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Muthoot Finance (MUTH)
NBFCs
Business in sweet spot, BUY. We retain our positive stance on Muthoot Finance in the
light of attractive valuations, significantly higher-than-industry business traction and
high RoE. Muthoot has reported strong loan growth largely on the back of new client
acquisitions; the recent rally in gold will further buoy its business. We raise estimates by
5-14% to factor higher growth and somewhat better-than-expected NIM; raise price
target to Rs230 (from Rs220). BUY.
Gold loan business in sweet spot; growth will likely remain strong
We believe that rising gold prices will support business growth for Muthoot. Higher gold prices
raise Muthoot’s ability to increase the loan ticket size. Gold prices have increased by 25% since
April (20% since June). On a yoy basis, gold prices are up about 45%.
Muthoot’s growth driven by more customers. In 1QFY12, Muthoot reported 96% yoy growth
in loan book – of this 72% was driven by increase in customers and the balance (24%) in average
loan size (representing rise in gold prices). On a qoq basis, the average ticket size was up only 3%
qoq even as gold prices increased by 6% qoq.
Raising loan growth estimates. We believe that the average ticket size will eventually catch up
with the average rise in gold prices. Thus, the company is well-placed for higher growth. We are
raising our loan growth estimates by 10% in FY2012E. We now model 58%, 25% and 13% loan
growth in FY2012E, FY2013E and FY2014E, respectively as compared to over 100% growth in the
past two years.
Limited exposure to short-term gold price movements. Muthoot’s loans are not linked to daily
gold prices but to a ‘benchmark gold price’. The management has highlighted that during periods
of sharp rises in gold prices (like the current scenario), they would wait for prices to stabilize before
revising the ‘benchmark gold price’. Thus, a sharp rise or fall does not affect the company in the
near term; the price-rise needs to sustain in order to drive loan growth.
RBI NBFC guidelines: Limited risk to earnings, leverage levels high
Despite fears of adverse regulations for gold loan NBFCs, RBI’s committee on NBFCs regulations
did not have any specific proposals for the gold loan business.
We find limited risk to earnings of Muthoot Finance if RBI’s proposed NBFC report is implemented.
The committee proposes to reduce regulatory arbitrage between banks and NBFCs; it proposes to
implement the 90-day NPL recognition norm for NBFCs as compared to 180 days currently.
Muthoot’s gross NPLs are currently low at 0.3%, which will likely rise to about 0.8% if NBFCs
move to the 90-day NPL recognition norm. This poses about 4% risk to base-case estimates.
The RBI committee proposes to raise Tier-I CAR ratio to 12%. We believe that Muthoot will
need to raise capital if its growth is stronger than expected. Gold loans (from NBFCs) cannot
be classified as priority sector loans for banks; we hence expect the share of loans outside
balance sheet to decline to 10% by March 2012E from 26% in March 2011. According to
the management, banks have appetite for buying out gold loans despite the removal of the
priority sector classification. We, however, believe that the demand will be considerably
lower. Slowdown in credit from the industrial sector will likely prompt banks to resume
focus on retail segments—as such, banks’ demand for gold loans will likely rise in 2QFY12E.
We believe that Muthoot’s Tier-I CAR will decline to 11.5-12% levels in the next few
quarters if the company cannot sell down loans to banks.
Will the regulator impose restrictions on expansion?
Banks currently require licenses from RBI to open new branches while NBFCs have no such
restrictions. The NBFC committee report is also silent on this issue.
As per the current regulations for banks, about 25% of incremental branches need to be in
Tier 3-6 cities. Most NBFCs are focused in smaller towns or lesser-banked/un-banked areas
and hence, such a regulation may not pose a challenge.
Muthoot had a massive expansion drive over the past few years—branches increased to
2,733 in March 2011 from 985 in March 2009. Typically, a branch requires about three
years to achieve optimum scale; hence, even if RBI imposes restrictions on new branches,
Muthoot’s existing branches can drive healthy growth in the medium term.
Government’s drive to unearth black money can affect gold-backed lending
As per the recent income tax notification, purchase of gold above Rs0.5 mn requires the
buyer to quote his PAN. We believe this is aimed to restrict the use of black money invested
in the sector. In this backdrop, high-value gold loans disbursed in cash may be restricted.
Notably, the average ticket size of gold loans is low at Rs34,000.
