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Core trends remain subdued

Muthoot Finance’s delivered 4% earnings miss in Q3 FY23, despite 2% NII/PPOP beat, due to higher provisions in gold loan and other businesses. On key franchise metrics, the performance of GL segment was mixed with a) flat customer base and marginal fall in tonnage, b) further moderation in pace of new customer acquisition, existing customer activation and subsequent loans to active customers, c) mild 0.6% qoq AUM growth aided by favourable price movement, d) material 80 bps recovery in portfolio yield, e) no change is customer segment focus (nearly flat incremental pledge per loan account) and f) deterioration in asset quality. With restrained increase in CoF, a significant margin expansion drove an improvement in RoA.

Amidst structural headwinds to growth, recent rally in gold prices can offer some respite

High competition and consequent growth struggle was visible in sustained subdued trends in customer acquisition (down 4% qoq/12% yoy), existing customer activation (down 5% qoq/11% yoy) and fresh loans on additional collateral to existing active customers (down 5% qoq/19% yoy). The gold loan customer base, tonnage and AUM is down 1.5%/6%/1% on YTD basis (since the stoppage of teaser rate/very low yielding schemes) and the portfolio yield recovery has been limited to 100 bps thus far. The structural/competitive dynamics are expected to remain adverse in the medium term due to increase in number of players and entry of large entities with vast distribution. However, the recent significant rally in gold prices offers value growth possibilities provided gold loan NBFCs maintain their customer base. Taking a cue from some positive trends over the past couple of months, Muthoot expects gold loan portfolio to witness healthy growth in Q4 FY23. The management expects 10% growth in the portfolio in FY24. Portfolio yield is now expected to stabilize, as the co. is wary about operating at much higher rates given increased competition.

Amidst structural headwinds to growth, recent rally in gold prices can offer some respite

High competition and consequent growth struggle was visible in sustained subdued trends in customer acquisition (down 4% qoq/12% yoy), existing customer activation (down 5% qoq/11% yoy) and fresh loans on additional collateral to existing active customers (down 5% qoq/19% yoy). The gold loan customer base, tonnage and AUM is down 1.5%/6%/1% on YTD basis (since the stoppage of teaser rate/very low yielding schemes) and the portfolio yield recovery has been limited to 100 bps thus far. The structural/competitive dynamics are expected to remain adverse in the medium term due to increase in number of players and entry of large entities with vast distribution. However, the recent significant rally in gold prices offers value growth possibilities provided gold loan NBFCs maintain their customer base.

Taking a cue from some positive trends over the past couple of months, Muthoot expects gold loan portfolio to witness healthy growth in Q4 FY23. The management expects 10% growth in the portfolio in FY24. Portfolio yield is now expected to stabilize, as the co. is wary about operating at much higher rates given increased competition.

Growth improvement required for valuation re-rating; retain ADD

Our FY23/24 earnings and RoE estimates doesn’t undergo any material change. Going forward, we will closely monitor the yield trajectory, run rate of inactive customer activation and fresh customer acquisition (indicators of growth revival/relative market positioning), movement in gold prices and the opex trend (any reflection of efforts taken to support growth). Valuation is unlikely to re-rate till growth improves. Retain ADD rating with a 12m PT of Rs1270.

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