Maintain ‘buy’ on Muthoot Finance, target Rs 290

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Published: June 4, 2016 7:09:57 AM

Muthoot Finance’s (Muthoot) Q4FY16 PAT of Rs 265 crore (up >60% y-o-y) was much higher than our and Street’s estimates, commendable given accelerated standard asset provisioning (up from 50bps to 100bps)

Muthoot Finance’s (Muthoot) Q4FY16 PAT of Rs 265 crore (up >60% y-o-y) was much higher than our and Street’s estimates, commendable given accelerated standard asset provisioning (up from 50bps to 100bps). AUM growth was optically lower at 4% y-o-y on higher auctions and higher settlements; however, stepping into FY17 we see growth tailwinds given higher gold price and lower auctions. This, along with valuation of 1.3x FY18E P/ABV, lends comfort.

Q4FY16 was characterised by superior revenue traction (NII up >55% y-o-y). Further, Muthoot launched new scheme, Muthoot Lifeline, encouraging one-time settlement for customers to repay overdue interest and intensified collection efforts at branch level which led to collection of overdue interest for 15-18 months on R3.85 billion of loan principal.

We see growth levers in place: stabilising gold prices; lower LTV/gram (Rs 1,714 vs incremental lending at Rs 1,900-2,000); and lower auctions and now expect better traction in AUM growth (22% CAGR over FY16-18). We revise our FY17/FY18 earnings estimates up 8.1%/11.7% and raise our target price to Rs 290 (1.8x FY18E P/BV; earlier Rs 275). We maintain ‘buy/SO’.

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