Loan-to-value is the ratio of amount of money an individual can borrow keeping gold as collateral. Both Muthoot and Manappuram were up 20 percent in early trade, locked in upper circuit.
Also read: An overview of loans in 2013 and the road ahead!
VP Nandkumar, CMD, Manappuram General Finance, said gold loan companies had pitched the change several times previously to the central bank and were expecting the development.
The move is likely to increase the loan books of gold loan companies, said Santosh Singh, Analyst, Espirito Santo. "A customer looks for high LTV and fast disbursal. Because of the 60 percent rule, they could not disburse much and were looking to diversify their businesses. This comes as a sort of a lifeline for them as gold loan products will become attractive," he said.
Gold loan companies, however, will now have to value borrowers' gold only on the basis of the value of the bullion rather than the jewellery, the RBI said. This would reduce the total amount that could be lent against a piece of jewellery.
But the overall impact will be positive, said Nandkumar. "Based on the earlier rule, we could lend up to 65-66 percent of the ornament's value. But at 75 percent, there is an increase of around 8-9 percent," he said. "To that extent, the loan book can grow."
Nandkumar added that the move would also likely help the companies avail cheaper capital as yields on its short-term papers may go down. "While our primary source of funding is banks, we do avail financing from commercial papers or non-convertible debentures. In fact, we have already come out with an NCD issue recently."
Singh said he would likely up his target price for the stocks. "I am yet to do calculations but this is a positive for gold loan companies. There won't be much impact on this fiscal's earnings as there are only a few months left. But for FY15, assets under management should go up."
But if prices of the gold metal decline, it could bog down gold-loan lenders' stocks, cautioned Sandip Sabharwal of Prabhudas Lilladher.
"With the recovery in the troubled global economies, we could see outflows in gold. Save for a near-term bounce, I expect prices to go down to USD 800-900 per ounce by the third quarter of this year," he said. "That's the time whatever related to gold could become a buy."
Muthoot Finance stock price
On January 09, 2014, at 11:09 hrs Muthoot Finance was quoting at Rs 129.10, up Rs 21.50, or 19.98 percent. The 52-week high of the share was Rs 233.70 and the 52-week low was Rs 73.60.
The company's trailing 12-month (TTM) EPS was at Rs 24.08 per share as per the quarter ended September 2013. The stock's price-to-earnings (P/E) ratio was 5.36. The latest book value of the company is Rs 100.50 per share. At current value, the price-to-book value of the company is 1.28.
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