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AUM and Gold holdings flat QoQ, auctions miniscule

* PAT grew by ~16% YoY, but fell 2% QoQ to INR9.7b (~9% miss) in 1QFY22. This was driven by a miss on NII (down 4% QoQ due to lower yields) and slightly mitigated by lower opex (down 23% QoQ).

* Core Gold loans continued to exhibit resilience, with the portfolio remaining flat QoQ (up 29% YoY), despite muted Gold loan demand and disruption in branch operations during 1QFY22.

* The deterioration in standalone GS3 was along expected lines at 1.2% (up ~25bp QoQ), but is largely technical in nature. We expect this to get reversed in 2QFY22, with provision write-backs.

* MUTH has reported a decent performance in a difficult quarter and it only goes to show the strength of this franchise. We expect a strong rebound in Gold loan demand over the next six months. Our FY22E/FY23E loan growth is in line with the management guidance of 15%

* On account of a longer than anticipated impact of the second COVID wave, we cut our FY22E/FY23E EPS estimate by 6%/2%. The stock trades at 2.7x FY23E P/BV. We reiterate our BUY rating with a TP of INR1,825/share (3.2x FY23E BVPS).

Gold holdings stable; acquires customers in a difficult quarter

* Monthly average disbursements stood at INR52k – the lowest in the last eight quarters due to the impact of the second COVID wave in all three months of 1QFY22 compared to just two months (Apr-May’20) in 1QFY21.

* Gold holdings were flat at 171t. Gold loan AUM was flat QoQ at INR521b (up 29% YoY). LTV declined by ~390bp QoQ to ~71%.

* Despite COVID-related lockdowns, MUTH added ~115k new loan accounts in 1QFY22. ATS has largely remained stable (with a declining bias) over the last three quarters.

Spreads moderated; excess liquidity continues to remain elevated

* Spreads (calculated) fell 145bp QoQ to 12.3%, led by a 130bp compression in yields to ~20.6%. The management feels one should not read too much into it and said it could have been driven by Gold loans offered at special interest rates for a specific purpose or during the festive season.

* Total borrowings increased by 4% QoQ, leading to an absolute increase in interest expenses (up 3% QoQ) in 1QFY22.

* Liquidity continued to remain elevated on the Balance Sheet. The management expects it to remain high since it helps it guard against volatile markets and execute its business targets. Proportion of NCD borrowings in the mix fell by ~180bp to ~29%, offset by bank/CP borrowings, which rose to ~44%/9%.

Highlights from the management commentary

* The management continues to guide ~15% growth in gold loans.

* In the non-Gold business segments, it expects a healthy pickup in disbursements by the end of 2Q and better growth in 2HFY22.

Other highlights

* The GNPL ratio deteriorated to 1.22% from 0.9% QoQ. ECL provisioning improved by ~5bp QoQ to 1.24%, driven by provisioning on the technical NPA pool in 1QFY22.

* Tier I ratio stood stable at 26%. Total opex declined by 23% QoQ to ~INR4b, driven by no CSR expenses/lower advertising expense in 1QFY22.

Subsidiary performance

* Muthoot Homefin: Loan book remained flat sequentially at INR17b (down 14% YoY). The GNPL ratio rose to 5.94% from 4% QoQ.

* Belstar Investment and Finance: Business volumes were impacted in 1QFY22, with the loan book declining by 7% QoQ to ~INR31b. GNPL ratio increased to 3.7% from 2.4% on a QoQ basis.

Valuation and view

* MUTH has proven its resilience yet again. Its Gold loan book and holdings were sequentially flat in 1QFY22, despite muted Gold loan demand during the COVIDled lockdowns. Led by an increase of ~6% QoQ in average gold prices, the LTV on Gold loans declined by ~390bp QoQ to ~71%, offering comfort to MUTH and not necessitating the need for aggressive auctions.

* Even as normalcy is restored and business activities resume, we expect Gold loan demand to rebound as customers fall back upon Gold loans when their own cash flows are stressed. We expect MUTH to deliver ~15% loan growth over the medium term. With an AA+ rating, the cost of funds is likely to decline in coming quarters. This should mitigate yield pressures, if any.

* RoA/RoE is likely to remain robust (6.6%/24%) over the medium term. On account of a longer than initially anticipated second COVID wave, we cut our FY22E/FY23E EPS estimate by ~6%/2%. We reiterate our Buy rating with a TP of INR1,825/share (3.2x FY23E BVPS).

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