Muthoot Finance is a Kerala headquartered large-cap gold finance company that remains a bright star in the Non-banking Finance Companies (NBFC) sector, which has been facing rising pressure on asset quality and liquidity issues. The stock gained 13 percent as of Thursday afternoon while touching a 52 week high of ₹1,139.8 on Thursday following the gold financer’s strong performance in March quarter. It has gained 88 percent in the past three months. The growth may continue in this buoyant trend in gold prices. Regarding NBFCs these days, analysts have raised the gold loan financer’s FY21 earnings per share (EPS) estimates by 8-16 percent after the company reported an uninterrupted growth in the loan book for the March quarter.
The increase in the FY22 earnings per share estimates looks even more optimistic at 12-26 percent as gold financing has turned out to be a safer finance provider for customers amid the possibility of higher problems in the retail loans segment due to job losses and pay cuts faced by employees working at different sectors in the country. The gold loan also has an additional benefit from other loans. People consider gold very valuable to them, and since gold is the collateral here, nearly two-thirds of the loan is repaid within six months of the disbursement. Thus reducing the probability of loan default.
As Muthoot is gradually expanding its geographic presence in the country, the share of southern states in gold loan assets dropped to 49 percent in FY20 from 65 percent in FY13. The gold finance business in India contributed 88 percent to the total loan assets worth ₹46,870.5 crores and 95 percent to the total net profit of ₹3,168.7 crores in FY20. The remaining 5 percent of the net profit was derived from subsidiaries in affordable home finance, insurance broking, microfinance, vehicle finance, and finance business in Sri Lanka.
Implementing the focus in gold financing will help in shielding the consolidated performance from the current tough economic situation in other segments of financing caused by COVID-19. The safety margin of Muthoot on gold loans increased to 42 percent at the end of March 2020 from 28 percent in 2014, in which the rise in gold prices had a major role. The safety margin is the difference between the market value of gold in the ornaments and the loan amount disbursed to the customers against these ornaments.