Two stocks to buy as rising gold import duties likely to add assets under management
Gold stocks to buy: The latest import duty hike is expected to increase the assets under management (AUM) of gold lenders of the yellow metal, as the new taxation is expected to drive up gold prices. As gold prices have a strong correlation with the growth of gold assets under management, increasing gold prices should lead to an increase in gold assets under management of lending companies. gold (assets under management are the total market value of investments managed by an asset management company).
The government raised the basic import duty on gold to 12.5% from 7.5%, the Union government announced in a notification issued on June 30.
An increase in gold import duties has made gold prices more expensive in the Indian market, which will benefit gold lending companies. Historically, we have seen gold lenders perform well when gold prices are high. Indeed, there is a strong correlation between gold AUM growth and gold prices. Historically, gold lending companies have also incurred negligible losses due to periodic interest collection and timely auctioning of gold. With rising gold prices, the AUMs of non-bank NBFCs, especially gold lenders, are expected to increase,” explained Bhavik Patel, Senior Commodity/Currency Research Analyst, TradeBulls Securities. .
Regarding the increase in import duties, research analysts Ansuman Deb and Kunal Shah of ICICI Securities said in their note that it may lead to higher prices. They further stated that this would be positive for gold lenders as higher gold prices would mean higher note sizes for the same amount of gold assuming the same average loan to value (LTV).
Data from ICICI Securities analysts revealed that AUM gold per branch increased at a CAGR of 12% and 10% from FY14 to FY22 for Muthoot and Manappuram Finance, which mainly led to a CAGR of gold AUM of 13% and 12% for companies during the same period. However, productivity in terms of gold tonnage per branch increased by 5% and 3% CAGR for Muthoot and Manappuram from FY14 to FY22 respectively. On the other hand, IIFL gold assets under management growth of 19% CAGR from FY2014 to FY22 was mainly driven by branch expansion of 12% CAGR and the gold loan per branch CAGR of 7%.
As of March 31, 2022, Muthoot had the highest gold AUM per leg of Rs 12.5 crore compared to Rs 5.2 crore and Rs 4.9 crore in Manappuram and IIFL.
RBI Approval – “A Positive Surprise”
Furthermore, the RBI’s approval to allow Muthoot Finance to expand its branch capacity has opened a positive doorway for other gold financial services firms to follow suit. Branch expansion coupled with higher gold prices should benefit businesses that offer gold loans.
Gold lending NBFCs with assets of 50% or more are required to obtain prior approval from the RBI before opening more than 1,000 branches.
Currently, Muthoot has the largest branch network of 4,617 gold lending branches, while Manappuram follows with a network of 3,829 branches and IIFL Finance with 3,296 branches as of March 31, 2022.
In the fourth quarter of FY22, Muthoot and Manappuram had mentioned that the RBI had been slow to provide approvals for further branch expansion, which analysts said “has traditionally been a growth concern for investors.”
ICICI Securities has assigned a buy rating to Muthoot and Manappuram with a target price of Rs 1,509 and Rs 147 respectively.
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