Update On Muthoot Finance Ltd By HDFC Securities
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Our Take:
Muthoot Finance Ltd. (MFL) continues to be the No. 1 gold loan financier, driven by its strong business model led by its lean cost structure, high standards of collection and operational efficiencies. This has resulted in best-in-class margins along with negligible ALM (Asset Liability Management) & NPA issues. As normalcy is restored in the post Covid world and businesses resume activities, gold loan demand would return as customers with stressed cash flows and short term needs fall back on gold loans.
MFL has a comfortable liquidity position with ~Rs 8250cr as cash and investments which when deployed would result in NIM expansion and higher return ratios. The non-gold portfolios faced asset quality challenges due to the pandemic and the management had strategically decided to curtail disbursements resulting in de-growth in the housing loan and vehicle finance business.
However the management expects these businesses to pick up Q2FY22 onwards. On February 12, 2021, we had initiated coverage on the stock (Link) with a recommendation to ‘Buy on dips to Rs 1220-1228 band and add further in Rs 1113-1121 band’ for base case fair value of Rs 1325 and bull case fair value of Rs 1406. The stock entered our buying range on March 8 and achieved both the targets on June 2, 2021.
Valuation & Recommendation:
We expect the MFL to maintain strong RoEs of >25% and RoAs of >7% by FY23E. Margins are expected to improve on higher gold lending, lower cost of borrowing and deployment of surplus cash Given the fast growth in book values, high profitability, high return ratios and low balance sheet risk, gold loan companies deserve to be valued higher than other NBFCs.
We have not gone for SOTP valuation of MFL but value the whole company on P/ABV. We feel investors could buy the stock in Rs 1520-1540 band and add on dips to Rs 1330-1350 band (2.2x Sep-23E ABV) for base case fair value of Rs 1680 (2.75x Sep-23E ABV) and bull case fair value of Rs 1805 (2.95x FY23E ABV) in 2 quarters. At CMP the stock is trading at 2.5x Sep-23E ABV
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