Expect Muthoot Fin to deliver 15% loan growth

By: |
September 01, 2021 3:00 AM

Post this equity infusion, MUTH's stake in Belstar Microfinance will reduce to 57.9%, and MAJ Invest, Augusta Investments, and Arum Holdings will hold 10%, 4.6%, and 13.8% stake, respectively.

We expect MUTH to deliver ~15% loan growth over the medium term. With an AA+ rating, the cost of funds is likely to decline in the coming quarters.

In an exchange filing, Muthoot Finance (MUTH) disclosed details of a definitive agreement entered by its subsidiary Belstar Microfinance (MUTH holds ~70% stake before the equity capital infusion) with Augusta Investments, Arum Holdings, MAJ Invest, and MUTH. This definitive agreement is in connection with a proposed primary equity infusion of Rs 3,500 crore in Belstar Microfinance and secondary OFS by promoters for a total consideration of Rs 20 crore.

Post this equity infusion, MUTH’s stake in Belstar Microfinance will reduce to 57.9%, and MAJ Invest, Augusta Investments, and Arum Holdings will hold 10%, 4.6%, and 13.8% stake, respectively. On a trailing basis, the transaction was undertaken at a valuation of 2.4x. We have not factored in this equity infusion in Belstar Microfinance in our estimates.

The transaction is subject to obtaining required regulatory approvals by Belstar Microfinance. The indicative time for completion of the above transaction is around three months. The nature of the transaction would be 100% cash-based, with no share swap.

MUTH showcased its resilience yet again with its Q1FY22 performance. Its gold loan book and holdings were sequentially flat in Q1FY22, despite muted gold loan demand during the Covid-led lockdowns. Led by a ~6% quarter-on-quarter (Q-o-Q) increase in average gold prices, the LTV on Gold loans fell ~390bp to ~71%, offering comfort to MUTH and not necessitating the need for aggressive auctions. Even as normalcy is restored and business activities resume, we expect gold loan demand to rebound as customers fall back on it when their cash flows are stressed.

We expect MUTH to deliver ~15% loan growth over the medium term. With an AA+ rating, the cost of funds is likely to decline in the coming quarters.

This should mitigate yield pressures if any. The RoA/RoE is likely to remain robust (6.6%/24%) over the medium term. MFI contributes ~5% to MUTH’s consolidated AUM. We do not see any material impact of this transaction on MUTH. It is important to note that MUTH’s stake in its MFI subsidiary will reduce to ~58% post this transaction from ~70%, but with two new investors (Augusta Investments and Arum Holdings), there could be some operational improvements.

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