Muthoot Finance stock shines on decent Q4; sustainability key

The management stated that demand revival and reduction in the competitive intensity, especially banks, have come down, aiding AUM growth in the March quarter (Q4FY23). Further, Muthoot managed to increase its net interest margin (NIM) by 40 basis points, bringing it to 12.26% in Q4. This upswing was achieved while maintaining control over the cost of funds.

Muthoot Finance also witnessed a sequential increase in gold tonnage, indicating the addition of new gold loan clients during the quarter. It also achieved the highest-ever quarterly disbursements in gold loans of over ₹51,000 crore in Q4.

Considering the demand and economic activity in India, the company’s management has expressed confidence in maintaining a gold AUM growth of over 15% annually in the coming years.

However, analysts are a little cautious. According to analysts at Motilal Oswal Financial Services, “We still do not see strong signs of an organic improvement in gold loan demand, even as banks remain aggressive in this segment.” In a report dated 20 May, the Motilal analysts model about 9% gold AUM growth in FY24.

Despite a healthy topline growth, Muthoot’s profit came below most analysts’ estimates. It largely remained flat sequentially on account of higher operating expenses (opex) and an increase in provisions.

In terms of the opex to AUM, it had remained elevated at 4.6% on account of employee expenses. While the management expects the opex to AUM to stand at 3.5% in FY24, it needs to be monitored closely considering the branch 100-150 branches the company plans to open in the coming quarters.

Also, the gross stage-3 ratio inched up to 3.8% in Q4 from 2.6% and 1.7% in Q2. While asset quality deterioration is disappointing, it is not a big concern yet. According to analysts from Kotak Institutional Equities, “We expect the stress to remain moderate at 1.6% over FY2024-26E.” Given the nature of the collateral and high margin of safety, overall credit losses are negligible unless gold prices correct sharply, the analysts added in a report dated 22 May.

Having said that, for the stock of Muthoot Finance to rerate further, sustainability in terms of gold AUM growth, tonnage increase, yield improvement, and stable asset quality are crucial. 

“Striking an appropriate balance between loan growth and margin will still remain an important deliverable in FY24,” analysts from Motilal Oswal Financial Services said. “With limited upside catalysts, an aggressive competitive landscape and the need for a shift in gold loan NBFCs’ business model, we maintain our Neutral rating with a TP of Rs1,125 (based on 1.6x Mar’25E BVPS).”