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Retain positive stance based on structural growth factors and profitability

Our view

Muthoot Finance’s Q3 FY22 performance was a mixed bag wherein substantial auctions of Rs28bn (5% of Gold AUM) and swift flow forwards in Stage 2 & 3 buckets (despite better economic environment) were key negatives, and resilient portfolio yield (notwithstanding rate competition), sustained core growth trends (customer acquisition, existing activation, etc.) and resolution of stress without much impact on P&L were key positives.

The gold loan portfolio declined 1% qoq and gold holdings were flat due to large quantum of auctions. However, pertinent to note is the sustained velocity in new customer acquisition and existing customer activation, which implies immediate resumption of growth when auctions subside. Auctions could continue in Q4 FY22, as the co. looks to resolve the 6% Stage-2 assets and 3.8% Stage-3 assets. Credit cost could also remain elevated due to under recovery of some portion of interest. Resilient portfolio yield was a pleasant surprise considering that co. had introduced lower rate schemes (starting from 6.9% pa) for high-value loans after the second wave. NIM improved by 20 bps qoq due to benign trend in CoF, which the management believes would continue for next couple of quarters as incr. CoF is much lower. While the co. is likely to miss its 12-15% growth guidance for FY22, it is targeting a similar growth for FY23.

We have cut FY22-24 earnings/ABV estimates by 3-6%/1-3% mainly on lowering of growth assumptions. We now estimate 11% CAGR in gold AUM and 14-15% CAGR in earnings over FY21-24 on stable gold prices. In our view, the transitory challenges pertaining to stress resolution (auctions, some interest loss, etc.) are already baked in the price (stock has underperformed recently and valuation is palatable at 2x FY24 P/ABV), thus we maintain our positive stance based on structural factors, mainly growth and profitability resilience. Our revised 12m PT is Rs1900.

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