IGI Logo

Below estimates led by higher opex and lower spreads

In the last two quarters, MGFL traded off margin/spreads for Gold loan growth. This new business strategy helped it cover a lot of lost ground in terms of market share, with a cumulative Gold loan growth of ~24% over 2Q and 3QFY22. This new strategy also meant: a) elevated advertising/promotion costs and incentives for employees translating in higher operating expenses, and b) compression in spreads to ~11.5% v/s 14.5-15% under its earlier high yielding business model. At this juncture, MGFL can neither afford such high operating expenses, nor can it cut yields further to match the competition. The natural outcome of this will be a near-term moderation in Gold loan growth for MGFL.

MGFL reported a consolidated PAT (24% miss) of INR2.6b, down 46% YoY and 29% QoQ. NII fell 7% QoQ to INR9.15b (in line), driven by a sharp compression in spreads.

Credit costs remained elevated in its MFI subsidiary due to the residual impact of the second COVID wave. We expect credit costs to now moderate from 4QFY22 onwards.

There has been a structural compression in spread/margin in the last two quarters, but MGFL seems to be betting on an improvement in cost ratios and leverage, led by a strong growth in AUM.

MGFL has exhausted both the levers of higher advertising/promotion expenses and spread compression to turbocharge its Gold loan growth. We now expect a Gold loan growth of ~10% for MGFL in FY22E and 15%/12% CAGR in consolidated /Gold loan AUM over FY22-24E.

We have cut our FY23E/FY24E EPS estimate by 18%/19% to factor in a compression in spreads and lower loan growth. We believe the risk-reward for MGFL is still favorable at 1x FY24 P/BV for a consolidated RoA/RoE of 5.1%/20%. We maintain our Buy rating with a TP of INR170/share (based on 1.2x FY24E consolidated BVPS).

Healthy sequential growth in Gold loans, but MFI AUM declines QoQ

Gold AUM rose 9% QoQ to INR204.5b. Gold tonnage grew 7% QoQ to 69.4t

Within Gold loans, LTV declined by 200bp QoQ to 65%, while average ticket size (ATS) rose to INR53k (v/s INR46k YoY and INR48k QoQ), driven by the healthy acquisition of higher ticket Gold loan customers.

MFI AUM declined by 4% QoQ, led by caution in disbursements in 3QFY22, even as collection efficiencies have been improving in this segment.

Sharp compression in spreads/margin

Consolidated spreads (calculated) fell 330bp YoY and 260bp QoQ, led by a sharp decline in consolidated yields to 20.1% (down 270bp QoQ). Consolidated CoB was broadly stable at 8.7% (down 10bp QoQ). Consolidated NIM fell 250bp QoQ to 12.7%.

Highlights from the management commentary

While demand was buoyant in Oct-Nov'21, there was a marked slowdown in Dec’21. Demand had not improved even in Jan'21.

Gold loan growth may moderate to 1.5-2% per month in the near term since MGFL doesn’t want to compete at yields of ~17% offered by the competition.

The management expects yields to improve to 21% since it has tweaked interest rates offered across different ticket sizes.

Valuation and view

MGFL has traded off spreads/margin to demonstrate a higher sequential growth in Gold loans in 2Q/3QFY22. It has transformed its business model and at the end of this glide path, we expect a sustainable medium-term RoA/RoE profile to emerge.

The demand environment in Gold loans is not very buoyant, and the management has clearly articulated that it does not wish to pursue growth at the cost of a further compression in spreads. We model consolidated AUM/PAT CAGR of ~15%/~25% over FY22-24E.

We believe the risk-reward for MGFL is still favorable at 1x FY24 P/BV for a consolidated RoA/RoE of 5.1%/20%. We maintain our Buy rating with a TP of INR170/share (based on 1.2x FY24E consolidated BVPS)

To Read Complete Report & Disclaimer Click Here

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html SEBI Registration number is INH000000412

Above views are of the author and not of the website kindly read disclaimer