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A mixed bag

Slightly better-than-expected growth, but yield remained under pressure as NPLs rose further

Muthoot Finance’s consolidated NII/PPOP/PAT were 2%/4%/3% below expectations and the miss was caused by decline in portfolio yield, higher non-employee opex and increase in BS liquidity (significant increase in borrowings), even as the credit cost was materially lower (aided by ARC sale of ~Rs7bn NPLs). Consolidated AUM growth stood at 3.5% qoq/23.5% yoy, constituting of 2.2% qoq/19.5% yoy growth in Gold Loans, 12.4% qoq/53% yoy growth in Belstar MFI and 12.5% qoq/36% yoy growth in HL + VF portfolio. There was a significant 20% qoq increase in NPLs adj. for ARC Sale, mainly representing fwd. flow of stressed accounts in Stage-2 as of June (Stage-2 declined by similar extent). Annualized RoA/RoE for the quarter stood at 5%/20%.

Growth metrics in Gold Loans has been improving gradually

Growth in active GL customer base was 3.3% qoq (adjusted for ARC Sale), which was highest in the past eight quarters and much better than 1.7% qoq growth in preceding two quarters. There was further improvement in the traction of new customer acquisition (six-quarter high) and old customer reactivation (six -quarter high), while additional loan to existing active customers was maintained at higher level. Additionally, there was some moderation in customer attrition/loan closures. Renewed growth in customer base over the past three quarters, after a decline over the preceding five quarters, has been a function of augmented advertising & local marketing activity and bettered incentive/reward schemes/contest for branches. Management remains sanguine about Gold Loans portfolio growth (had guided 10-15% growth for FY24 in Q1 earnings call). While this looks comfortably achievable based on current pace of customer accretion and extant gold prices, the resolution (unless rolled over) of high NPLs (4%) would be a drag.

Spread guidance lowered to 9-9.5%

The sequential decline of 40 bps in GL portfolio yield came as a negative surprise. With customer/portfolio mix largely stable (implied by steady avg. pledge per customer), the yield reduction was mainly driven by de-recognition of interest income (~Rs1bn) on new NPLs. This along with marginal increase in CoF drove 50 bps spread compression to 9.2%, which was at multi-quarter low. Management now expects spread to settle in the band of 9-9.5% v/s its earlier expectation of 10%. The yield should stabilize near the current level of 17.7% in the absence of further NPL addition, and it can improve marginally with NPL resolution. Management expects CoF to further inch-up in the current quarter.

Trim estimates, but maintain BUY; NPL resolution would be the key monitorable

Our earnings estimate for FY24/25 undergo 2%/5% cut on lowering of margin/spread assumptions, even as AUM growth has been mildly upgraded for both years. The incremental re-rating of the stock hinges on continuance of healthy customer growth, stable-to-rising gold prices and stabilization of yield with resolution of NPLs. The stock trades at 10x PE and 1.8x PABV on FY25 estimates. We retain BUY with revised 12m PT of Rs1520.

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