Accumulate Muthoot Finance Ltd For Target Rs. 2,551 - Elara Capita
On a strong footing
Muthoot Finance (MUTH IN) is in a sweet spot with strong tailwinds underpinned by continued gold price traction, full adherence to regulatory norms and risk aversion to unsecured loans propelling gold loan demand. Q3 earnings were another testimony to the outperformance underscored by the highest consol AUM growth of 34% YoY, and superior productivity gains (customer count uptick 1.8% QoQ, and loan per branch uptick 8% QoQ) positioning MUTH favorably to ride on the upcycle for the next 12 months. The underlying price rally of 27.5% in the past 6 months compels us to revise rating to Accumulate with a higher TP of INR 2,551 on 2.5x FY27E PABV.
Healthy PL on strong core, rising productivity and demand: PAT at INR 13.6bn was in line with our estimates, up 9% QoQ and 32.7% YoY, on robust business and margin. NIM improved 6bp QoQ and 72bp YoY, led by lower cost of funds (COF) and stable yield. The cost-income ratio rose 36bp QoQ to 26% due to festival rewards and growth initiatives. Average gold loan per branch rose 8% QoQ and 32% YoY, with loan accounts up 3%. Muthoot Homefin faced PAT pressure from higher borrowing cost but remains resilient, led by cross-selling. NIM is set to witness a slight decline as yield remains stable. Fundamentals have played a key role in earnings growth for 9MFY25
Gold loan traction sustains; upward revision in guidance: Q3 loan growth was robust, bolstered by the festival season and strategic transformation of Muthoot Money branches to facilitate gold loan disbursement. This was reflected in 34.3% YoY and 7.9% QoQ growth in gold loans alongside 34.5% YoY and 6.7% QoQ expansion in consolidated book fueled by robust customer acquisition of 1.5mn in Q3, aggressive branch expansion, a digital-first strategy, and customer-centric initiatives. Further strengthening the growth trajectory are tailwinds from rising asset appreciation, favorable macros, partnerships with GPay & PhonePe and regulatory alignment. While management remains prudent with 15% growth with room for upward revision. We expect AUM growth at 35% YoY for FY25E with an AUM CAGR of 25% during FY24-27E.
Steady asset quality, ECL spikes; auction last resort: Stage 3 stood at ~4.2%, down from 4.3% in Q2. Technical NPA are not a concern for concern, and auction of INR 600mn in Q3 are considered the last resort, as MUTH prioritizes customer relationships. Belstar MFI Stage 3 improved from ~3.5% in Q2 to ~2.9% as the MFI book runs down, although PAR 0 stands at 90.5%. With MFI forming a mere 8% of consolidated AUM, gold loans comprises 84% of overall mix, security receipts declining, and non-gold NPA peaking, asset quality remains under control. NPA is set to settle at 2.5% during FY25-2
Revise to Accumulate with higher TP of INR 2,551: Favorable market positioning underpinned by subsiding competition and conformation with regulatory norms coupled with underlying sustained asset price momentum continue to aid earnings. We pare down FY25 EPS by 1.7% to factor in higher provision but raise our EPS by an average of 4% for FY26E and FY27E on continued robust growth and superior returns. MUTH is likely to post a 25% loan CAGR during FY24-27E and despite factoring in higher ECL, expect a superior return profile at 5% ROA and 18% ROE during FY24-27E. A 27.5% price rally in the past 6 months compel us to revise to Accumulate from Buy with a higher TP of INR 2,551 from INR 2,266 on 2.5x as we rollover to FY27E core PABV
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SEBI Registration number is INH000000933
