Home >Industry >Banking >Why investors are betting on Muthoot Finance shares

An Indian lender has seen its shares surge during the coronavirus pandemic, in a stark contrast with peers in a nation struggling with mounting bad loans. Its secret sauce: Taking gold as collateral.

Muthoot Finance Ltd., India’s largest cash-for-gold lender by assets, has soared 41% this year, beating all but two on the 103-member S&P BSE Finance Index. All 14 analysts tracking the stock still recommend buying or holding on to it, data compiled by Bloomberg show.

Indian households, among the world’s biggest hoarders of the commodity, have been pawning gold ornaments with lenders like Muthoot to tide over a cash crunch as the pandemic led to job losses and a credit crunch. The long-standing practice has proved a win-win for all involved as gold prices surged to a record.

“This is like a season of gold loans," Ashutosh Khajuria, the chief financial officer at Federal Bank Ltd., which also offers the loans. “Whenever there are uncertainties about business cycles, gold loans grow the fastest, and the current momentum is likely to last at least till the end of this financial year."

With a transaction time of less than an hour and collateral that can be quickly sold off in the event of default, India’s market for such lending is set to expand by at least one-third to 4.6 trillion rupees ($61 billion) in two years to March 2022, according to an estimate by KPMG. Lenders themselves usually face little difficulties in rolling over funds used for lending against gold as more than half of these loans get repaid in less than six months.

While bank loans may not grow at all this year, Muthoot’s Chief Financial Officer Oommen K Mammen forecasts 15% growth from lending against gold to the likes of farmers, truck owners, and agri-traders. The firm’s gross gold-loan assets stood at 416 billion rupees against collateral of 176 tonnes of the metal as of March 31, filings show.

Still, S&P Global Ratings maintains a negative outlook on Muthoot in a shrinking economy in which it’s difficult for some lenders to roll over short-term debt or raise funds.

Shares of Muthoot can gain another 11% in the next 12 months, according to a consensus of analyst estimates compiled by Bloomberg.

“Investors are buying our shares for three reasons: credit quality, low leverage ratio, and unique business model," said Muthoot’s Mammen.

Gold doubles up as an insurance policy and a retirement plan in India that lacks robust social welfare systems. DCB Bank Ltd., another lender that offers financing backed by the metal, saw its gold loan disbursals surge in May and June, said Praveen Kutty, its head of retail and SME banking.

“The working capital requirements for many small businesses is getting stretched beyond what is normal," said Kutty. “Gold has been a part of the Indian psyche as something that will come in handy on a rainy day."

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