Muthoot Finance Rating: Retain ‘add’ with FV of Rs 900

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Published: May 6, 2020 12:20:03 AM

A solid security and appreciating asset prices will augur well for Muthoot Finance’s stable asset quality performance during a period when most NBFCs have negligible visibility on their recoveries.

The long lockdown and rub-off of liquidity challenges for NBFCs will, however, likely translate into muted growth in FY21E.

A solid security and appreciating asset prices will augur well for Muthoot Finance’s stable asset quality performance during a period when most NBFCs have negligible visibility on their recoveries. The long lockdown and rub-off of liquidity challenges for NBFCs will, however, likely translate into muted growth in FY21E. Strong return ratios and limited risk to asset quality will likely continue to drive its rich valuations; retain ‘add’ with FV of Rs 900. Key risks remain on asset quality of its subsidiaries engaged in microfinance, auto and housing, aggregating 11% of consolidated AUM.

Gold loan NBFCs tend to be counter-cyclical plays as gold loan growth tends to have a strong relationship with overall movement in gold prices, which in turn, typically rise during economic downturns. The recent sharp (up ~25% y-o-y in FY20) run-up will provide tailwinds to the India gold loan business. Muthoot is one of the best pure plays (~89% of consolidated AUM is gold loans) in this space with >10% market share as of FY19.

Lockdown-related challenges, mostly on the collections front, will temper near-term performance. Rising gold prices help maintain healthy LTV ratios.

The company may be the first to bounce back as risk aversion moderates likely by H2FY21, a trend visible in M9FY20 as well. We are revising down our estimates by 8-11% due to lower growth in H1FY20 and marginally lower NIM, reflecting lower penal income during moratorium. The overall business will still remain highly profitable with about 20% RoE in the near as well as medium term.

Muthoot has significantly outperformed other BFSI stocks and remains in a sweet spot. We retain ‘add’ with RGM-based FV of Rs 900 (rollover from Rs 860). At our FV, it will trade at 2.2X book. Even as we remain positive on the gold loan business, any challenges in its subsidiaries can pose some risk of higher capital commitments.

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