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Healthy gold loan growth but NIM compression leads to earnings miss

* Muthoot Finance (MUTH)’s 1QFY24 performance was characterized by: 1) healthy gold loan growth at ~7% QoQ to reach ~INR660b, 2) ~70bp QoQ contraction in NIM; 3) higher ECL provisioning due to rise in Stage 2 and Stage 3; and 4) a moderation in cost-to-income ratio to ~29% (PY: ~35%) primarily owing to higher NII and lower advertisement & publicity expenses.

* Standalone PAT grew ~22% YoY to ~INR9.75b (5% miss). Net total income grew 25% YoY to ~INR19.6b while PPoP rose 37% YoY to INR14b (in line).

* Healthy gold loan growth was supported by: a) higher gold prices allowing an increase in LTV to ~68% (PQ: ~63%), b) gold tonnage growth of ~1% QoQ and increase in customer base of ~2% QoQ.

* MUTH reported a ~55bp QoQ decline in yields and ~40bp increase in CoB resulting in a ~1pp decline in spreads. Management guided that it would endeavor to maintain spreads at current levels of ~10%.

* We model ~16% growth in standalone AUM in FY24. We estimate a standalone AUM CAGR of ~13% over FY23-FY25 and model RoA/RoE of 5.7%/ 18.5% in FY25. Higher gold prices have aided sectoral gold loan growth and even MUTH has benefitted from the same. We are still not sure, though, if MUTH is over the hump of a trade-off between gold loan growth and margin.

* With limited upside catalysts for the stock, we maintain our Neutral rating with a TP of INR1,290 (based on 1.8x Mar’25E P/BV).

Highlights from the management commentary

* Management guided for NIM of ~11% and spreads of 10%. MUTH admitted that spreads of ~12% achieved in the past are not sustainable.

* Management guided that Housing Finance AUM would grow to INR18-19b and Belstar MFI AUM would grow to ~INR90b by Mar'24.

Belstar MFI: Healthy AUM growth of 49% YoY with better asset quality

* MUTH’s MFI subsidiary (Belstar) posted ~49% YoY AUM growth to ~INR70b. Reported PAT surged 275% YoY (albeit on a lower base) to INR517m.

* Belstar is expanding beyond Tamil Nadu (the company's home state), in alignment with its long-term strategy to reduce concentration to ~35% (from current levels of ~49%) by FY26.

* Asset quality improved sequentially with GS3 declining ~80bp QoQ to 1.6% and collection efficiency on regular accounts being at ~99.4%.

* CAR stood at ~22% and Belstar is evaluating various fund raising options.

Sustenance of strong gold loan growth uncertain; reiterate Neutral

* MUTH reported a healthy sequential growth in gold loans but this growth was accompanied by a corresponding trade-off between spreads and margins. Striking an appropriate balance between loan growth and margin will still remain an important deliverable in FY24.

* With limited upside catalysts, a not so benign competitive landscape and clouded outlook on the margin trajectory, we maintain our Neutral rating with a TP of INR1,290 (based on 1.8x Mar’25E BVPS).

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