Competition can put pressures on margins and profitability
We believe that increase in competition and pressure on NIM is the biggest risk to gold loan
companies. We expect Muthoot’s spread to decline to 8.9% by FY2014E from 10.9% in
FY2011 and 13.1% in FY2007. However, better operating leverage ratio (on the back of
optimum utilization from recently set up branches) will support RoA.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Muthoot Finance (MUTH)
NBFCs
Business in sweet spot, BUY. We retain our positive stance on Muthoot Finance in the
light of attractive valuations, significantly higher-than-industry business traction and
high RoE. Muthoot has reported strong loan growth largely on the back of new client
acquisitions; the recent rally in gold will further buoy its business. We raise estimates by
5-14% to factor higher growth and somewhat better-than-expected NIM; raise price
target to Rs230 (from Rs220). BUY.
Gold loan business in sweet spot; growth will likely remain strong
We believe that rising gold prices will support business growth for Muthoot. Higher gold prices
raise Muthoot’s ability to increase the loan ticket size. Gold prices have increased by 25% since
April (20% since June). On a yoy basis, gold prices are up about 45%.
Muthoot’s growth driven by more customers. In 1QFY12, Muthoot reported 96% yoy growth
in loan book – of this 72% was driven by increase in customers and the balance (24%) in average
loan size (representing rise in gold prices). On a qoq basis, the average ticket size was up only 3%
qoq even as gold prices increased by 6% qoq.
Raising loan growth estimates. We believe that the average ticket size will eventually catch up
with the average rise in gold prices. Thus, the company is well-placed for higher growth. We are
raising our loan growth estimates by 10% in FY2012E. We now model 58%, 25% and 13% loan
growth in FY2012E, FY2013E and FY2014E, respectively as compared to over 100% growth in the
past two years.
Limited exposure to short-term gold price movements. Muthoot’s loans are not linked to daily
gold prices but to a ‘benchmark gold price’. The management has highlighted that during periods
of sharp rises in gold prices (like the current scenario), they would wait for prices to stabilize before
revising the ‘benchmark gold price’. Thus, a sharp rise or fall does not affect the company in the
near term; the price-rise needs to sustain in order to drive loan growth.
RBI NBFC guidelines: Limited risk to earnings, leverage levels high
Despite fears of adverse regulations for gold loan NBFCs, RBI’s committee on NBFCs regulations
did not have any specific proposals for the gold loan business.
We find limited risk to earnings of Muthoot Finance if RBI’s proposed NBFC report is implemented.
The committee proposes to reduce regulatory arbitrage between banks and NBFCs; it proposes to
implement the 90-day NPL recognition norm for NBFCs as compared to 180 days currently.
Muthoot’s gross NPLs are currently low at 0.3%, which will likely rise to about 0.8% if NBFCs
move to the 90-day NPL recognition norm. This poses about 4% risk to base-case estimates.
The RBI committee proposes to raise Tier-I CAR ratio to 12%. We believe that Muthoot will
need to raise capital if its growth is stronger than expected. Gold loans (from NBFCs) cannot
be classified as priority sector loans for banks; we hence expect the share of loans outside
balance sheet to decline to 10% by March 2012E from 26% in March 2011. According to
the management, banks have appetite for buying out gold loans despite the removal of the
priority sector classification. We, however, believe that the demand will be considerably
lower. Slowdown in credit from the industrial sector will likely prompt banks to resume
focus on retail segments—as such, banks’ demand for gold loans will likely rise in 2QFY12E.
We believe that Muthoot’s Tier-I CAR will decline to 11.5-12% levels in the next few
quarters if the company cannot sell down loans to banks.
Will the regulator impose restrictions on expansion?
Banks currently require licenses from RBI to open new branches while NBFCs have no such
restrictions. The NBFC committee report is also silent on this issue.
As per the current regulations for banks, about 25% of incremental branches need to be in
Tier 3-6 cities. Most NBFCs are focused in smaller towns or lesser-banked/un-banked areas
and hence, such a regulation may not pose a challenge.
Muthoot had a massive expansion drive over the past few years—branches increased to
2,733 in March 2011 from 985 in March 2009. Typically, a branch requires about three
years to achieve optimum scale; hence, even if RBI imposes restrictions on new branches,
Muthoot’s existing branches can drive healthy growth in the medium term.
Government’s drive to unearth black money can affect gold-backed lending
As per the recent income tax notification, purchase of gold above Rs0.5 mn requires the
buyer to quote his PAN. We believe this is aimed to restrict the use of black money invested
in the sector. In this backdrop, high-value gold loans disbursed in cash may be restricted.
Notably, the average ticket size of gold loans is low at Rs34,000.
Competition can put pressures on margins and profitability
We believe that increase in competition and pressure on NIM is the biggest risk to gold loan
companies. We expect Muthoot’s spread to decline to 8.9% by FY2014E from 10.9% in
FY2011 and 13.1% in FY2007. However, better operating leverage ratio (on the back of
optimum utilization from recently set up branches) will support RoA.
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