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Solid RoE delivery led by Gold Loans

Strong performance in Gold Loans; MFI and other products witness NPL spike

Muthoot Finance delivered a 5-6% NII/PPOP beat on our expectations aided by strong growth, yield improvement and operating leverage in the mainstay Gold Loans business (83% of AUM). Consolidated PAT was however in-line with our estimate with higher provisioning in Belstar MFI and other non-GL businesses (HF, VF, PL, BL, etc.). Consolidated RoA/RoE sequentially improved to 4.9%/20%.

Gold Loan portfolio grew by 6.5% qoq on the back of 3.9%/5.8% sequential growth in customer base/loan accounts and increase in gold prices during the quarter. The tonnage grew by 2.6% on qoq basis and the portfolio LTV was stable at 63%. Muthoot has witnessed significant improvement in customer acquisition over the past two quarters (H1 customer acquisition run-rate was 24% higher on yoy basis), which could be attributed to the regulatory embargo on a large competitor IIFL Finance between March and September and a material reduction in unsecured loans availability to the core gold loan customer segment (low-to-mid ticket). Gold Loans credit cost was elevated again in Q2 FY25 due to strong portfolio addition, increase in Stage-3 assets and improvement of overall ECL cover.

Belstar MFI book de-grew by 3.3% qoq with further curtailment of disbursement owing to the decline in collection efficiency (98.2% for H1 FY25 v/s 99% in H1 FY24). NPLs rose to 3.5% and the credit cost further increased decreasing profits to Rs526mn (after being aided by higher DA income). The Housing Finance and Vehicle Finance portfolios grew by 11% and 37% on sequential basis. NPLs increased by 40 bps in Vehicle Finance business.

Growth guidance raised for gold loans; robust growth in housing and vehicle finance to continue

After growing the Gold Loans portfolio by 18% in H1 FY25, the co. has raised its annual growth guidance to 25% implying 6-7% further growth in H2 FY25. Management doesn’t perceive any significant regulatory restrictions on the business conduct and assesses limited impact from the resumption of IIFL Finance. It expects demand for gold loans to remain strong with lesser availability of unsecured credit lines to the core customer segment and sees competitive intensity from PSU Banks lessening. A limited correction in gold price shouldn’t preclude Muthoot from achieving its growth guidance. Co. see substantial opportunity in affordable housing finance and vehicle finance and expects strong growth momentum to continue. Belstar MFI is likely to come back on growth path from next year.

Retain BUY with revised 12m PT of Rs2240

We estimate 16%/20% CAGR in consolidated AUM/PAT over FY24-27, after assuming stable gold prices, marginal LTV catch-up in Gold Loans, and recovery in Belstar MFI growth from FY26. The average RoA/RoE delivery is likely to be 5.1%/20% in the aforementioned period. Given a reasonably clear visibility of medium-term growth and RoE for Muthoot and considering asset quality/growth issues in many other NBFCs, we expect the stock to re-rate further. Muthoot is currently trading at palatable valuation multiples of 9.5x P/E and 1.8x P/ABV on FY27 estimates.

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