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Weak on key business metrics

Muthoot Finance’s in-line profit performance, despite a 4% NII miss, was aided by lower CoF and reduction of opex (decline in employee, advt. & maintenance costs). On key business metrics, the performance remains soft with a) flat gold tonnage/AUM, b) no recovery in portfolio yield (despite migration of teaser portfolio to normal rates), c) no change is customer segment focus (loan per account & customer same for past 3Qs) and d) no improvement in the run-rate of inactive customer activation and fresh customer acquisition. Auctions were lower at Rs5.8bn v/s Rs14bn in Q1. Though Stage-3 assets declined materially from 2.1% to 1.7% on sequential basis, there was a significant increase in Stage-2 assets which rose from 0.8% to 1.5%.

Uncertain commentary on growth and yields

Management commentary on growth and yield outlook has been softening over the past couple of quarters. Notwithstanding a flat gold loan book during H1 FY23, the co. hopes to deliver 10% growth for the year. Portfolio yield is now expected to gradually improve, but management is wary about operating at much higher rates given increased competition. The expectation of CoF remaining around 8% for some more time is likely to cushion profitability.

Growth improvement must for valuation re-rating; downgrade to ADD

Our FY23/24 earnings estimates get cut by 5-7% as we make some adverse adjustments to growth and portfolio yield. Going forward, we will closely monitor the yield trajectory (expect some recovery), run rate of inactive customer activation and fresh customer acquisition (indicators of growth revival/relative market positioning) and the opex trend (any reflection of efforts taken to support growth). Till growth visibility improves, valuation is unlikely to re-rate. Some yield recovery in coming quarters is a must for meeting even the revised earnings estimates. Downgrade the stock to ADD with a lowered 12m PT of 1300.

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