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Set to shine

Convergence of fundamentals and tailwinds to prop growth

Muthoot Finance (MUTH IN) is in a sweet spot, given robust growth prospects backed by sound fundamentals and sectoral tailwinds. Fundamentals are underscored by 1) proven moats of leadership and higher productivity (AUM per branch at INR 145mn vs INR 80mn for IIFL Finance and a mere INR 56mn for MGFL), 2) steady-state branch and customer expansion, 3) customer segmentation with limited share of 27% in the above INR 300,000 ticket size which faces rising competition, and 4) increased thrust on marketing & digital initiatives along with enhanced customer service to strengthen MUTH’s competitive positioning. We believe high productivity and staunch distribution network can add ~3% to AUM growth annual basis.

Sectoral tailwinds, such as 1) continued momentum in underlaying asset value like gold, 2) concerns regarding unsecured, systemic credit expansion fueling MSME credit via gold loans, 3) less competition from banks (refer Exhibit 15) with unit economics turning unfavorable amid tight liquidity will enable MUTH to reclaim its market positioning. We revise 14% growth to 15%+ during FY24-26E.

Margin to stabilize as competitive positioning strengthens

Taking cognizance of high funding cost, MUTH is yet expected to clock stable margins without requiring material alteration in lending rates. Moreover, its ability to transmit high cost (we factor in 100bp COF spike in FY24E) may sustain margin at the current levels. We expect yield to stabilize in the range of 18-19%, leading to margin improvement from 11.6% in FY24 to settle at 11.8% by FY26E, as MUTH succeeds in countering increased competition in the near term

Benign asset quality; auctions at the lowest levels

Firm’s underlying security and robust risk-management systems have ensured good credit quality across cycles. Credit cost was lower and auctions at INR 3,810mn or 0.6% of gold loan book was modest at Q3FY24-end. We expect GNPA at 2.5% during FY24-26E

Valuation: revise to Buy with a higher TP of INR 1,948

MUTH is poised to reclaim strong market positioning in the gold finance space. Continued rise in gold prices and tight liquidity scenario for banks are leading to healthy business traction. This along with the company’s moats of higher productivity and strong branch network would result in a loan CAGR of 15% during FY24-26E. Margin should stabilize as its competitive positioning strengthens. We expect a rich return profile with an ROA of 5.2% and 17% ROE during FY24-26E. MUTH also stands in conformation with regulatory norms. We revise our rating to Buy from Accumulate with a higher SOTP-based TP 1,948 from INR 1,520. We ascribe 2.5x (from 2.2x) September 2025E P/ABV for the core business and 1.2x (unchanged) for Belstar Micro finance business and 0.4x (unchanged) September 2025E P/ABV for the home finance business.

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SEBI Registration number is INH000000933