Star performer gold loan stock suddenly falls out of favour on Dalal Street

NEW DELHI: Up 150 per cent from its 52-week low, the stock of India’s largest gold financing company has been making the most of the recent spike in gold price.

Analysts said the company’s business outlook remains strong, but the stock is losing sheen gradually, because valuations have become toppish and have mostly baked in much of future growth prospects.

This is Muthoot Finance.

Sharp rally

Higher gold prices potentially drive higher loan growth for gold lenders and provide investors comfort on underlying asset qualities of these non-banking financial companies.

This has held true even in the Covid-19 hit environment, where the NBFC sector has been facing the greatest risks to asset quality. The stock has seen a rerating accordingly, and is up 152 per cent from its March low of Rs 477.50.

Muthoot snip 4ETMarkets.com

Stock performance in last one year

That said, the stock fell 0.6 per cent on Friday, in addition to a 5.29 per cent drop on Thursday, following the company’s June quarter earnings. Analysts said it would take some time before the earnings catch up with the high stock valuations. They see limited upside for the stock from here on.

June quarter earnings

The gold loan company last week posted a 53.46 per cent rise in consolidated net profit at Rs 853.51 crore against Rs 556.19 crore posted for the corresponding period a year ago. Standalone profit rose 59 per cent to Rs 841 crore. Net interest income (NII) grew 22 per cent YoY to Rs 1,444.50 crore, but fell 13.94 per cent sequentially from 15.78 per cent in March quarter.

Pre-provision profit rose 39 per cent YoY to Rs 1,140 crore.

At its subsidiaries levels, growth moderated for Muthoot Homefin as loan book was flat sequentially at Rs 1,980 crore. Belstar Investment and Finance’s loan portfolio stood at Rs 2,570 crore, down 2 per cent sequentially. Muthoot Insurance Brokers saw a 25 per cent degrowth in premium collection at Rs 44.30 crore. Asia Asset Finance’s loan portfolio contracted 3 per cent sequentially. Consolidated AUM for the lender grew 16 per cent year on year, but declined 1 per cent sequentially.

Muthoot snip 2Agencies

Muthoot snip 3Agencies

What does the management say

Managing Director George Alexander Muthoot says the NBFC should be able to record 15 per cent growth in asset management in next three quarters.

“What gives us confidence is that there has been very good demand for gold loans in last two months. People are coming forward, because they need credit to restart businesses and gold loans are certainly the easiest and most convenient one today. We have sufficient cash with us at more than Rs 8,000 crore to take care of this demand,” he told ETNow.

The NBFC plans to open 250 branches in next 12 months, as it remains bullish on the growth prospects of gold loans. Competition for gold loans from banks and other lenders has always existed and the management is not too worried about that.

Muthoot snip 1Agencies

The company is not in favour of auctioning gold and returning money to customers, even where the due amount is pending for 12 months, as it hurts customer relationships. The company said it is protected by the value of gold for now.

Digital demand, repayments

The company said its digital conversion of customers is gaining traction, as the share of transacting customers has risen to 40 per cent post-pandemic from 19 per cent earlier. The company, which has no major repayments due in next six months, said collection efficiency has improved consistently on a month-on-month basis. In July, it stood at 76 per cent.

Top-up loans have been higher compared with earlier scenarios. There is sufficient room to grow with the current loan to value (LTV) level of 54 per cent, it said.

Business opportunities

Antique Stock Broking said access to unsecured loans had become difficult post 2018 IL&FS crisis, due to tighter credit standards and the ill health of many NBFCs. The recent Covid situation has made banks further risk averse towards unsecured loans, nudging them to expand their gold loan portfolios.

“Strength in gold prices has improved the recall of gold loans. With such huge demand, all institutions will thrive and Muthoot Finance will continue to maintain its market share,” the brokerage said.

Edelweiss said the current environment offers unique growth and asset safety tailwinds to gold financing — a rarity among the lenders.

What do past trends suggest

The gold loan provider reported average return on asset (RoA) of 2.6-6.8 per cent during the 2014-20 cycle. That cycle saw RoA of the company peak at 6.8 per cent in FY2020. Return of equity (RoE) peaked at 28 per cent in FY2020 after moving in the 14-28 per cent range during FY14-20.

Kotak Institutional Equities said Muthoot’s business tends to be highly cyclical with linkages to the gold cycle. “It would be inaccurate to juxtapose prevailing strong return ratios to arrive at long-term valuation multiples,” the brokerage said.

What worries analysts

Recent softness in gold prices, tepid show in the non-gold segments and competition from banks, if any, are near-term worries for the stock. Jaikishan Parmar of Angel Broking said RBI recently increased the permissible loan-to-value (LTV) ratio for banks offering gold loans to 90 per cent, which may bring in some competition.

“Near-term risk for Muthoot includes a sudden decline in gold price and increased competition from banks,” he said, adding that he expects the stock to consolidate going forward.

Kotak said a sharp rally in gold prices has reflected the safe haven nature of the commodity, and it broadly corresponded with the rise in pandemic. Early signs of stability in Covid cases coupled with a rally in stock prompted it to downgrade Muthoot Finance to ‘reduce’ from ‘buy’.

“Near-term risks include a sudden dip in gold prices and inability of the branches to handle customers in the wake of Covid-19. Long-term risks constitute the recent stance taken by RBI. If it continues beyond March 2021, it can have some impact on growth and margins,” said Antique Stock Broking .

Motilal Oswal Securities said Muthoot has increased liquidity on balance sheet from 3 per cent of loans to 20 per cent over the past years, which is comforting.

“This is likely to be a drag on margins going forward. While Muthoot subsidiaries have witnessed improved collection efficiency, we remain cautious on their asset quality outlook,” it said.

Valuations

Nirmal Bang values the stock at 2.8 times FY22 price-to-book value. Its target of Rs 1,301 on the stock suggests limited upside. The brokerage said the stock is capturing a strong business performance expected following the recent runup. It has downgraded the stock rating to ‘accumulate’.

Motilal Oswal Securities has a similar price target of Rs 1,300 on the stock. Kotak pegs the fair value for the stock at Rs 1,000 against Rs 1,025 earlier, at 2.5 times June 2022 price to book value.

It prefers inexpensively valued vehicle finance NBFCs such as Cholamandalam, Shriram Transport Finance and SCUF to Muthoot Finance.

“We expect Muthoot Finance to deliver 16 per cent loan book annually during FY2021-23, driving 15 per cent EPS growth during the same period. Near-term RoE will likely remain high at 22-24 per cent. It remains challenging to take a call on gold prices. Continuous rise in gold prices will likely drive further rerating of Muthoot and pose risk to our stock call,” it said.

Edelweiss has a higher price target of Rs 1,450 on the stock, as it bets on “unique medium-term combination of strong growth and an impressive RoE; not to mention the low asset quality risk.”