Muthoot Finance: Retain ‘reduce’ with FV of Rs 1,250

By: |
February 12, 2021 9:17 AM

High growth phase behind us. Muthoot Finance’s 3QFY21 performance was supported by strong gold price rally during 9MCY20, improving funding environment and efficient cost controls at the company.

muthoot financeThe funds raised will be utilised primarily for lending activities.

High growth phase behind us. Muthoot Finance’s 3QFY21 performance was supported by strong gold price rally during 9MCY20, improving funding environment and efficient cost controls at the company. With stable gold prices and favorable base waning, we expect growth to revert to mid-teen levels from FY2022E. Limited scope for NIM expansion and credit cost reversals makes Muthoot less preferred at the current juncture over pro-cyclical diversified financials. Retain REDUCE; Fair ValueRs 1,250

We believe the recent rally in gold and improving liquidity will drive about 26% loan growth in FY2021E; however, with stable gold prices, we expect growth to normalise to about 14-15% over the medium term, supported by gradual organic expansion. We expect the liquidity environment to remain favorable as well.

Muthoot’s business is linked to gold. Muthoot’s business tends to have high linkages to the gold cycle. Notably, Muthoot reported average RoA of 2.6-6.8% during the recent cycle, i.e. 2014-20 (peak of 6.5-6.8% in FY2020-21) and RoE of 14-28% (peak of 28% in FY2020- 21). With stable gold prices, we expect RoE to revert to about 22% by FY2024E; any sharp correction in gold prices can provide downside to our estimates, even as we have built some buffers on NIM compression and marginally higher credit costs from current negligible levels.

Prefer NBFCs that play on recovery. In the current environment we prefer vehicle finance/SME NBFCs (Cholamandalam, Mahindra Finance, Shriram Transport Finance and SCUF) that benefit from a combination of improving demand recovery and reducing credit costs, driving high earnings growth in the near term. Muthoot, on a high base of FY2021E, will moderate in the near term.

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