Muthoot Finance’s reported profit after tax (PAT) for Q1FY17 grew by 48% year-on-year (y-o-y) and 2% quarter-on-quarter (q-o-q) to Rs 270 crore (24% beat v/s our estimate of Rs 218 crore).
The strong performance was led by a revival in AUM growth (+6% q-o-q) and improvement in yields on the back of lower auction losses. Firm gold prices helped the company to settle recoveries from overdue accounts. Share of overdue accounts declined from 25% in Q3FY16 to 13% in Q4FY16 and to 8% in Q1FY16 led by collection efforts.
AUM for the quarter stood at R25,860 crore, up 5.9% (y-o-y) and 6.1% (q-o-q). Management has turned optimistic on 6% (q-o-q) growth achieved this quarter, and believes that the AUM growth target of 15% y-o-y for FY17 should be easily met.
Muthoot plans to open 200 branches in FY17. However, management does not expect much impact on C/I ratio as AUM will also grow well. NIM increased by 220bp y-o-y to 11.8%. However, this was on account of one-off items (strong recoveries).
Revival in business and improving return ratios make the stock appear attractive at its current valuation of 1.8x financial year 18E BV. We are raising our FY17/18 earnings per share (EPS) estimates in order to factor in better margins. Maintain Buy with Target price (TP) of R405 (2.25x FY18E BV).