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Strong gold loan growth tempered with sharp increase in Stage 2 Earnings beat driven by NIM expansion; expects yields to sustain at ~18.5%

* Muthoot Finance’s (MUTH) 2QFY27 PAT grew 27% YoY and ~17% QoQ to ~INR29.8b (~17% beat). Net total income grew 37% YoY to ~INR88.3b (~12% beat). Opex grew ~10% YoY to INR9.7b (~5% lower than MOFSLe). ? PPOP grew 38% YoY to ~INR45.1b (~27% beat). Provisions stood at ~INR5.1b (vs. MOFSLe of ~INR1.2b) and translated into annualized credit costs of ~114bp in 2QFY27 [PY: ~36bp and PQ: ~12bp].

* MUTH upgraded its FY27 gold AUM growth guidance to 25% (from 15% earlier). The company shared that it remains confident of sustaining its market leadership despite rising competition, citing its established customer franchise, collateral-management expertise, security systems, fraud prevention, and recovery capabilities. We model gold loan growth of ~28% in FY27.

* Management shared that the increase in Stage 2 and 3 was primarily due to customers adjusting to the monthly/periodic interest-servicing structure introduced following the revised RBI regulations effective 1st Apr’26. Historically, most customers were accustomed to bullet repayments, and the transition to monthly interest/EMI servicing has resulted in missed payments and consequent slippages. The company does not necessarily view this as indicative of underlying borrower stress.

* We raise our FY27/FY28 EPS estimates by ~15%/~8% to factor in the sharp NIM expansion and strong gold loan growth in 2QFY27. We model a standalone AUM/PAT CAGR of ~23%/17% over FY26-28E and estimate RoA/RoE of 5.6%/26% by FY28.

* MUTH trades at 1.6x FY28E P/BV and 7x P/E. While the growth remained strong and NIM expanded during the quarter, we believe there are risks of a structural compression in yields and NIM for NBFC gold financiers if they pivot toward monthly interest repayment or EMI products. RBI’s new regulations on gold lending effective from Apr’26 has brought in a tradeoff between growth and yields. In addition, the high competitive intensity and aggressive foray of multiple deep-pocketed AAA (or AA+ rated) NBFC franchises into gold loans could result in market share losses for incumbents. Reiterate our Neutral rating with a revised TP of INR2,550 (based on 1.5x Sep’28E P/BV).

NIMs expand ~150bp QoQ, driven by an increase in yields

* NIM (calc.) expanded ~150bp QoQ to ~12.2% (PQ: 10.6%). Spreads also expanded ~165bp QoQ to 11.0%. Yields rose ~150bp QoQ to 19.6%, while CoB declined ~15bp QoQ to 8.6%.

* Management shared that sequential improvement in yields was driven by the migration of loans originated under lower-rate schemes in 1Q to higher-yielding schemes in 2Q. The company expects yields to normalize at ~18.5%, as quarterly yields are influenced by portfolio churn, short loan tenures, renewals, and business mix. We model NIMs of 11.1%/10.4% in FY27/FY28E (vs. 12.6% in FY26).

Valuation and view

* MUTH reported a mixed quarter, with strong gold loan growth, supported by an increase in gold tonnage, number of loan accounts, and customer additions. NIM expanded sharply driven by higher yields as loans originated under loweryielding schemes in the previous quarter migrated to higher-yielding schemes. However, asset quality weakened significantly, with a sharp increase in Stage 2 assets following the introduction of monthly interest-servicing loan products.

* We believe near-term asset-quality trends remain uncertain as customers adapt to the revised repayment structure, necessitating higher collection efforts. Further, the recent correction in gold prices and intensifying competition could moderate gold-loan growth momentum.

* MUTH currently trades at 1.6x FY28E P/BV and 7x FY28E P/E. We estimate a PAT CAGR of ~17% over FY26-28E. Reiterate our Neutral rating with a TP of INR2,550 (based on ~1.5x Sep’28 P/B).

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