Gold prices at Rs 71,000! Should you buy Manappuram, Muthoot Finance shares? Here are targets

Multiple sectoral tailwinds in the form of surge in gold prices to Rs 71,000 per 10 grams mark, reduction in competitive intensity from banks and regulatory interventions in unsecured gold loan segments have brought the focus back on Muthoot Finance Ltd and Manappuram Finance Ltd (MGFL). While shares of Manappuram Finance are up 15 per cent in the last one month, Muthoot Finance has rallied 18.80 per cent during the same period.

If one goes by what Nirmal Bang Institutional Equities suggest, the two gold loan companies are likely to benefit in terms of growth and profitability going ahead, considering their leadership position in the industry.

"In terms of our pecking order in gold loan NBFCs, we are positive on Muthoot Finance because of its strong customer acquisition and retention measures, entry into new geographies and customer segments, economies of scale with low cost to average asset ratio of 3 per cent and growth based on strong internal accruals (CAR at 30.9 per cent).

Nirmal Bang has upped its earnings estimates for FY24, FY25 and FY26 by 0.9 per cent, 9.8 per cent and 10.8 per cent, respectively. This is because the broking firm expects 16.8 per cent growth compounded annually in gold loans over the 2.25-year period between the December quarter of FY24 and FY26. This is based on assumption of 10.5 per cent CAGR growth in the 22-carat gold prices, 5 per cent CAGR in overall tonnage and 5.7 per cent CAGR in client addition. Nirmal Bang is also expecting some improvement in spreads and benign credit costs.

It maintained a ‘BUY’ rating on Muthoot Finance Ltd with a revised target price of Rs 1,927, valuing the NBFC at 2.5 times FY26E adjusted book value and a subsidiary value of Rs 76.30 per share. This is against its previous target of Rs 1,702 on Muthoot Finance.

In case of Manappuram Finance, besides growth being back in its core business, Nirmal Bang said it is optimistic about Manappuram Finance's growth potential as a diversified lender.

"However, its re-rating hinges on timely execution of its diversification plans and RBI giving approval for the addition of gold loan branches in future. We have raised our earnings estimates for FY24E, FY25E and FY26E by 0.5 per cent, 4.5 per cent and 5.7 per cent, respectively," it said.

Nirmal Bang expects expectation of 14.9 per cent AUM CAGR in gold loan AUM during the 2.25 year period between Q3FY24 and FY26 on assumption of 10.5 per cen CAGR in 22 carat gold prices, 2.9 per cent CAGR in overall tonnage and 2 per cent CAGR in client addition.

"We maintain a ‘BUY’ rating on MGFL a revised target price of Rs 233.