Why Morgan Stanley, CLSA Are Betting On Manappuram, Muthoot
Shares of gold loan financers Manappuram Finance and Muthoot Finance rose as Morgan Stanley and CLSA upgraded the stocks.
Shares of Manappuram Finance Ltd. and Muthoot Finance Ltd. rose on Monday as Morgan Stanley and CLSA expect the gold lenders to benefit from diversification and loan growth.
Morgan Stanley initiated coverage on gold lenders with an equal-weight rating, according to its note. It has a price target of Rs 1,150 on Muthoot Finance Ltd. and an overweight rating and price target of Rs 150 on Manappuram Finance Ltd.
"Cyclically, the gold loan business is in a relatively weak spot," said Morgan Stanley in its report. "Consequently, loan growth in gold finance is likely to remain muted and underperform overall system credit growth. However, diversification is the solution."
According to the report, Manappuram Finance is better placed, with over 35% of its loan book being non-gold—comprising microfinance, affordable home loans, vehicle loans, SME loans, and other loans.
Muthoot Finance has been slow in scaling up the non-gold businesses, which is still only slightly above 10% of its loan book. Still, Morgan Stanley forecasts gold loan growth and margin expansion for Muthoot Finance.
It assigned Manappuram Finance an overweight rating due to a well-executed diversification strategy, loan growth, and rising profit contribution of non-gold segments.
Gold lending has been a business with a supernormal ROE but low growth, and competition from banks is rising. Diversification is the way out, and overweight-rated Manappuram looks better positioned than Muthoot both cyclically and structurally. Valuation multiples are also attractive for Manappuram.Morgan Stanley
CLSA, in its report, highlighted the rising competition in gold loan financing and the entry of fintechs, banks, and select NBFCs in this space.
But Manappuram Finance Ltd. and Muthoot Finance Ltd. have "adapted to competition by launching online and doorstep gold loan offerings" to be on par with the fintechs and banking sector, it said. "We believe that competition is here to stay and thus our current expectation is lower than the historical trend."
Manappuram Finance rose as much 5.07% before closing 3.6%. Muthoot Finance rose as much as 0.64% and closed 0.11% higher.
The shares of Manappuram Finance were trading at 3.8 times their 30-day average, with 44% of analysts changing their price targets on the stock over the past month. Out of the 18 analysts tracking the stock, 16 maintained a 'buy' rating, one suggested 'hold,' and one recommended 'sell' the stock, according to Bloomberg data.
On the other hand, the shares of Muthoot Finance were trading at 1.7 times their 30-day average. Out of the 21 analysts tracking the stock, 13 maintained a 'buy' rating, four suggested 'hold,' and four recommended to 'sell'.