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Moderate sequential AuM growth, however, guidance maintained

Moderate top-line growth: Muthoot Finance consolidated net interest income remained in line with expectation in Q2FY24 was Rs 2,170 Cr, up by 1.3% QoQ/24.9% YoY as yield on loans remained positive while cost of borrowings saw an increase. Interest income increased by 3.8% QoQ/27.1% YoY to Rs 3,505 Cr, however, interest expense grew by 8% YoY/30.8% QoQ to Rs 1,335 Cr.

Pressure on margins: During the quarter, net interest margin remained under pressure as it declined by 70bps QoQ/16bps YoY to 10.9% led by increase in cost of borrowings by 27bps QoQ/43bps YoY to 6.8%. The management in Q1 had indicated that NIMs would remain stable and any increase in cost of borrowing would be easily passed on to customers. However, it remained a challenge due to which NIMs saw a decline. Going forward, management expects cost of borrowings to increase marginally while NIMs would be maintained at current levels.

Moderation in sequential AuM growth: Gold AuM increased by 2.2% QoQ/19.5% YoY to Rs 67,517 Cr while total AuM increased by 2% QoQ/20.6% YoY. However, the management remains confident of the AuM in H2FY24 and therefore maintained its guidance of 15-20% by FY24. The average ticket size of the customers increased by 14% to Rs 79,158.

Sale of NPAs to ARC: In an attempt to reduce NPAs from its books, the company sold its NPA worth Rs 700 Cr to an ARC for recovery of loans. The company chose ARC route rather than auctioning the gold to recover the NPAs due to its customer friendly policies and retaining the gold of customers. The company expects full recovery of loans going forward from its customers.

Con-call highlights: 1) The company is seeing reduction in the competitive intensity from the banks. 2) Margins remains subdued partially due to sale of NPAs to ARC which capped the NIM. 3) Out of Rs 700 Cr NPA sold to ARC, the company managed to recover Rs 250-300 Cr of loans and going forward it expects full recovery of loans. 4) The customer count of NPAs sold to ARC is 80,000 out of which the ARC completed recovery of 24,000 customer’s loan. 5) Cost of borrowing is expected to see slight elevation post which it is expected to remain moderate. The management expects cost of borrowings to increase by 10-15bps in the near term.

Valuation and outlook: We remain positive on Muthoot Finance as the company remains a market leader in the gold lending business and it is preferred choice for customers due to its customer friendly policies. The company expects growth in its AuM in H2 higher than H1 and also expects margin to be retained at current levels. We expect NII/PAT growth of 8%/9% CAGR over FY23-25E and maintain Buy, however, we revise our target price downwards to Rs 1,453 valuing the company at 2.1x of its FY25E Adj. BV.

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