold prices reach unprecedented levels, foreign brokerage Jefferies is optimistic about gold Non-Banking Financial Companies (NBFCs) in India, predicting substantial growth potential.

On Tuesday, July 16, Muthoot Finance share price settled 0.11% lower at ₹1,834.15 while Manappuram share price tumbled 0.61% to ₹220.71. The shares of Manappuram have gained up to 30% so far this year while Muthoot has risen 25% during the same period.

Jefferies has initiated coverage on Muthoot Finance and Manappuram Finance with a 'buy' recommendation and target prices of ₹2,200 and ₹270, respectively, suggesting potential gains of 20% and 22%.

Jefferies highlights that gold NBFCs benefit significantly from rising gold prices. The stabilization of competition and diversification are expected to support loan growth, which is projected to be stronger than the past three fiscal years, with a 17-19% EPS CAGR for FY24-27 compared to 3-8% in FY21-24. Both Muthoot Finance and Manappuram Finance are expected to achieve an 18% RoE over the next three years. Check MCX Gold Rate Today Live

The brokerage notes that asset quality risks for gold loans are low, returns are high, and earnings have been steadily improving, resulting in superior RoEs compared to most other NBFCs. Therefore, their valuations appear reasonable.

This, as per the brokerage, is expected to support stronger loan growth, compared to the past three years, with an earnings per share CAGR of 17-19% (3-8% FY21-24) and an ROE of over 18% for FY24-27 at Muthoot and Manappuram Finance. 

Between the two, Jefferies favors Muthoot Finance, which derives 82% of its AUM from gold loans, offering better leverage to gold prices. However, Manappuram Finance benefits from diversification and cheaper valuations.

Check Gold Rate Today in India

On May 8, the Reserve Bank of India (RBI) issued an advisory to Manappuram Finance and Muthoot Finance, limiting cash disbursal of loans. The RBI emphasized adherence to the Income Tax Act provision on cash disbursements, stating no NBFC should disburse loan amounts over ₹20,000 in cash. This advisory followed requests for clarity from large gold loan-providing NBFCs and was reported by CNBC-TV18.

Gold prices recently hit a record high, driven by optimism for a potential interest-rate cut from the U.S. Federal Reserve in September and a weaker dollar boosting demand. Spot gold fell by about 0.6% to $2,454.98 per ounce by 1748 GMT, following profit-taking after reaching an all-time high of $2,483.60 earlier in the session. U.S. gold futures settled 0.3% lower at $2,459.90 per ounce.

David Meger, director of alternative investments and trading at High Ridge Futures, stated, "The expectation that we are getting closer to a Fed interest rate cut and we've seen this as yields continue to slowly grind lower in anticipation, that, along with a weaker dollar, are the main supportive factors behind this gold move."

Several Fed policymakers have indicated increasing comfort that inflation is more firmly on track to the Fed's goal, despite earlier higher-than-expected readings. Fed Governor Christopher Waller mentioned that the time for a U.S. central bank interest rate cut "is drawing closer," but uncertainty about the economic path makes the timing unclear.

Data showed U.S. factory production increased more than expected in June, contributing to a robust rebound in output for the second quarter. Markets now see a 98% chance of a U.S. rate cut in September, according to the CME FedWatch Tool. Lower interest rates reduce the opportunity cost of holding non-yielding bullion and depress the dollar, making gold cheaper for investors holding other currencies.

The U.S. dollar weakened by about 0.5%, nearing a four-month low against a basket of currencies. Meanwhile, silver fell 3.7% to $30.21 per ounce, platinum declined 0.4% to $996.30, and palladium dropped 0.5% to $953.93.