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Gold loan business on track following gold price.

Muthoot Finance, India’s largest NBFC in gold loans by loan portfolio, operates over 6,759 branches nationwide. Besides gold loans, it offers various loans, insurance, money transfer services, and gold coin sales through its subsidiaries.

* We anticipate the loan AUM to grow at a CAGR of 16% over FY24-26E, driven by increasing gold prices, reduced competitive intensity, and a projected decline in unsecured lending options due to rising credit risks.

* Yields are expected to stabilize at current levels (~18.0%) due to decreased competition in the gold segment. In this lower yield scenario, the company anticipates a 19% CAGR in profits for FY24-26E, driven by higher AUM and improved operational leverage.

* Customer acquisition will be driven by branch expansion, with management planning 150-200 new branches annually. This scaling up will boost loan growth and support future growth.

* Muthoot maintains higher provisions than its closest peer due to a more conservative auction policy, aimed at preserving customer relationships. Despite this, asset quality risk remains low due to lower LTV ratios (LTV Q1FY25~63%) and the rally in gold prices.

* Given gold’s stability as a secure asset class and the expected ROE improvement by FY26, Muthoot merits a premium valuation. We initiate coverage with an “Accumulate” rating and a target price of ?2,140 based on the SOTP valuation method. Gold loan business on track following gold price. Sector: NBFC Initiating Coverage 10th October 2024 Data as of: 09-10 2024 Gold Loan Operations Continue to Excel The positive correlation between gold prices and gold loan growth indicates that the recent rally in gold prices is likely to generate additional loan AUM to the company. Muthoot currently lends at lower yields compared to peers; as they put lower yields, it attracts more customers and helps to compete with others. We expect Muthoot’s gold loan book to grow at a pace of 16% CAGR over FY24-26E. The company maintains a capital adequacy ratio (CAR) well above the regulatory requirement of 10%, reporting a CAR of 30.4% at the end of FY24. Muthoot also boasts healthy return ratios, with an ROE of 18.1% and an ROA of 5.1% in FY24.

Outlook and Valuation

Given the resilience of gold as a secure investment and a projected ROE increase of 100bps to 19.1% by FY26, Muthoot is positioned to receive a premium valuation. We value the consolidated entity at 2.4x of FY26E BVPS, above the 5yr Avg. of 2.3x and initiate coverage with an “Accumulate” rating and a target price of ?2,140 based on the SOTP valuation method.

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