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Gold loan growth remain muted; Margin recovery still elusive

* MUTH’s 2QFY23 results were characterized by: a) muted gold loan growth of 3% YoY to INR565b (PY:547b); b) maturity of much higher interest rate gold loans (disbursed prior to the introduction of teaser rate gold loans), keeping the yield improvement muted; c) retirement of higher cost liabilities, aiding benign borrowing costs (CoB) in a rising rate environment, and d) lower reported operating expenses, translating into an inline PPoP

* Standalone PAT declined ~13% YoY to ~INR8.7b (in-line), led by a 13% YoY decline in NII. Standalone yields (calc.) increased marginally ~8bp QoQ to 17.5%, while the CoB declined ~8bp QoQ, leading to a ~15bp/30bp sequential improvement in spreads and margins, respectively. Both the yield improvement and the margin recovery were below expectations.

* The trade-off between loan growth and margin, which has been evident in the last five quarters, will continue to persist in the foreseeable future. We expect the continued aggression of Banks and FinTechs to eventually make Gold loan NBFCs pivot their business models to lower spreads and margin (than they did in the past), complemented with steady gold loan growth.

* Delivering on the guided 10% YoY gold loan growth in FY23 will be difficult, in our view. This is backed by our hypothesis that MUTH and others are unlikely to pursue loan growth at the cost of profitability. Moreover, we expect elevated run-off from the maturity of higher-ticket gold loans for MUTH in 4QFY23 and now model standalone AUM growth of ~3% in FY23.

* We estimate standalone AUM CAGR of 7% over FY22-FY24, with spreads improving marginally to ~10%. We model an RoA/RoE of 4.9%/17%, respectively, in FY24. Given the lack of loan growth visibility and a structural change in Gold loan NBFC business models that we foresee, we expect limited upside catalysts for the stock. We reiterate our Neutral rating with a TP of INR1,130 (based on 1.9x FY24E P/BV).

Gold loans growth muted, with a decline in gold holdings

* Gold loan AUM was flat QoQ and grew 3% YoY to ~INR565b, while the consolidated AUM at INR644b grew ~6% YoY. The MFI subsidiary (Belstar) reported a 53% YoY growth (albeit on a small base) in AUM to ~INR51.4b.

* Gold tonnage declined 1% YoY and QoQ to 177tonne. The number of loan accounts declined ~7% YoY and grew 1% QoQ to 8.16m, while the number of active customers also grew 1% QoQ to 5.22m.

* The average monthly disbursement of INR88b in 2QFY23 (v/s INR127b in 1QFY23) suggests that Gold-NBFCs like MUTH have now gravitated toward lower-ticket gold loans.

Yield expansion will remain slow; opex likely to be higher in 3Q/4QFY23

* The company shared that all teaser loans have been migrated to higher interest rate loans (upwards of 10%) and this is expected to contribute toward an expansion in yields in the subsequent quarters.

* Opex stood at INR4.5b (18% lower than MOFSLe), mainly driven by lower employee expenses and a moderation in the advertising/publicity costs, which stood at INR238m (PQ: INR467m and PY: INR288m) in 2QFY23.

Highlights from the management commentary

* The company had received RBI approval for opening 150 new branches. About 24 new branches were opened until Sep'22 and the company expects to open all the remaining branches by Dec'22.

* The company guided for margins in the range of 11-12% and is reasonably confident in its ability to maintain CoF at its current levels of ~8% in 3QFY23 despite rising interest rates.

* Muthoot Finance has applied to the RBI for approval of credit cards business, but the company has not heard back from the regulator as yet.

Valuation and view

* As highlighted earlier, there is a tradeoff between spreads/margins and growth in Gold loans. Gold loan NBFCs have now reverted to restoring spreads and margins. We believe this will translate into muted gold loan growth. Striking an appropriate balance between loan growth and margin is important.

* We have cut our FY23/FY24 EPS by 2%/4% to factor in a moderation in our gold loan growth estimates. We see limited upside catalysts, given the concerns around Gold loan growth and the need to evolve the Gold loan NBFC business model. We reiterate our Neutral rating with a TP of INR1,130 (based on 1.9x FY24E BVPS)

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