Geopolitical tensions in the Middle East, the US-China trade conflict, uncertainty around Brexit and the global slowdown have driven gold's spot prices to all-time highs.
The yellow metal surpassed Rs 35,000 per 10 gram in some Indian states on June 25. On the global front, it breached the $1,400-mark to reach its six-year peak.
Some analysts expect a further surge in gold prices on the expectations of aggressive rate cuts by the US Fed, while others see a slump in the near future on the expectations that the ongoing G-20 Summit will provide some respite in regard to the US-Iran and US-China relations.
Titan and Muthoot Finance are two stocks that could be impacted by the surge in gold prices, said investment management firm JM Financial.
According to the company, the price movement of gold will have no material impact on the margins of Titan, as the compan’s making charges are now linked to the underlying value of jewellery pieces.
"From a jewellery demand perspective, consumers typically work with a budget and these are rarely based on grammage. As a result, higher gold prices would mostly be offset by lower grammage purchased and vice-versa, though, in the initial stages of a highly price-inflationary phase, consumers may adopt a wait-and-watch approach," said JM Financial in a report.
This is also evident from FY17 and FY18 results as average gold prices were 12 percent higher in FY17 but dropped by 1 percent in FY18, while Titan’s jewellery segment posted more than 20 percent revenue growth coupled with operating margin expansion in both years.
As for Muthoot Finance, the rise in gold prices would enable a rise in credit of 8 percent from existing customers by providing them top-up loans, which would also enhance asset quality, said the brokerage.
"If the company wants to maintain a moderate LTV level of 62 percent, then it can grant around top-up loans which alone could result in an 8.3 percent YoY growth in FY20. The asset quality will strengthen further," said JM Financial
During FY13 to FY 16, gold prices declined 8-9 percent. In this period the firm’s loan-to-value (LTV) increased by 400 bps to 68 percent. After FY16 till FY19, gold prices increased by 10 percent and the firm’s LTV was at 62 percent.
"The gold finance companies by maintaining an average LTV of 62-65 percent (despite the maximum limit of 75 percent) have been able to lower the risk of a sharp decline in gold prices. The recent surge in gold prices will further reduce the risk of defaults by existing customers," the report added.
In the recent spike in gold prices, LTVs have reduced to 57 percent, down from 62 percent as of March 31, 2019.
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