Muthoot Finance stock surges as gold prices rally

Large-cap gold finance company, Muthoot Finance, remains to be an outperformer in the non-banking financial (NBFC) space, which has been plagued by the rising pressure on asset quality and liquidity issues.  

In the last three months, the stock price has increased by around 66 per cent in the buoyed by the increasing trend in gold prices, traction in gold loans and less asset quality issues since the commodity is collateral for its loan assets.

The impressive performance of the stock is largely been attributed to the business of gold financing, which is turning out to be a safer business model amidst the risk of defaults in the retail loans segment, following a rise in job losses and pay cuts by the employers to fend off the impact of the nationwide lockdown. Gold as an asset class gains value during crises and makes borrowing against it easier. Moreover, since the commodity is collateral for these businesses, nearly two-thirds of the loan is repaid within six months of the disbursement thus, reducing the probability of loan default.

The gold lender has gradually expanded its geographic presence in the country and reported a strong performance in FY20. It's gold finance business contributed to around 88 per cent to the total gold loan assets worth Rs 46,870.5 crore and close to 95 per cent of the company’s net profit of Rs 3,168.7 crore in FY20. The remaining was attributed to the company’s subsidiaries in the affordable home finance, microfinance, vehicle finance, insurance broking and finance business. These subsidies that lend non-gold loans are, however, expected to bear the brunt of the nationwide lockdown and this could put pressure on the group level net profits in the quarters to come.

At 9.30 am on Friday, the stock of Muthoot Finance was trading at Rs 1,191.40, up by 1.19 per cent or Rs 14.1 per share. Its 52-week high is recorded at Rs 1,200.20 and the 52-week low is Rs 477.50 on BSE.