Muthoot Finance share price has nearly tripled from its 52-week low hit on March 24 after PM Narendra Modi announced a 21-day lockdown on March 24 to contain rising number of coronavirus cases in the country.
The lockdown, which ended on June 1 after its fourth phase saw huge job losses and salary cuts by employers to withstand its effect on their businesses. During the last three months, gold financing has emerged as a safer bet after job losses and pay cuts likely made repayment of loans difficult in the retail segment. Loan on gold involves custody of the yellow metal as collateral with lender which makes it a safer option than borrowing from banks.
The business of gold financing was so strong during the ongoing slowdown that management of Muthoot Finance saw no further requirement of provisions for Covid-19 in Q4. That led to a spike in the share price of Muthoot Finance since March 24.
On March 24, the large-cap stock fell to a 52-week low of Rs 477.50 a day after Sensex and Nifty logged their biggest intra day fall in history. Sensex tumbled 3,934.72, or 13.15%, to end at 25,981.24 points. Nifty index settled 1,100.85 points, or 12.70%, lower at 7634.60. However, the stock hit an all-time high of Rs 1,284 today, clocking 168% rise in nearly three months. The large cap stock rose up to 9.06% today. The stock has risen 23.51% in four days.
Besides Covid 19 lockdown, a rise in the price of gold since March 24 has led to positive sentiment for the business of Muthoot Finance. Gold price per 10 gm for 24 karat which stood at nearly Rs 41,000 during March end rose over Rs 47,000 per 10 gm today. The rise in gold price raised the loan raising capacity of borrowers during the lockdown and pushed the stock of the gold financing firm higher.
Jaikishan Parmar, senior Equity Research Analyst at Angel Broking said, "The primary reason for increase in stock price post lockdown is strong growth prospects due to increase in gold prices, which has led to increase in value of collateral thereby reducing the LTV ratio and possibility of principal loss. Muthoot Finance's LTV ratio at 52% on outstanding loan book is significantly lower than the RBI prescribed limit of 75%, thus providing comfort on asset quality. Hence, any price fall in gold prices to the extent of 15-20% would not have an adverse impact on either loan book and profitability.
The company's strong branch network and quick tunraround time of 4 hours will help them to maintain growth momentum. We have a positive outlook on the stock considering that the company has one of the safest asset class as an underlying in today's environment with a low possibility of principal loss, strong growth prospects, benign credit cost, and healthy return ratios."
The coronavirus lockdown failed to affect the March quarter earnings of the firm. The firm reported a 59% growth in Q4 profit at Rs 815 crore against Rs 512 crore in Q4FY19. Standalone loan assets stood at Rs 41,611 crore in Q4 against Rs 34,246 crore as on March 31, 2019, Y-o-Y growth of 22%.
During the quarter, gold loan assets increased by Rs 3,113 crore. The firm reported 51 per cent year-on-year increase in its consolidated net profit at Rs 3, 169 crore for the financial year ended March 31, 2020 (FY20). The company had posted consolidated net profit of Rs 2,103 crore in the financial year 2018-19 (FY19). Standalone net profit of the company stood at Rs 3,018 crore logging an increase of 53% for FY20 against Rs 1,972 crore in the previous year.
Abhijeet Ramachandran, Independent Analyst/ Co-Founder and trainer at Tips2trade said, "Post the Covid 19 outbreak, all NBFC's had a very rough fall in March. However, since Muthoot Finance is primarily into gold loans, their reserves and recent financial performance has been very strong. Over the next 3-4 quarters, as major economies grapple with the financial destruction caused by this pandemic, more countries may opt for extravagant monetary easing, thereby ensuring a solid bull trend in gold & thereby in Muthoot Finance. Any dip in prices till Rs 1,000- Rs 1,020 should be used to enter this stock and hold for higher targets of Rs 1400-Rs 1,630 in the coming months."