Jefferies India Pvt. has initiated coverage on Muthoot Finance Ltd. and Manappuram Finance Ltd. with a 'buy' rating. The brokerage sees the non-banking financial companies benefitting from better gold-price leverage and stabilising competition.
For Muthoot, Jefferies has a target price of Rs 2,220 per share, implying a potential upside of 21% from the previous close, while it has set a target price of Rs 270 apiece for Manappuram, a potential upside of 21.5%.
Organised gold financiers form 6% of household gold tonnage and only 40% of the gold financing market in India, Jefferies said in a note dated July 17. "Yet, gold prices have been a key driver of growth, especially as customer accretion and network expansion at key players have lagged."
Loan growth at the gold NBFCs could improve due to higher gold prices, stabilising competition from banks and diversification into non-gold segments, according to the brokerage.
Continued central-bank purchase, US fiscal concerns and geopolitical uncertainty should support gold prices. Eventual rebound in exchange-traded-fund demand from western countries can also drive more upsides, it said. "With gold loan LTVs (loan to value) at Manappuram and Muthoot at 54–59% at spot prices, we see headroom for growth even if prices are range-bound."
The brokerage expects earnings growth to improve across their coverage while the stocks are still at a discount to the five-year average price to book despite a 23% rally.
Given the strong franchise and healthy operating metrics, Muthoot can offer better leverage to improve gold financing fundamentals, while diversification thrust and cheap valuation are the key for Manappuram, it said.
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