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Muthoot Finance (MUTH)
Banks/Financial Institutions
Strong results; retain BUY. Muthoot Finance reported PAT of Rs2.15 bn, up 90% yoy
and 4% above estimates. Strong (81% yoy) growth in loan book, marginal yoy
improvement in NIM and somewhat lower tax rates were key growth drivers although
operating expenses were higher than expected. Retain BUY with price target of Rs230.
Sharp decline in gold prices poses a risk to growth and earnings.
Strong loan growth continues
Loan growth remains high. Muthoot Finance reported loan book (including loans sold down) of
Rs209 bn, up 81% yoy. On a qoq basis the company added Rs29 bn, up 17% qoq; this compares
with Rs20 bn added in 1QFY12. Thus, loan growth was 31% on a YTD basis. We are modeling
58%, 25% and 13% loan growth in FY2012E, FY2013E and FY2014E, respectively, as compared
to over 100% growth in the past two years. The company will likely need to raise capital if its
growth traction remains strong and the regulatory proposals are finalized (as discussed later).
Gold prices volatile. Gold prices have been volatile during the past few months. Gold prices had
increased 27% qoq between June and September 2011; however, the yellow metal has already
corrected by 17% from its peak. The decline in international gold prices was somewhat offset by
depreciation in the Indian Rupee; thus, the decline in India was less severe.
Muthoot well-placed to manage decline in gold prices. While gold prices increased by 27%
qoq, Muthoot’s average ticket size was up only 9% (higher than 3% growth reported in 1QFY12).
The management highlighted that (1) they have not fully considered the rise in gold prices in
valuing underlying gold for loan disbursements during the quarter and (2) average holding per
customer was stable at about 25 grams. Based on this, the average LTV declined to 58% in
September 2011 from 63-68% in the past. Thus, while sharp decline in gold prices poses a risk to
gold loan companies, Muthoot has been fairly conservative on this front.
Retain BUY rating. We retain BUY rating on Muthoot with a price target of Rs230 (29% upside).
At our target price, Muthoot will trade at 8.6X PER and 2.1X PBR FY2013E for 25% EPS CAGR
between FY2011 and FY2014E and 28-30% RoE.
NIM improves as well
Muthoot reported NIM of 11.4% in 2QFY12 as compared to 11.2% in 1QFY12 and 10.9%
in 2QFY11. The company had raised lending rates in 3QFY11 and 2QFY12 to offset 170 bps
rise in borrowings costs in the past four quarters. After adding back the one-time cost of the
recent NCD issuance to its interest expenses, NIM appears stable qoq.
The removal of agriculture priority-sector status for gold-loan NBFCs has raised concerns on
financial flexibility of gold-loan NBFCs. Muthoot has not faced any significant pressure as yet.
The company has been selling down loans to banks (without PSL benefits) over the past few
months. Loans outside balance sheet have increased to Rs26 bn in September 2011 from
Rs24 bn as of June 2011. We, however, believe that the company will find it challenging to
sell down loans if the proposed revised draft securitization guidelines are implemented by
RBI; the regulator proposes to ban loan sell-down for assets that have bullet repayment and
increase minimum holding period for loans sold down by NBFCs to banks.
Other highlights of the quarter
�� Gross NPLs increased to 0.6% from 0.31%; the management highlighted that NPLs are at
seasonally high levels and expect the ratio to improve over the next two quarters.
�� Operating expenses ratio increased to 4.6% of average assets from 4.2% in 1QFY12. The
company has set up 277 branches in 2QFY12 (541 in 1HFY12); higher expenses of these
branches have affected the ratio for the quarters.
�� As of September 2011, capital adequacy was 18.24%, down from 19.2% in June 2011.
In case annual growth exceeds 60-70%, the company will need to tap the capital markets
over the next 4-6 quarters.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Muthoot Finance (MUTH)
Banks/Financial Institutions
Strong results; retain BUY. Muthoot Finance reported PAT of Rs2.15 bn, up 90% yoy
and 4% above estimates. Strong (81% yoy) growth in loan book, marginal yoy
improvement in NIM and somewhat lower tax rates were key growth drivers although
operating expenses were higher than expected. Retain BUY with price target of Rs230.
Sharp decline in gold prices poses a risk to growth and earnings.
Strong loan growth continues
Loan growth remains high. Muthoot Finance reported loan book (including loans sold down) of
Rs209 bn, up 81% yoy. On a qoq basis the company added Rs29 bn, up 17% qoq; this compares
with Rs20 bn added in 1QFY12. Thus, loan growth was 31% on a YTD basis. We are modeling
58%, 25% and 13% loan growth in FY2012E, FY2013E and FY2014E, respectively, as compared
to over 100% growth in the past two years. The company will likely need to raise capital if its
growth traction remains strong and the regulatory proposals are finalized (as discussed later).
Gold prices volatile. Gold prices have been volatile during the past few months. Gold prices had
increased 27% qoq between June and September 2011; however, the yellow metal has already
corrected by 17% from its peak. The decline in international gold prices was somewhat offset by
depreciation in the Indian Rupee; thus, the decline in India was less severe.
Muthoot well-placed to manage decline in gold prices. While gold prices increased by 27%
qoq, Muthoot’s average ticket size was up only 9% (higher than 3% growth reported in 1QFY12).
The management highlighted that (1) they have not fully considered the rise in gold prices in
valuing underlying gold for loan disbursements during the quarter and (2) average holding per
customer was stable at about 25 grams. Based on this, the average LTV declined to 58% in
September 2011 from 63-68% in the past. Thus, while sharp decline in gold prices poses a risk to
gold loan companies, Muthoot has been fairly conservative on this front.
Retain BUY rating. We retain BUY rating on Muthoot with a price target of Rs230 (29% upside).
At our target price, Muthoot will trade at 8.6X PER and 2.1X PBR FY2013E for 25% EPS CAGR
between FY2011 and FY2014E and 28-30% RoE.
NIM improves as well
Muthoot reported NIM of 11.4% in 2QFY12 as compared to 11.2% in 1QFY12 and 10.9%
in 2QFY11. The company had raised lending rates in 3QFY11 and 2QFY12 to offset 170 bps
rise in borrowings costs in the past four quarters. After adding back the one-time cost of the
recent NCD issuance to its interest expenses, NIM appears stable qoq.
The removal of agriculture priority-sector status for gold-loan NBFCs has raised concerns on
financial flexibility of gold-loan NBFCs. Muthoot has not faced any significant pressure as yet.
The company has been selling down loans to banks (without PSL benefits) over the past few
months. Loans outside balance sheet have increased to Rs26 bn in September 2011 from
Rs24 bn as of June 2011. We, however, believe that the company will find it challenging to
sell down loans if the proposed revised draft securitization guidelines are implemented by
RBI; the regulator proposes to ban loan sell-down for assets that have bullet repayment and
increase minimum holding period for loans sold down by NBFCs to banks.
Other highlights of the quarter
�� Gross NPLs increased to 0.6% from 0.31%; the management highlighted that NPLs are at
seasonally high levels and expect the ratio to improve over the next two quarters.
�� Operating expenses ratio increased to 4.6% of average assets from 4.2% in 1QFY12. The
company has set up 277 branches in 2QFY12 (541 in 1HFY12); higher expenses of these
branches have affected the ratio for the quarters.
�� As of September 2011, capital adequacy was 18.24%, down from 19.2% in June 2011.
In case annual growth exceeds 60-70%, the company will need to tap the capital markets
over the next 4-6 quarters.
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