Gold loan companies: RBI panel's views add sparkle to sector

Stocks of Muthoot Finance and Manappuram Finance have gained as much as 10.2% and 20%, respectively, on Thursday as investors bet that 2013 will be better for gold lenders than 2012, based on the recommendations announced on Wednesday by a panel led by KUB Rao.

In the short to medium term, returns on Manappuram are likely to be higher as its valuations are cheap and the report is a good trigger for the stock to catch up with the valuations of Muthoot. Regulatory issues and general concerns about the business significantly impacted growth of the firms last year.

The Rao report highlights the important role gold loan NBFC’s play in financial inclusion and removes doubts of a possible systemic risk due to their rapid growth. Another contentious issue was the capping of the loan to value ratio, or LTV, at 60% of the value of the jewellery, including making charges. The panel proposes to increase the LTV limit to 75% of the value of gold (excluding making charges), which will be taken as the 30-day average and fixed every week.



This provides for greater transparency for borrowers. These recommendations, though purely sentimental, are likely to help change the perception of the industry and boost the confidence of lenders to fund these firms.

The Muthoot stock has risen 55% last year and trades at a P/E of 8.6 and a P/B of 2.5 times. Manappuram grossly under-performed the market through 2012, losing 15% of its market value, compared with the 25% rise in Sensex. The stock currently trades at a P/E multiple of 5.6 times and a P/B of 1.3 times. While ROCE of both companies is around 20, Muthoot gives a higher return on equity of 41.8, compared with Manappuram’s 27.5.