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Healthy all-around delivery with select one-offs

Strong gold loan growth of ~40% YoY, with improving new customer additions

* Muthoot Finance (MUTH)’s strong operating performance in 1QFY26 was characterized by 1) strong gold loan growth of ~40% YoY to ~INR1.13t, 2) around 80bp QoQ improvement in GS3 to 2.6%, aided by NPA recoveries, which also drove a sequential reduction in credit costs, 3) an increase in gold tonnage by ~8% YoY to 209 tonne, and 4) adjusted spreads, which were broadly stable QoQ at ~9.9%, despite the high competitive intensity.

* MUTH’s 1QFY26 PAT grew 90% YoY and 36% QoQ to ~INR20.5b (~21% beat). This included a one-off interest income of ~INR3.5b, comprising ~INR2.5b from interest income write-backs and recoveries from NPA and ~INR1b recoveries from the ARC sale transaction, which was done in FY24. Reported RoA/RoE in 1QFY26 was healthy at 7.2%/28%.

* Net total income grew 53% YoY to ~INR36b (~12% beat). Opex grew ~26% YoY to INR8.1b (in line), resulting in a cost-to-income ratio of ~23% (PY: 27% and PQ: 29%). PPOP grew 63% YoY to ~INR27.9b (~15% beat). Provisions stood at ~INR433m (vs. est. of ~INR1.4b) and translated into annualized credit costs of 15bp in 1QFY26 (PY: ~1.1% and PQ: ~0.5%).

* Adjusted for the one-offs in interest income, spreads were broadly stable QoQ, NIM declined ~30bp QoQ, PPoP was in line, and there was a minor beat on PAT driven by lower credit costs in the quarter.

* Gold loan growth was supported by growth in gold tonnage (up 8% YoY), along with an increase in the customer base (up ~1.4% QoQ) to ~6.46m. Gold loan LTV rose ~1pp QoQ to ~61.7%.

* Management guided additional recoveries of INR1.0-1.5b from the prior ARC sale over the next two quarters, and we have factored these into our estimates. We raise our FY26 EPS estimates by ~10% to factor in higher loan growth and lower credit costs. We model a standalone AUM CAGR of ~20% over FY25-27E. This, we believe, will result in a PAT CAGR of ~28% over this period. We model an RoA/RoE of 5.2%/22% for FY27.

* MUTH now trades at 2.4x FY27E P/BV and, in our view, has benefited from the tailwinds of 1) a sharp rise in gold prices and 2) an improvement in gold loan demand due to the industry-wide rationing in unsecured credit. MUTH is indeed one of the best franchises for gold loans in the country, as is evident from its ability to deliver industry-leading gold loan growth and best-in-class profitability. However, we believe that its valuations are rich for the deep cyclicality in its gold loan growth, which will remain vulnerable to any volatility in gold prices. We reiterate our Neutral rating with an unchanged TP of INR2,790 (based on 2.7x Mar’27E P/BV).

Belstar: Sequential decline in AUM; GNPA improves ~55bp QoQ

* MUTH’s microfinance subsidiary, Belstar, reported a ~3% QoQ and 23% YoY decline in AUM to ~INR77b. Reported loss stood at ~INR1.3b during the quarter (vs. a loss of INR1.2b in 4QFY25).

* Asset quality improved, with GS3 declining ~55bp QoQ to ~4.45% (PQ: 5%).

* Belstar expanded its gold loan network by opening 10 new branches in 1Q, taking the total to 15, and plans to add 50 more in FY26 as part of its portfolio diversification strategy. Belstar MFI’s CRAR stood at ~23%.

Highlights from the management commentary

* MUTH shared that most of its loans are linked to the MCLR, and the company expects to receive the benefit of lower MCLR rates from banks within 3-6 months. However, none of its bank term loans are linked to the EBLR.

* The non-gold business currently accounts for 13–14% of the portfolio, and the company targets to maintain this share in the 15–20% range going forward.

* The Board of Directors approved an equity infusion of INR5b in Muthoot Money and INR2b in Muthoot HomeFin.

Valuation and View

* MUTH delivered a healthy all-round performance during the quarter, even after considering the one-offs in interest income. Gold loan growth remained strong, while asset quality improved on the back of recoveries from the NPA pool.

* With a favorable demand outlook for gold loans driven by the limited availability of unsecured credit, the company is well-positioned to maintain its healthy loan growth momentum. However, we believe that the positives are already factored into its valuations of 2.4x FY27E P/BV. We reiterate our Neutral rating with an unchanged TP of INR2,790 (based on 2.7x Mar’27E BVPS).

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