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Strong all-round performance

Muthoot Finance (MUTH)’s 3QFY21 PAT grew 22% YoY to INR9.9b, driven by healthy loan growth, stable spreads, and continued cost control. In 9MFY21, MUTH delivered 23–24% NII/PPOP/PAT growth.

Key highlights of the quarter – volume-led loan growth; lower CoF

* While the number of customers and loan accounts had been largely flattish for the past several quarters, a 4–5% sequential uptick was seen in the same. Likewise, gold tonnage and gold loans grew 2%/7% QoQ. Total AUM (standalone) stood at INR497b (up 32% YoY).

* Notably, with 7% sequential loan growth, MUTH outperformed its next largest peer (3% QoQ) despite more than twice the loan book size.

* The company continues to diversify the borrowing mix, raising INR20b via retail NCDs in the quarter. Overall cost of funds (calc.) declined 60bp QoQ to 8.5%, while spreads were sequentially stable at 14.2%.

* The company continues to maintain a tight control on expenses – total opex was down 2–3% QoQ and YoY, driven by lower employee expenses (due to lower variable pay) and advertising costs. Its expense ratio of 3.6% is the lowest in the past several years and ~100bp lower v/s FY20.

Highlights from management commentary

* The company reported 67% LTV on the balance sheet; incremental LTV is 68–70%.

* Incremental CoF is 8% for banks and 7.5% for NCDs. It would maintain excess liquidity.

Other highlights

* The GNPL ratio was stable at 1.3%. Total provisions on the BS stand at 1.8%.

* The share of NCDs has increased 500bp to 30% over the past two quarters. Liquidity on the BS remains elevated at 21% of borrowings.

Subsidiary performance

* Muthoot Homefin: Total AUM declined 3% QoQ / 7% YoY to INR19b. Disbursements are still at 10–15% of pre-COVID levels. The GNPL ratio increased from 1.7% to 6.8% (proforma). Total BS provisions stand at 2.1%.

* Belstar Investment and Finance: After two subdued quarters, the company resumed growth. AUM grew 7% QoQ / 26% YoY to INR29b, while PAT was muted at INR54m (v/s INR258m YoY). The GNPL ratio was largely stable at 0.7%. Total BS provisions stand at 2.1%.

Valuation and view

After several quarters of stagnant customer and loan count, 4–5% sequential growth this quarter is encouraging. As the economy recovers from the shock of the pandemic, loan demand is likely to remain high. We expect the company to deliver 12–15% loan growth post FY21. Incremental cost of funds is ~100bp lower than on-book cost of funds – this should mitigate yield pressure, if any. RoA/RoE is likely to remain robust at 7%/27% over the medium term. We increase our EPS estimates by 6–7%, factoring in stronger growth and lower opex. Maintain Buy, with TP of INR1,500 (2.7x FY23E BVPS).

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