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Strong quarter, growth sustenance key

Muthoot Finance (Muthoot) reported yet another strong quarter with improving loan growth (4.8% QoQ) supported by customer additions. Customer additions (up >3% QoQ) was strong, vindicating our stance of a perceptible volume growth tailwind. Management maintained the growth guidance of 15%-plus, which they would beat in our view.

Current environment offers unique growth and asset safety tailwinds to gold financing. With credit risk a structural non-issue and supernormal profitability, Muthoot remains one of our preferred NBFC picks. Given its better recovery and sustained superior returns (RoE >25%), we are raising the target to 3.5x P/BV (from 3.2x), leading to a revised TP of INR1,975 (earlier INR1,780). Maintain ‘BUY’.

Growth better than expectations; medium-term outlook solid

AUM (gold) growth of >17% YoY/4.8% QoQ, came in better than our expectation despite operating challenges. Moreover, strong customer addition (3% QoQ) vindicates our stance of perceptible growth tailwinds. Going forward, as momentum picks up, we expect volume growth to remain a function of disbursement velocity and gold prices. Management has conservatively maintained 15% as the lower band of growth for FY22. We believe it has a high probability of surpassing that, and are building in 18%/15% loan growth estimates for FY22/FY23.

Core steady, ability to sustain superior returns – A rarity in lenders

The company continued to sustain steady core momentum – NIMs improved QoQ deriving benefit from lower funding cost. Yield reversal and a borrowing cost tailwind should support margins going forward. Competitive pressure on yields seems some time away and will perhaps first arrive from substitute credit sources rather than the same product. In the meanwhile, super-normal profitability (RoE of >25%) should sustain for another couple of years. Other businesses – home finance, Belstar and insurance broking – understandably decelerated due to adverse circumstances. Non-core lending forays (~10% of AUM) remain our sole point of discomfort.

Outlook and valuation: A purple patch; maintain ‘BUY’

We see a rare medium-term combination of strong growth and high RoEs (~25%) until segment competition cyclically mean-reverts due to entry of new gold financiers, amid structurally low asset quality risk. Maintain ‘BUY/SO’ with a TP of INR1,975.

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