Muthoot Finance’s (Muthoot) Q2FY16 PAT of Rs 175 crore (up 2% YoY, down 5% QoQ) was lower than our estimate following slower–than–expected revenue momentum—a function of declining NIMs and relatively lower AUM traction (up 1.9% QoQ, a derivative of slower demand). A large part of growth was volume driven as gold tonnage grew 4.3% QoQ to 144 tonne while overall LTV/gram declined to Rs 1,720.
Key highlights were, continuing trend of decline in NIMs to 9.27% on lower lending rates (over >35bps QoQ fall in Q1FY16 as well); GNPLs inching up to 2.55% (2.13% in Q1FY16) due to delayed recovery and auctions; and with rise in branch and employee base, opex/AUM rising to 4.77%. Despite cutting earnings by 10% following NIM pressure and lower growth trajectory in H1FY15, it will still generate RoE of >15% by FY17E. Given limited asset quality risk due to collateralized nature of lending, we believe emerging certainty in AUM growth following customer acquisition push at branch level and stabilising gold price will lead to valuation re–rating. Maintain ‘buy’ with target price of Rs 275.
One of the key monitorables for Muthoot is accretion to AUMs, which over the past couple of quarters were on expected lines.