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A strong

show Robust growth in Gold Loans; calibration of growth in Belstar MFI

Muthoot Finance delivered a much stronger-than-expected operational performance in Q1 FY25, manifested in 3%/7% beat on NII/PPOP despite much lower DA income in Belstar MFI. The operational beat essentially came from consolidated loan growth being 10% qoq as against our/market expectation of 5-6%. Large growth surprise came in the mainstay Gold Loans business (82.5% of consolidated AUM) wherein portfolio increased by 11% qoq on the back of 4%/3% growth in active customers/tonnage and 6%/7% growth in avg. loan ticket/avg. loan per customer. The improvement in customer activity (22.5% qoq growth in new customer acquisition and 6% qoq growth in volume of inactive customer activation) was driven by 1) increase in GL demand, 2) absence of IIFL, 3) some moderation in competition from banks and 4) lesser availability of unsecured credit to borrowers. Belstar MFI AUM (10% of consolidated AUM) marginally declined in Q1 FY25 underpinned by a cautious disbursement stance amidst increase in delinquencies.

Stable yields and operating leverage in Gold Loans; higher credit cost reflects more time given to customers

Gold Loans Yield was stable (stand-alone portfolio yield flat at 18.3%) with hardly any change in the customer mix (32% Rs.3 lac). The 20-bps increase in borrowing cost drove a similar decline in spread/NIM. Higher funding cost was driven by availment of funds from relatively costlier sources like ECB and NCDs during the quarter. Stronger growth underpinned significant operating leverage in the stand-alone (gold loan) entity, which got reflected in robust 13% qoq/29% yoy growth in PPOP at consolidated level. Credit cost was high both in stand-alone entity and Belstar MFI. A sharp jump in provisions in Gold Loans was driven by substantial increase in Stage-2/Stage-3 assets, reflecting customers being given more-than-usual time to repay amidst higher gold prices. MFI asset quality deteriorated due to impact of heatwaves, elections and over-leveraging in some pockets.

Gold Loans growth guidance to be revised up after Q2 FY25

After delivering 11% growth in Gold Loans in Q1 FY25, the management is looking to increase the 15-16% growth guidance for the year. Notwithstanding the correction in domestic gold price after recent customs duty cut, the disbursement activity in JulyAugust has been healthy. Keeping aside the factor of gold price (which has improved now after rally in international gold prices), Muthoot’s customer acquisition and activation on the ground has been structurally improving with balancing out of competition, lesser availability of unsecured credit and sharper focus on operations/growth. A continuation of 2-4% qoq customer base growth and gradual normalization of LTV (assuming stable gold prices) can lead to 20% growth being delivered for the whole year.

Retain BUY with revised 12m PT of Rs2175

We estimate 16%/21% CAGR in consolidated AUM/PAT over FY24-26. This is after assuming stable gold prices and marginal LTV catch-up in Gold Loans and further growth moderation in Belstar MFI. Over the next two years, average RoA/RoE delivery is likely to be 5.2%/20%. Given strong visibility of Growth and RoE for Muthoot and considering asset quality issues/uncertainty in many other NBFCs, we expect Muthoot’s valuation to re-rate further. Stock is currently trading at palatable multiples of 11x PE and 2.2x P/ABV on FY26 estimates.

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