1. Edelweiss says ‘Buy’ Muthoot Finance shares; target price Rs 442

Edelweiss says ‘Buy’ Muthoot Finance shares; target price Rs 442

As against fears of gold loan companies bearing major brunt of demonetisation, Muthoot’s business practices helped it recover swiftly with: AUM growth of 8% y-o-y versus initial expectation of decline; and GNPLs rise restricted to 2.9% (2.2% in Q2FY17; a technical increase which management expects to recoup in Q4FY17).

By: | Published: February 15, 2017 5:35 AM
Muthoot Finance  (File Photo) Muthoot Finance (File Photo)

(Muthoot) delivered steady Q3FY17 performance in an otherwise challenging quarter.

As against fears of gold loan companies bearing major brunt of demonetisation, Muthoot’s business practices helped it recover swiftly with: AUM growth of 8% y-o-y versus initial expectation of decline; and GNPLs rise restricted to 2.9% (2.2% in Q2FY17; a technical increase which management expects to recoup in Q4FY17).

Focus on cost efficiency persisted (opex/asset at sub-4.5% levels), thus supporting profitability. NIMs were softer on lower yields (lower collections, higher interest income reversal), though funding cost will benefit from retirement of long-term borrowings over next few quarters, which will help sustain/improve NIMs.

Revenue tailwinds, along with normalised auctions and controlled costs will enable Muthoot deliver >25% earnings CAGR over FY16-19E.AUM growth of ~8% y-o-y (to Rs 270 billion), though lower than 6% q-o-q run rate in past couple of quarters, was commendable amidst demonetisation.

The stock is trading at 1.6x FY19E P/ABV. We maintain ‘Buy/SO’ with a revised TP of R442 (R410 earlier), as we roll forward to FY19E.

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