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Positive long term outlook persists

About the stock: Muthoot Finance is a leading gold financier in India with gold loan AUM of | 54214 crore as on December 2021.

* It has a large footprint across India with 4617 gold lending branches

* The company also has a presence in other lending segments like housing, microfinance, vehicle finance via its subsidiaries

Q3FY22 Results: Soft quarter on overall basis

* Overall AUM up 8.5% YoY, gold AUM up 9.3% YoY at | 54214 crore

* Stage-3 assets up 197 bps QoQ to 3.8%. Auctioned worth |2800 crore gold

* NII up 4.1% QoQ, NIMs up 28 bps QoQ at 13.7%, C/I steady at 23.6%

* PAT at |1029 crore, in line with estimates

What should investors do? Muthoot Finance’s share price has grown by ~5x over the past five years. We believe this is a good opportunity to play on the gold finance theme.

* We maintain BUY rating on the stock

Target Price and Valuation: We value the core business (gold loan) at ~2.7x FY24E ABV and assign | 43 to subsidiaries to arrive at a target price of | 1700 per share

Key triggers for future price performance: 

* Customer addition and economic revival to aid AUM trajectory ahead

* Limited impact of rising funding costs to aid margins and thus profitability

* Strong asset quality, low leverage, positive ALMs with sticky customer base levers to aid strong operating performance

* Healthy return ratios RoE, RoA of ~25%, 6%, respectively, to aid valuations

Alternate Stock Idea: Apart from Muthoot, in our coverage we also like CSB Bank.

* CSB Bank has gold and SME as its key loan segments. Restructuring of business strategy has led to an improved performance in past few years

* BUY with a target price of | 320

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