Muthoot Finance - Stellar Quarter; Growth Guidance Revised Upwards: Systematix

Systematix Research Report

Muthoot Finance Ltd. delivered a stellar Q2 FY25 performance on most parameters. Operating profit came in ahead of estimates at Rs 19.2 billion (versus estimate of Rs 18.4 billion) aided by a strong 28% YoY growth in Gold loan portfolio, steady net interest margins at 11.5% and lower than expected opex. However, due to higher-than-expected provisions at Rs 2.1 billion (versus estimate of Rs 1.1 billion), PAT was in-line at Rs 12.5 billion.

Strong customer addition (4% QoQ) for the second consecutive quarter and 4%QoQ increase in LTV ratio to 66%, aided strong growth in Gold AUM, even as average gold price was stable sequentially. While asset quality further deteriorated as gross stage III ratio in standalone entity increased to 4.3% from 4% in Q1, it is not a cause of concern, as higher Gold price provides comfort. However, GS3 asset ratio in microfinance subsidiary (9% of Portfolio) also jumped to 3.5% from 2.4% in Q1, which led to elevated credit cost.

Continued risk aversion in unsecured segments is causing many borrowers to shift to Gold loan, driving strong growth in new customer addition. We have revised our estimates upwards for FY25/FY26 to factor in strong performance in H1 FY25 and continued healthy demand for gold loans. We estimate a 21% CAGR in Muthoot Finance’s AUM to deliver a 22% CAGR in earnings over FY24-FY26E.

At CMP stock trades at 2.2 times FY26 book value with RoA of 5.4% and RoE of 20%.

We Maintain our Buy rating on the stock with a revised price target of Rs 2,250 (earlier Rs 2,050).

Key risks-

1. significant fall in gold price

2. tightening of regulatory norms for gold loans.

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