Buy Muthoot Finance Ltd For Target Rs.2,075 - Yes Securities
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‘Growth recovers without further giving away margins’
Our view
Muthoot Finance’s stronger-than-expected gold AUM growth of 5% qoq/18% yoy assumes significance as it was characterized by granularity (3.4% qoq customer franchise growth and 4.1% qoq gold tonnage growth), market share gains (many competing banks & NBFCs witnessed -2% to +2% gold loan portfolio movement in Q2 FY22) and low auctions at Rs2.2bn (amid fears of much higher auctions due to sharp gold price correction in past 9-12m). On top, the growth reinvigorated on stable portfolio yield and improved spread which stood at 20.2% and 11.4% respectively; underlining static competitive intensity. Besides Belstar MFI (5% of AUM) which witnessed substantial AUM expansion of 9% qoq on strong disbursements recovery, the portfolios of housing finance and vehicle finance subsidiaries contracted on sustained calibrated business approach and significant collection recovery (sizeable reduction in absolute Stage-3 assets). However, the contribution of non-Gold Loan businesses in consolidated profits stayed at negligible 1% v/s 10% in AUM.
Management remains confident about delivering 15% gold AUM growth for the full year, even as it calls for continuance of 5% qoq growth in the remaining two quarters. Competition unlikely a risk to sustaining healthy growth for Muthoot given a) significant demand recovery, b) market expansion (from customer profile/use cases perspective) and c) co.’s demonstrated ability to fend competition. New customer acquisition and existing customer activation run-rate have reverted to normalcy which depicts positive customer franchise progression. We raise FY23/24 earnings estimates by 4-8% largely by upgrading gold AUM growth assumptions. We estimate a much sharper improvement in RoA now during FY22-24. On the back of stronger growth visibility and rollover of target valuation multiple to FY24 ABV, we have raised the 12m PT to Rs2075.
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