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Steady performer

Steady earnings quarter;

business and asset quality healthy Q3 earnings stood healthy, characterized by strong gold loan traction coupled with steady NIMs and improved asset quality for Muthoot Finance (MUTH IN). PAT at INR 10.2bn grew 3.7% QoQ on steady NII (up 2.5% QoQ) and flat opex (down 1% QoQ), with cost-income declining to 29% from 30% in Q2FY24. Yields increased 14bps QoQ to 17.79%, with a similar QoQ spike in the cost of funds (CoF) to 6.92% offsetting pressures leading to flat NIMs QoQ at 10.9%. Q3 saw the share of bank borrowings increasing to 28.9% from 24.4% in Q2, hence CoF may tad surge to ~9% ahead as cited by Management; NIMs to be maintained.

Value-driven gold loan uptick; microfinance growth robust too

Defying competition, MUTH reported a 1% QoQ/27.2% YoY consolidated AUM growth. While gold loans grew a healthy 2.5% QoQ/22% YoY to INR 660bn, these were largely led by underlying gold price rise (up 9.5% QoQ) due to which even LTVs dropped to 65% from 70% in Q2. Tonnage at 184 waslargely steady and fresh loans with new collaterals declined QoQ. Competitive intensities persist, but the management is confident of 15% gold loan growth with greater focus on marketing/advertisement initiatives. On the micro finance side, Belstar reported a staggering 65% YoY / 12% QoQ growth.

Asset quality improved; auctions declined Asset

quality improved, with Stage 3 assets decreasing to 3.6% from 4% in Q3FY24, above estimated. ECL provision was a tad lower QoQ at 0.7% versus 0.8% in Q3FY24. Stage 2 in Q3 drastically decreased by 36% sequentially. Auctions at INR 3,810mn or 0.6% of gold loan book were low. Belstar Stage 3 deteriorated slightly, with marginal impact from Tamil Nadu floods where lies 50% of its network presence. Expect GNPA estimate at 2.0% for FY24E-26E.

Valuations: Revise to Accumulate; TP retained at INR 1,520

While growth and asset quality were impressive in Q3, growth was largely value- and base-driven. Any fluctuations in the underlying price may hinder 15% growth guidance for MUTH. Hence, to err on the side of caution, we estimate 14% gold loan CAGR in FY24E-26E. Healthy fresh consumer accretion is the key to growth. With competitive intensitiesstill at play, yields and opex may remain in check. Subsequently, expect NIMs steadying at average 11.7% and cost-income ~29%. Subsidiaries, although a small share, are in good shape and are supportive of earnings. Expect RoAs at 5.1% and RoEs closer to 17% for FY24E-26E. While MUTH is expected to perform better than peers, the price rally of 15% since our past upgrade in Oct ’23 leaves us now with 10% upside. Revise to Accumulate from Buy as we ascribe 2.2x FY25E P/ABV for a commodity led business fabric, with SoTPTP retained at INR 1,520

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