Neutral Muthoot Finance Ltd for the Target Rs.2,850 by Motilal Oswal Financial Services Ltd
Yield compression weighs on margins amid rising competition
The competitive intensity in the gold loan industry has increased meaningfully, with Muthoot Finance (MUTH) management acknowledging that it has taken calibrated pricing actions to defend AUM growth. While management expects gold loan yields to stabilize at 18.0-18.5%, we believe downside risks remain, particularly as several large and well-capitalized NBFCs continue to scale up their gold loan franchises. In our view, the industry could witness a brief period of aggressive customer acquisition, leading to persistent pressure on pricing, spreads and margins. With gold loans now a mainstream product, demand is likely to remain robust, but MUTH may increasingly face the trade-off between protecting market share and preserving profitability. We, therefore, remain cautious on margin sustainability over the next few quarters and believe the competition’s response to Muthoot's pricing actions will be a key monitorable. For MUTH, we now estimate standalone gold loan growth of 22% and PAT growth of 4-5% in FY27. Maintain Neutral
* 1QFY27 PAT grew 25% YoY and declined 17% QoQ to ~INR25.5b (~20% miss). Net total income grew 24% YoY to ~INR44.6b (19% miss). Opex grew ~21% YoY to INR9.8b (in line).
* PPOP grew 25% YoY to ~INR34.7b (~24% miss). Provisions stood at ~INR510m and translated into annualized credit costs of ~12bp in 1QFY27 [PY: ~15bp and PQ: ~62bp].
Multitude of reasons led to yield and NIM compression
* NIMs moderated in 1QFY27, primarily due to lower gold loan yields, led by product mix changes and a higher share of lower-yield loans. Additionally, ahead of Apr’26 when the new RBI gold lending regulations came in effect, MUTH got customers to roll over their loans (by paying the accrued interest) and all these rolled-over loans are now yielding lower interest because of the rebate structure. Strong recoveries, renewals, and interest collections during 2HFY26 also supported higher yields.
* NIM (calc.) declined ~3pp QoQ to ~10.6% (PQ: 13.7%). Spreads also declined ~3pp QoQ to 9.4%. Yield declined ~3pp QoQ to 18.1%, while CoB rose ~15bp QoQ to 8.75%. Management expects gold loan yields to stabilize around ~18.0-18.5%. We expect NIM to moderate to ~10.3% in FY27E/FY28E, primarily driven by a decline in steady-state yields
Gold loan business delivers strong growth with rising customer traction
* Standalone gold loan AUM grew ~6% QoQ and ~44% YoY to ~INR1.63t, while consolidated AUM rose ~43% YoY/5% QoQ to ~INR1.92t.
* Gold loan LTV rose 5pp QoQ to 64%. Average ticket size (ATS) in gold loans rose to INR150k (PQ: INR149k). Gold tonnage inched up to 197t (PQ: 196t).
* No. of gold loan accounts grew ~5% QoQ to 10.9m (PQ: 10.4m). Gold loan disbursements to new customers grew 41% YoY to INR89.4b. MUTH opened 86 new branches across the group, and total branches stood at 7,654 as of Jun’26.
* We expect MUTH to deliver a loan growth CAGR of ~21% over FY26-28E.
Valuation and view
* FY27 started on a relatively weak footing, with 1QFY27 profitability impacted by lower gold loan yields and margin moderation despite healthy gold loan growth and customer additions.
* While gold loan demand remains robust, the industry has entered a more competitive phase, with aggressive pricing materially compressing yields. Incremental earnings could increasingly be dependent on balance-sheet expansion rather than margin resilience. With borrowing costs expected to remain largely unchanged in the near term, any further pressure on asset yields could directly weigh on margins. We believe FY26 likely represented a cyclical peak in profitability, with normalization in NIMs expected to keep FY27 RoA/RoE healthy at 5.3%/25% but significantly below recent highs.
* While management remains confident that Muthoot's franchise strength will help navigate the competitive landscape, we believe sustained stabilization in yields and margins will be key before turning more constructive.
* MUTH currently trades at 2.2x FY28E P/BV and 10x FY28E P/E. We cut our FY27E/FY28E estimates by ~17%/~7%, to factor in the sharp NIM compression. We estimate a PAT CAGR of ~12% over FY26-28E. Maintain our Neutral rating with a TP of INR2,850 (based on ~2x Mar’28 P/B)
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