Gold highs bring glitter to lenders, miners
Gold financiers and mining companies stand to gain, directly or indirectly, with gold scaling a new high and silver prices, too, heading north. The impact on jewellers, however, is projected to be mixed.
Since March 19, when the latest rally in the yellow metal took off, international spot gold price has risen 28 per cent and silver 86 per cent (given its sharper fall in mid-march due to the crash in global markets).
Simultaneously, shares of Muthoot Finance, Manappuram Finance, and Hindustan Zinc have surged 123 per cent, 111 per cent, and 58 per cent, respectively. Titan Company, though, has risen just 17.5 per cent. In comparison, the Sensex has jumped 35 per cent.
Experts believe the momentum in precious metals will continue. Widening fiscal deficit of many developed and emerging economies — amid Covid-led stimulus packages, political tensions, and other asset classes being less attractive/unreasonably pricey — should continue to support gold prices, said G Chokkalingam, founder and MF of Equinomics Research and Advisory.
Others say the biggest beneficiaries will be gold finance majors, mainly Manappuram Finance and Muthoot Finance, not just in terms of improved asset quality outlook but also because higher gold prices indicate good support to growth in loan book.
Siddhartha Khemka, head (retail research) at Motilal Oswal Financial Services, said: “The bottom-of-the-pyramid segment, which largely obtains gold loans, has seen relatively severe impact of the pandemic. Thus, it will take advantage of rising gold prices to avail loans.”
At a time when banks and
NBFCS are struggling with asset quality risk, gold-financing NBFCS are in a sweet spot. Gold loans account for 65-95 per cent of the overall loan book for Manappuram and Muthoot.
However, the over-100 per cent gains posted by these stocks since their March lows leaves little valuation comfort (price-to-book value of 3.04.5x, based on trailing 12month earnings).
While gold mining is minuscule in India, Hindustan
Zinc produces silver, which accounts for 16 per cent of its overall revenue and more than a third of its operating profit.
Therefore, rising silver prices should protect revenues and profitability of Hindustan Zinc, at a time when zinc and lead prices are under pressure.
This was reflected in its June quarter results, wherein profit from sale of silver metal rose 6 per cent, aided by a 10 per cent rise in price even though production of saleable silver declined 26 per cent.
Zinc and lead output fell 78 per cent, while profit plunged 63.4 per cent — with prices falling an average 11-29 per cent YOY in the quarter.
On the other hand, jewellery players like Titan, already reeling from the lockdown impact and muted demand for high discretionary products, could face increased demand woes if precious metals turn costlier.
Deepak Jasani, head of research (retail) at HDFC Securities, said: “At a time of income uncertainty, rising gold prices only add to demand shrinkage for gold jewellers.”
Given that most jewellery players buy gold inventory on loan, inventory gains will be limited, he added.
However, the jewellery demand trend could revive as the economy gets unlocked, and Khemka says: “In the wake of a continuous rise in gold prices, there will be pre-buying of jewellery by customers.”