Why disruption in gold finance segment is inevitable? Analyst decodes - believes sectors long-term story intact

Gold Financing, Muthoot Finance, Manappuram Finance, IIFL: The gold financing segment is to witness disruption on the back of multiple positive triggers, however, the overall long-term story is likely to be intact, going forward, a research report on the segment released by Systematix Group revealed.

“A safety from an asset quality perspective and the huge untapped potential” are among the two major reasons that gold financing may see new entrants besides Muthoot Finance and Manappuram Finance – undisputed leaders in India’s gold financing business for the last 15 years, Pradeep Agrawal of Systematix Group said in the report. 

Specialised gold finance NBFCs (non-bank finance companies) like Muthoot Finance and Manappuram Finance find themselves in the eye of a storm, as banks, fintech and other NBFCs like IIFL Finance have turned aggressive in the gold financing space, the report noted.

Comparison among various market players

Banks, Fintechs, and NBFCs' sudden attention to gold financing could disrupt the market near term, especially for the two specialised players, the report noted.

“However, we estimate, over the next 5 years, the total pledge ratio to surge to 25 per cent, with the share of organised rising to 45 per cent, driving 13 per cent CAGR (Compound Annual Growth Rate) in the gold loan market,” the research report also said.

“We initiate coverage on both these companies along with IIFL a BUY rating, as their valuations are favourable, product pricing is stabilising and growth is expected to revive,” the brokerage said, citing the key risks stemming from a sharp correction in gold prices and/or competition intensifying.

Muthoot Finance and Manappuram Finance valuations have turned attractive post a 40-50 per cent correction in their stock prices.

Rising penetration of organised players 

Indian households hold a mammoth 14 per cent share of global gold at 27,000 tonnes and mere 20 per cent of which is pledged. While the unorganised sector holds a grip on the chunk 65 per cent, with organised players like banks and NBFCs toying with the remaining 35 per cent share.

In value terms, India’s share translates into Rs 130 trillion (Rs 85 trillion Jewellery share), which at 75 per cent LTV (Loan-To-Value), presents a potential Rs 63 trillion market opportunity; currently, the organised market operates at mere Rs 6 trillion.