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Healthy Gold loan growth; gold auctions still minuscule

Operational performance in line

* PAT (in line) grew by 11% YoY and 2% QoQ to INR9.94b. Despite higherthan-estimated provisions, lower-than-estimated interest expenses (driven by lower CoB), and benefits of lower operating expenses led to an in line performance.

* It posted an OPEX beat of 6% – OPEX declined by 2% YoY, but grew 10% QoQ to INR4.4b. The cost ratio declined by 80bp YoY to 3.3%. PPOP (3% beat) grew by 17% YoY and 6% QoQ to INR14.14b.

* Gross Stage 3 increased by 63bp QoQ to 1.85% in 2QFY22.

* We expect MUTH to deliver standalone AUM growth of ~17%/14% in FY22E/FY23E. RoA/RoE is likely to remain robust (6%/23%) over the medium term. We cut our FY22E/FY23E EPS estimate by ~2%/1% to factor in slightly higher credit costs. We reiterate our BUY rating with a TP of INR1,900/share (3.1x Sep’23E BVPS).

Improved demand outlook for Gold loans; gold tonnage grew 4% QoQ

* Gold loan AUM grew 5% QoQ and 18% YoY to INR547b. Consolidated AUM rose 5% QoQ and 17% YoY to INR609b. The MFI subsidiary (Belstar) reported a 9% QoQ and 25% YoY AUM growth (albeit on a small base) to INR33.5b.

* Tonnage grew ~4% QoQ and ~9% YoY to 178t. This is a positive as a large portion of gold AUM growth in 2QFY22 was complemented by an increase in tonnage.

* Average monthly disbursements of INR85b in 2QFY22 (v/s INR77b in 4QFY21) suggest that: 1) the demand outlook for Gold loans has improved, and 2) despite aggressive pricing from NBFC peers and Banks in high-ticket size Gold loans, MUTH has been able to retain customers and grow its Gold loan book.

* The number of customers rose 3.4% QoQ to 8.8m. LTV increased by ~200bp QoQ to 73%.

Although technical in nature, deterioration seen in asset quality

* For the second consecutive quarter, deterioration was observed in GS3, which increased 63bp QoQ to 1.85%. Write-offs were insignificant at 1bp of loans, or INR77m, in 2QFY22. MUTH auctioned INR2.7b worth of Gold loans (~50bp) in 2QFY22.

* NPAs in Gold financing are largely technical in nature, without any significant write-offs. This deterioration – with gold prices remaining stable in 2QFY22 – suggests that MUTH is granting its customers (who would have perhaps borrowed at the peak of gold prices in Aug-Sep’20) leeway to repay their loans rather than rushing to auction the gold.

* Stage 2 was relatively elevated ~11%. The management said it is taking concerted efforts to improve Stage 2 loans.

* Credit cost at ~55bp (as a percentage of average AUM) was INR744m (est. INR400m).

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