By Kotak Institutional Estimates
We believe that the withdrawal of teaser rate loans and better pricing discipline will support Muthoot’s near-term net interest margin (NIM). Gold price tailwinds due to a depreciating INR will augur well for Muthoot’s medium-term growth prospects. We remain positive and upgrade the stock to BUY (from ADD) with a revised Fair Value of Rs 1,240 (22% upside).
Competitive pressures easing
Our channel checks suggest that price wars in the gold loan business have likely eased as lenders discontinued teaser rate loans and are exercising pricing discipline in light of rising interest rates. Market sources suggest that the lowest gold loan rates (teaser loans) are up to 12% from 6% offered a few months earlier. Further, interest rates across standalone gold finance NBFCs have been standardised and are back to Q2FY22 level; most lenders are cautious about rise in interest rates in the system. However, we don’t expect weighted average yields to bounce back to pre-teaser levels just as yet, even as headline rates are back.
Rising competitive pressures had prompted Muthoot to launch teaser loans in December 2021 that put pressure on its NIM for two subsequent quarters. The company stopped the scheme in April but the entire portfolio was shifted to higher-yielding loans by June 2022. Increasing credit growth in the system will likely prompt these players to shift focus away from gold loans that tend to be a low-ticket, low-duration and high-velocity business.
Valuation undemanding despite improving underlying security
We remain assertive on Muthoot’s business model to deliver ~20% RoE and low-to-mid teens medium-term growth. Credit cost remains low due to solid underlying security and Muthoot’s risk-management systems that have ensured strong portfolio performance over cycles. Growth has, however, been volatile linked to gold price movements and auctions. While we are not revising our estimates, we find upside risks from a depreciating INR supporting gold prices. Valuations at 7.6X earnings and 1.5X book FY2024E are undemanding. BUY; RGM-based FV stands at Rs 1,240 .