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AUM growth surprises positively

* PAT grew 22% YoY to INR10b in 4QFY21, in line with our estimate. Strong loan growth, despite falling gold prices, was the key surprise in 4QFY21.

* The company delivered 26% gold loan growth in FY21. NII/PPOP/PAT growth was also healthy at 15%/23%/23%. On account of the strong performance, we upgrade our FY22E/FY23E EPS estimate by 3-4%.

Growth in AUM surprised; spread compression modest

* Gold loan AUM grew 4% QoQ to INR526b (v/s our estimate of a 3% QoQ decline), driven by 3% growth in tonnage to 171MT.

* Spreads declined 50bp QoQ to 13.7%, led by 80bp compression in yields to 21.9%. Cost of funds (CoF) improved 30bp to 8.2%.

* The overall borrowing book as well as borrowing mix was largely stable. The company pruned liquidity to INR71b from INR96b. It would continue to maintain excess liquidity in the near term.

* Opex missed our expectations – total opex jumped 17% QoQ to INR5.16b, 10% higher than our estimate.

Highlights from the management commentary

* The management has guided at 15% AUM growth in FY22. However, AprMay’21 were washout months as many branches were shut.

* It would like to open 100-150 branches annually (though in FY22 it may be lower).

Other highlights

* The GNPL ratio declined to 0.9% from 1.3% QoQ. ECL provisioning remains largely stable QoQ at 1.2% of loans. The company has excess provisions of INR3b (0.6% of loans).

* Tier I ratio remained stable at 26%.

Subsidiary performance

* Muthoot Homefin:

The book continues to run down – it declined 9% QoQ to INR17b. The GNPL ratio fell to 4% from 6.8% QoQ.

* Belstar Investment and Finance:

There was a sharp pick-up in business, with the loan book increasing 14% QoQ to INR33b. GNPL ratio increased to 2.4% from 0.7%. Total ECL provisioning is 3%.

Valuation and view

MUTH delivered a strong 4QFY21, especially on the growth front. Despite the 10-12% decline in gold prices, it managed to grow the loan book by 4% QoQ, which is encouraging. Even in the second COVID wave, loan demand is likely to remain high as customers’ cash flows will be stressed. We expect the company to deliver ~15% loan growth in the medium term.

With an AA+ rating, the cost of funds is likely to decline. This should mitigate yield pressure, if any. RoA/RoE is likely to remain robust at 6.5%/25% over the medium term. We increase our FY22E/23E EPS estimate by 3-4%. We maintain our Buy rating with a TP of INR1,725/share (3x FY23E BVPS).

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