Yesterday, while scrolling through social media, I saw a video of a guy pushing a small wooden block. But the problem here was that that block of wood was the first of a whole arrangement of many blocks that were placed on top of each other.
So all the wooden blocks started to fall one after the other. A beautiful picture was formed when all the blocks fell. It was pleasing to the eyes.
One move started a whole cycle of other moves. This is called a domino effect. However, the outcome of all dominoes does not always paint a pretty picture.
Sometimes the result is disappointing, like the domino effect created by falling gold prices in Muthoot Finance.
Muthoot Finance share price is down 23% in 2022. It touched its 52-week low price of Rs 961.1 on June 29, 2022.
Below is the performance of Muthoot Finance stock since previous year.
Muthoot Finance is the largest gold lending NBFC in India. A major part of Muthoot’s business comes from giving gold loans.
90% of Muthoot Finance’s assets are in gold loans. Therefore, even a small upward or downward movement in the price of gold will affect the financial statements of Muthoot Finance.
Gold prices fell rapidly in 2022. They return to 2020 levels. When gold prices fall, fewer people will mortgage gold because less money will be offered to them. Therefore, people avoid trading in gold when the price of gold is falling.
A company’s stock price falls when its external circumstances worsen. It also happened with Muthoot Finance.
#2 Poor financial performance
When 90% of your balance sheet value deteriorates, it’s obvious that your finances will paint a bad picture.
Muthoot Finance posted weak Q1 results on August 12, 2022.
Muthoot Finance reported a net profit of Rs 8,000 crore in the first quarter of the financial year 2022-23. It is 17% lower compared to the net profit of Rs 9.7 billion reported in the same quarter last year.
Total revenue for the quarter was Rs 25.1 billion. It is 8% lower than the income of the same quarter last year.
The value of the loan’s assets has been reduced by 2% quarter-on-quarter. However, year-on-year, loan assets have increased by 8%.
The poor financial situation has caused Muthoot Finance’s share price to fall.
Investments to take away
2021 was a stellar year for companies in the gold sector as gold prices were soaring. However, in 2022, gold prices took a hit and the impact can be seen in related businesses.
However, as gold prices recover, so will these companies.
Muthoot Finance’s asset value has come down due to falling gold prices. But Muthoot Finance business is still intact.
So the company may be facing headwinds at the moment, but overall it has a strong presence in the gold loan market.
In the short term, the stock price may remain muted due to muted gold prices and the company’s lack of organic growth.
Markets are still volatile. Therefore, gold prices will continue to fluctuate. Therefore, an investor should be aware that the assets of Muthoot Finance will also fluctuate.
Therefore, an investor should carefully analyze their risk appetite and time horizon before making an investment decision.
Disclaimer: This article is for informational purposes only. It is not a stock recommendation and should not be treated as such.
This article is distributed on Equitymaster.com
(This story has not been edited by NDTV staff and is automatically generated from a syndicated feed.)