Yesterday, while scrolling through social media, I saw a video of a guy pushing on a small wooden block. But the catch here was that that wooden block was the first in a whole arrangement of many blocks which were placed close to one another.
Thus, all the wooden blocks started falling one after the other. A beautiful image was formed when all blocks fell. It was eye-pleasing.
One movement started a whole cycle of other movements. This is called the domino effect. However, the result of all dominoes does not always paint a pretty image.
Sometimes, the outcome is disappointing, like the domino effect created by the falling gold price on Muthoot Finance.
Muthoot Finance share price is down 23% in 2022. It reached its 52-week low price of Rs 961.1 on 29 June 2022.
Here's how Muthoot Finance shares have performed on a YTD basis.
Muthoot Finance is the largest gold loan NBFC in India. A major chunk of Muthoot's business comes from giving gold loans.
90% of Muthoot Finance's assets are in gold loans. Hence, even a small up or down move in the gold price will affect Muthoot Finance's financial statements.
Gold prices fell rapidly in 2022. They are back down to 2020 levels. When gold prices fall, fewer people will mortgage gold because less money will be offered to them. Hence, people avoid dealing in gold when gold price is falling.
A company's share price falls when its external circumstances deteriorate. It happened with Muthoot Finance too.
#2 Poor Financial Performance
When 90% of your balance sheet's value is deteriorating, it is obvious your financials will paint a bad picture.
Muthoot Finance posted weak Q1 results on 12 August 2022.
Muthoot Finance reported a net profit of Rs 8 bn in Q1 of the financial year 2022-23. It is 17% lower compared to the net profit of Rs 9.7 bn reported in the same quarter last year.
The total income for the quarter was Rs 25.1 bn. It is 8% lower than the income in the same quarter last year.
The value of loan assets has been reduced by 2% on a QoQ basis. However, on a YoY basis, loan assets have increased by 8%.
Poor financials have led to a fall in Muthoot Finance's share price.
Investment Takeaway
2021 was a stellar year for gold sector businesses as gold prices were soaring. However, in 2022, gold prices took a hit and the impact can be seen in related businesses.
However, as gold prices recover, these businesses will also recover.
The asset value of Muthoot Finance has been reduced because of falling gold prices. But the business of Muthoot Finance is still intact.
Hence the company may be facing headwinds right now but overall it has a strong presence in the gold loan market.
For the short term, the share price may remain muted due to muted gold prices and the company's lack of organic growth.
The markets are still volatile. Hence gold prices will continue to fluctuate. Thus, an investor must keep in mind that the assets of Muthoot Finance will also fluctuate.
Hence, an investor should carefully analyse his risk appetite and time horizon before making an investment decision.
Happy Investing!
Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.
This article is syndicated from Equitymaster.com
(This story has not been edited by NDTV staff and is auto-generated from a syndicated feed.)
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