Why Muthoot, Manappuram Finance Are New Market Darlings

Shares of gold loan companies Muthoot Finance and Manappuram Finance have outperformed the broader indices over last one month. Including today's gains, Muthoot Finance shares are up nearly 27 per cent while Manappuram Finance shares have surged nearly 40 per cent in last month, compared to nearly 4 per cent gain in the broader Sensex. 

The surge in Manappuram Finance and Muthoot Finance shares follow strong financial performance by these companies in the fourth quarter. 

Sentiment in the broader NBFC stocks has also perked up following a surge in bad loans in the banking sector. Retail-facing NBFCs have reported a higher credit growth and lower gross non-performing assets as compared to banks, which have high exposure to the stressed corporate sector. 

Muthoot Finance reported 61 per cent increase in its profit for the January-March quarter at Rs 265 crore while Manappuram Finance's net profit surged 86 per cent to Rs 131 crore. 

Improved collection mechanism and an increase in profitability helped these companies post strong results in the fourth quarter. Increase in the gold prices also acted as a sentimental boost for their business, said analysts. 

Analysts believe the strong show by these gold loan companies is likely to continue in the forthcoming quarters as well. 

"Q4 was definitely a better quarter. In this quarter (Q1 of FY17) we are seeing the same growth trajectory in business," Alexander Muthoot, managing director at Muthoot Finance told NDTV Profit. (Watch)

Mr Muthoot said their asset under management (AUM) could see a minimum 10 per cent growth in the current fiscal. 

Meanwhile, domestic brokerage Nirmal Bang in a note to client said that Manappuram Finance's AUM could grow at a CAGR (compound annual growth rate) of 25 per cent over FY2016-18. 

Nirmal Bang has initiated coverage on Manappuram Finance with a "buy" rating for a target price of Rs 85, which indicates a potential upside of 48 per cent from Thursday's closing price of Rs 57.4. 

As of 11.39 a.m., Manappuram Finance shares traded 2.22 per cent higher at Rs 57.45 while Muthoot Finance shares were up 2.9 per cent at Rs 269.9. In comparison the broader Nifty was 0.1 per cent lower.