Gold loan stocks attractive, Muthoot Finance is top pick: GreenEdge Wealth

Detailed summary

GreenEdge Wealth Services' Digant Haria sees strong earnings growth ahead for gold loan lenders and microfinance companies, while expecting HDFC Bank to have greater re-rating potential.

Gold loan companies are poised for strong growth over the next two to three years, with attractive valuations creating investment opportunities in the NBFC sector, according to Digant Haria, Founder of GreenEdge Wealth Services.

He is particularly positive on Muthoot Finance and IIFL Finance, while also seeing growth potential in Bajaj Finance.

Haria added, “We are in for good times for the sector and Bajaj Finance being the bellwether of NBFCs, should do well. And there is nothing to complain, it's just that right now the large boys are rallying. The smaller boys have to wait a little bit.”

Haria believes improving business conditions, better earnings visibility and attractive valuations have created an opportunity for investors in the financial services space. He is particularly positive on gold loan companies.

Among gold loan companies, Haria prefers Muthoot Finance, followed by IIFL Finance. He also highlighted Fedbank Financial Services and Tamilnad Mercantile Bank as other interesting opportunities.

He is particularly positive on Muthoot Finance because of its strong return ratios. The company has an ROE of more than 25%, which, according to Haria, offers investors the potential to benefit from consistent book value growth even without an expansion in valuation multiples.

He also believes the valuations of gold loan companies remain attractive, with concerns around gold prices weighing on the stocks.

He flagged gold prices as an important factor to watch for the sector. He expects gold prices to remain around $4,000 per ounce or higher, which would support the growth outlook for gold loan companies.

Speaking about Bajaj Finance's proposed ₹11,700 crore qualified institutional placement (QIP), Haria expects the issue to receive a strong response, given the company's position in the NBFC industry. He believes Bajaj Finance can deliver around 25% growth while maintaining a return on equity (ROE) of nearly 20% over the next two years.

Opening of the article, excerpted from CNBC-TV18. To read the rest, open the article on the publisher's site.