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Growth visibility lacking; NIM compression led to the earnings miss

* MUTH’s standalone PAT declined by 17% YoY to ~INR8b (23% miss), led by a compression of ~220bp YoY in NIM and the annualized OPEX/AUM ratio remaining elevated at 3.8% (PY: 3%).

* For MUTH, 1QFY23 was characterized by: a) a 2.4% QoQ decline in Gold AUM, led by auctions of ~INR13.7b (FY22: INR52b), and some closure of teaser-rate customer accounts, who were migrated to higher interest rates; b) ~180bp QoQ decline in spreads to 9.6%, reflecting the impact of teaser-rate loans disbursed during Dec’21 to Mar’22; and c) elevated advertising and publicity costs at INR467m (PQ: INR366m), suggestive of the aggressive brand campaigns in the face of the current competitive landscape in high-ticket gold lending

* The trade-off between loan growth and margin was evident in the last three quarters. The continued aggression of Banks and Gold loan FinTechs will eventually make Gold loan NBFCs pivot their business models to much lower spreads and margin (than they did in the past), complemented by steady Gold loan growth.

* With the migration (effected during May-Jun’22) of teaser-rate customers to higher interest rates, spreads and margin will improve over the next two quarters. However, it leaves MUTH vulnerable, as these customers can be poached by Banks and Gold FinTechs, who offer Gold loans at much lower interest rates.

* We estimate standalone AUM growth of 9%/13% in FY23/FY24, with spreads declining to ~9.4%. We have cut our FY23/FY24 estimate by 16%/4% to factor in a moderation in spreads and elevated OPEX. We model a RoA/RoE of 4.8%/18% in FY24. Given the lack of loan growth visibility and a structural change in Gold loan NBFC business models that we foresee, we believe there are limited triggers for a further upside in the stock. We downgrade the stock to Neutral with a TP of INR1,250 (based on 2.1x FY24E P/BV).

Gold loans fell by ~2.4% QoQ, with a decline in gold holdings

* Gold loan AUM fell 2.4% QoQ, but grew 8% YoY to ~INR562b, while consolidated AUM declined by 1.6% QoQ to INR634b.

* Gold tonnage fell 5% QoQ to 178t. The number of loan accounts/ active customers declined by ~3% QoQ each to 8.1m/5.2m.

* The average monthly disbursement of INR127b in 1QFY23 (PQ: INR112b) suggests that Gold disbursements were healthy, but AUM declined due to the gold auctions of INR13.7b (PQ: INR21b) and/or balance transfers to the competition.

* The MFI subsidiary (Belstar) reported a 53% YoY growth (albeit on a small base) in AUM to ~INR47b.

NIM compresses by ~150bp QoQ; Reduction of liquidity on Balance Sheet

* Standalone yields (calculated) fell ~150bp QoQ, and even borrowing costs grew ~30bp. This led to a QoQ decline of ~180bp/~150bp in spreads/NIM.

* Liquidity on the Balance Sheet declined to ~INR59b from INR80-90b that it maintained over the last eight quarters. The reduction in the negative carry will have partly offset the impact on margin as well.

Expect gold auctions to moderate now, which should aid loan growth

* GS3% fell ~90bp QoQ to 2.1%, with the 30+dpd declining to ~3% (v/s a peak of 13% in Sep’21).

* Gold auctions stood at INR13.7b in 1QFY23 v/s ~INR52b/INR1.7b/INR5b/INR10b in FY22/FY21/FY20/FY19. We expect the auctions to moderate now and reduce the run-off in gold AUM

Highlights from the management commentary

* The management guided at a Gold loan growth of 10-15% and minimum spreads of ~10% in FY23.

* MUTH opened new Gold loan branches in Jul'22 and expects the rollout of the newer branches to be completed by Oct'22.

*Borrowing costs should remain stable. The higher incremental cost of borrowings can be offset by the maturity of higher cost existing borrowings.

Valuation and view

* The demand for Gold loans is not very buoyant. As highlighted earlier, there is a tradeoff between spreads/margins and growth in Gold loans. The stance of Gold loan NBFCs has now reverted to restoring spreads and margin. We believe this will translate into muted gold loan growth. Striking an appropriate balance between loan growth and margin will be important.

* The stock trades at 2x FY24 P/BV, but we see limited triggers for a further upside, given the concerns around Gold loan growth and the need to evolve the Gold loan NBFC business model. We downgrade the stock to Neutral with a TP of INR1,250 (based on 2.1x FY24E BVPS).

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