Muthoot Finance is in a secure spot. Here's why

If there is a section that has been undeterred by the coronavirus disturbances and instead has flourished during the pandemic, it is the gold loan companies. Muthoot Finance, the gold loan NBFC could beat analysts’ expectations and its revenues and net profit for the first quarter of 2020-21 went up by 27% and 59% respectively y-o-y. Several tailwinds are helping gold loan companies prosper and the recent jump in gold prices is one of them. This means that now people can borrow more using the same gold jewellery. Since other lenders are looking at big defaults, they are becoming choosy with new loans and this is good news for companies like Muthoot Finance as more and more customers are now leveraging their gold assets to get loans. Though gold loan growth rate is expected to moderate after the current thrust, analysts expect that its gold loan growth will remain above 15% in the coming years.Gold loan companies usually enjoy high asset quality because of the short-term nature of gold loans. Most of them are in the 6-12 month bracket. Since Indian households have an emotional attachment to their jewellery, they rarely default on gold loans and let go of their jewelleries. And if at all they default, selling of gold and recovering the outstanding loan amount is also an easy task for gold loan companies. The recent jumps in gold prices have also helped these companies reduce their default. Muthoot Finance is now persuading its borrowers to pay up and take back their valuable gold. This is the reason why there was no gold auction in the first quarter.Analysts’ viewsBuy: 10Hold: 3Sell: 1While the gold loan business (88% of the loan book) is rock solid, the situation is not that great with other businesses (12% of the loan book). Around 87% of home loan borrowers and 75% of vehicle loan borrowers were making regular repayments in July. Muthoot Finance is not giving new loans at present. However, it is expected to restart from October, once the company is able to draw a clear picture of its status after the completion of moratorium and restructuring process.Its microfinance business (Belstar) is also expected to get back to normal after 3-4 months. As is visible from the Relative Performance Chart, Muthoot Finance has significantly outperformed other NBFCs in the past six months. However, analysts say that its valuation is still reasonable. Its trailing PE is only 13.52. More importantly, Muthoot Finance now offers a unique combination of strong growth and low asset quality risk and therefore, this leading gold finance company deserves higher multiples. 78460880Selection methodology We pick up the stock that has shown the maximum increase in “consensus analyst rating” during the last 1 month. Consensus rating is arrived at by averaging all analyst recommendations after attributing weights to each of them (ie 5 for strong buy, 4 for buy, 3 for hold, 2 for sell and 1 for strong sell) and any improvement in consensus analyst rating indicates that the analysts are getting more bullish on the stock. To make sure that we pick only companies with decent analyst coverage, this search will be restricted to stocks with at least 10 analysts covering it. You can see similar consensus analyst rating changes during the last one week in ETW 50 table.

from Economic Times https://ift.tt/3lh1JyO