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Operationally healthy quarter with strong gold loan growth

* MUTH’s 1QFY25 performance was characterized by: 1) gold loan growth of ~11% YoY to ~INR809b; 2) NIM compression of ~15bp QoQ to 11.8%; and 3) the rise in gold tonnage by ~3% QoQ to 194 tonnes.

* PAT grew 11% YoY and 2% QoQ to ~INR10.8b (8% miss). Net total income rose 7% YoY to ~INR23.6b (in line), and PPOP was up 22% YoY at ~INR17.2b (in line).

* Gold loan growth was supported by gold tonnage growth, along with an increase in the customer base by ~4% QoQ to ~5.9m. LTV was largely stable QoQ at ~63%.

* We model a standalone AUM CAGR of ~18% over FY24-26E. This, we believe, will result in a PAT CAGR of ~19% over this period. We model RoA/ RoE of ~5.2%/19% in FY26.

* MUTH’s valuations have re-rated in the last three months, aided by 1) higher gold prices, resulting in better visibility on stronger gold loan growth, and 2) RBI’s gold loan ban on (once) the second largest gold loan NBFC, resulting in lower competitive intensity and better gold loan growth for other gold NBFC peers.

* The management acknowledged that the competitive aggression from banks in gold loans has reduced over the last couple of quarters. Additionally, lower availability of unsecured credit in the form of personal loans/MFI loans, could have resulted in stronger demand for gold loans. This improvement in gold loan demand could sustain in the near term.

* MUTH now trades at 2.3x FY26E P/BV and, in our view, has benefited from the sharp rise in gold prices and the RBI ban on gold loans on a large gold loan NBFC. In the short term, the removal of the RBI embargo on gold loans for its gold loan NBFC peer could change the dynamics of both gold loan growth and pricing for MUTH. We maintain our Neutral rating with a revised TP of INR1,720 (based on 2.1x FY26E P/BV).

Strong AUM growth in Belstar; deterioration in asset quality

* MUTH’s microfinance subsidiary, Belstar, reported 42% YoY growth in AUM to ~INR99.5b. Reported PAT stood at ~INR900m, down ~14% QoQ.

* Asset quality deteriorated, with GS3 increasing ~55bp QoQ to ~2.4%.

* Belstar added ~6 branches in 1QFY25, and CRAR stood at ~21%.

Highlights from the management commentary

* MUTH management continued to guide for gold loan growth of ~15% and will revise its growth guidance after 1HFY25 results. Trends in July/August disbursements have been along similar lines as during 1QFY25.

* The company expects CoB to further increase by ~35bp over the next few quarters.

Valuation and view

* MUTH reported healthy gold loan growth, aided by gold tonnage growth and stronger customer additions. Despite the expected seasonality in gold loan growth in 2Q/3Q, we expect it to remain healthy in the near term, aided by higher gold prices and levers on LTV (~63% as of Jun’24).

* The removal of the RBI’s ban on gold loans for a large gold loan NBFC remains a near-term risk for MUTH. If and when the RBI revokes the ban, we expect competitive intensity to again increase in the gold loan ecosystem, even though it might not be as aggressive as earlier. Maintain our Neutral rating with a revised TP of INR1,720 (based on 2.1x FY26E BVPS).

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