IIFL Finance loss, Muthoot Finance gain? Kotak shares target price for gold loan player

Kotak Institutional Equities in its latest note said Muthoot Finance Ltd is well-placed to gain market share in gold loans, following the RBI’s ban on gold loan disbursements by IIFL Finance. While competition from banks is stable, the vacuum in the NBFC lending space will be beneficial for Muthoot Finance, the domestic brokerge said adding that elevated gold prices provide tailwinds despite the rise in borrowing costs that could temper margins in the near term.

Kotak said the ban on gold loan disbursements by IIFL Finance provides an opportunity for peers in the interim. Muthoot Finance had opened 150 branches last year after getting the RBI’s approval. Gold prices remained strong and are up 11 per cent YoY in March 2024 and 5 per cent since December 2023. It find tailwinds to Muthoot Finance’s gold loan growth and factor in a 16 per cent loan growth in FY2024 and 15 per cent over FY2025- 26 compared with 22 per cent in 9MFY24.

"Competition from banks, however, remains unchanged," Kotak said.

IIFL Finance, Kotak noted, is the fast-growing gold-loan player. IIFL Finance gained a significant share of 13 per cent in gold loans in the last few years, up 420 basis points over four years against 38 per cent for Muthoot Finance and 12 per cent for Manappuram Finance Ltd.

The gap reduced further in 9MFY24 as IIFL’s gold loan book was up 35 per cent compared with 22 per cent and 12 per cent growth in the loan books of Muthoot Finance and Manappuram Finance, respectively.

"While the latter two struggled to gain permission to open new branches, IIFL Finance was able to expand aggressively and gain share during the period. IIFL Finance reported an average ticket size of Rs 73,700 compared to Rs 82,953 for Muthoot Finance," Kotak said.

The RBI has now banned IIFL Finance’s gold loan business for multiple reasons. The RBI has desisted IIFL Finance from sanctioning or disbursing gold loans or selling any of its gold loans.

In a conference call with investors, IIFL Finance’s management highlighted four key points of the regulator’s contention: disparity in audits (deviations in assaying and certifying purity and net weight of the gold at the time of sanction of loans and at the time of auction upon default); non-adherence in the standard auction process; a lack of transparency on charges levied to the customer; and higher cash disbursements.

"Changes in the auction process, an increase in the disclosures on customer charges and reduction in cash disbursements may not be challenging for IIFL Finance to accomplish, in our view. However, the resolution of regulatory concerns about deviations in assaying and certifying the purity and weight of gold during disbursements and auctions up to default remains unclear. IIFL’s management is engaging with the RBI on the same. Muthoot may be gainer; reiterate ADD," it said.

Kotak has a fair value of Rs 1,500 on the stock.