Muthoot Finance rating: Maintain ‘buy’ with target price of Rs 1450

August 21, 2020 5:00 AM

Despite lower penal interest and a negative carry of higher liquidity, ~14% margin underscore pricing power, with paucity of competition from in-group (other gold jewellery financiers) as well as substitute products.

The current environment offers unique growth and asset safety tailwinds to gold financing — a rarity amongst lenders.The current environment offers unique growth and asset safety tailwinds to gold financing — a rarity amongst lenders.

By Edelweiss Securities

Muthoot Finance (Muthoot) beat Q1FY21 earnings estimates due to a strong top line and opex savings. Gold loan AUM saw a marginal, but nevertheless less-than-expected, dip q-o-q (6% q-o-q fall in gold holdings nearly mitigated by an equivalent rise in AUM/gm). However, superior NIM (normalised for lower penal collections) supported revenue traction. GNPL rose to 2.6% (2.2% in FY20) given lower auctions. Other businesses — home finance, Belstar and insurance broking —understandably decelerated due to adverse circumstances. The current environment offers unique growth and asset safety tailwinds to gold financing — a rarity amongst lenders.

Super-normal profitability (RoE potential of >25%), strengthening gold price tailwind and low asset quality risks compel us to increase target multiple to 3.1x FY22E P/B (2.5x earlier). This represents the very upper-end of our comfort zone — gold financing is after all a mature credit category. Simultaneously, we see little competitive threat from banks being allowed to increase gold loan LTV to 90% from 75% due to non-overlapping customer base and operational challenges of processing gold loans at scale. Overhang of non-core businesses (~12% of AUM) remains the key risk. Maintain ‘buy’ with revised TP of Rs 1,450 (earlier Rs 1,160).

Gold loan AUM came in at Rs 405bn (marginally down q-o-q), but still better than our estimate. Gold price tailwind helped, reflected in >22% y-o-y/6% q-o-q rise in AUM per gram. The company has already gained strong business momentum and expects to maintain 15% growth for FY21, which we believe will be surpassed given gold price tailwinds. We have built in 23%/21% loan growth estimates for FY21/FY22.

Despite lower penal interest and a negative carry of higher liquidity, ~14% margin underscore pricing power, with paucity of competition from in-group (other gold jewellery financiers) as well as substitute products. We estimate core NIM to expand by ~50bps by FY22. Operating economies should support an impressive earnings trajectory.

We see a unique medium-term combination of strong growth and an impressive RoE of 28%, not to mention the low asset quality risk–the biggest draw in current circumstances. Valuations do materially reflect this robustness. We maintain ‘buy’/SP’.

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