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Steady growth: Muthoot Finance reported steady growth in its top-line by 4.6% QoQ/20.3% YoY in Q3FY24 which was driven by healthy growth in interest income by 5.1% QoQ/25.6% YoY. Consequentially, pre-provision operation grew by 5.7% QoQ/19.8% YoY which was led by the company’s cost efficiency measures. Provisions declined on a YoY basis by 12.2%, however, sequentially it increased by 30.3% QoQ. Factoring the healthy growth in and cost control measures, PAT reported strong growth of 4.6% QoQ/22.6% YoY.

Growth in AuM across all segments: Consolidated loan AuM of Muthoot Finance reported healthy growth of 4.1% QoQ/27.2% YoY which was led mainly by the gold AuM which contributes 86% of the overall AuM. Gold AuM during the quarter increased by 2.5% QoQ/21.8% YoY which was driven by increase in gold prices (9.6% QoQ/15.3% YoY), thus, increasing the average ticket size of the customer (1.5% QoQ/15.1% YoY). The AuM growth was well supported by its subsidiaries such as Belstar Microfinance (12.2% QoQ/65.4% YoY) which continue to report strong growth on a lower base.

Efficiency in operations: Along with the growth in gold price, AuM was also driven by the inherent operating efficiency of the company as the average gold per branch increased by 1.9% QoQ/19.2% YoY to Rs 14.5 Cr. The monthly disbursements/ collections reported growth of 16.5%/12.9% YoY enabling growth in the AuM. The gold held as security grew consistently by 0.5% QoQ/5.1% YoY to 184 Tonnes. The company continues to add branches as the business remains operationally heavy. During 9MFY24, it added 487 new branches as compared to 231 new branches in 9MFY23. The company saw a decline in the active customer; however, it was due to the high customer churn rate as the during of loan remains relatively low. The company remains confident of the branch additions going ahead and more branches to open subject to regulatory approval.

Decline in margins: Net interest margin during the quarter remained flat sequentially, however, on a YoY basis it declined by 98bps. The decline in margins can be mainly attributed to the increase in cost of borrowings by 9bps QoQ/42bps YoY. Its margins have also declined due to competition in the gold lending segment which prompts the company to reduce their interest spread. Going ahead, the management expects that the cost of borrowings to increase during Q4FY24 and remain at 8.5-9% levels. The management also guided that the NIMs could remain at the same levels in Q4FY24.

Increase in stage-3 assets: Asset quality improved on a QoQ basis as stage 3 assets reported a decline of 39bps, however, on a YoY basis it increased by 104bps. The stage 1 assets growth remained healthy by 4% QoQ/24% YoY, however, stage 2 assets declined by 36.3% QoQ/65.9% YoY signaling that many stage 2 assets were upgraded to stage 1 assets. The management remains confident of the asset quality and reiterated that the increase in stage 3 is delay in payment and not default

Valuation and outlook: We remain positive on Muthoot Finance as the company saw healthy growth in AuM which was driven majorly by its gold loan AuM along with other subsidiaries. The company continue to maintain its operational efficiencies along with controlling opex. It expects to grow at a healthy pace despite facing competition from bank and other entities in the gold lending business. It continues to be the market leader in the organized gold lending business. We maintain Buy rating on Muthoot Finance and increase our target price to Rs 1,627 valuing the company at 2.1x of its FY26E Adj. BVPS.

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