MUTHOOT FINANCE Growth picks up as regulatory landscape settles:: Edel

Muthoot Finance reported a healthy set of numbers for Q3FY13 with PAT
at INR2.7bn, in line with expectations, on the back of ~8% QoQ growth in
AUMs at INR257bn. The growth comes after 2 quarters, as gold loan
NBFCs, struggled under uncertain regulatory environment. Calculated
yields moderated by ~30bps, though still at a robust 22%, leading to 15‐
20bps decline in NIMs to 10.5%. GNPA, though technical in nature still
continues in the 1% plus range for third quarter in a row. Overall, we
would like to re‐iterate our positive stance on gold loan NBFCs expecting
sustainable RoA/RoE of 3.5%/20% plus. The current quarter is a reflection
of stability returning to the business and with the KUB Rao Committee
report filed we believe the stage is set for growth to return. The quality of
Muthoot Finance’s operations as reflected in its employees, risk
management practices and high branch productivity is also an advantage.
Maintain ‘BUY’ with a target price of INR287.

�� -->


Growth signaling return to normal; FY14 to reap full benefits
AUM grew by 8.3% QoQ to INR257bn. Adjusting for the run down in the assigned
portfolio, the growth is higher at 10% QoQ. AUM growth YTD has been 4% and the
management is guiding for a year end number of 10% thereby implying a modest
asking rate of 5‐6% since with the KUB Rao report being tabled a major overhang over
the sector has been removed. In tonnage terms the growth is of 4% to 132 tonnes of
gold implying some portion of the growth is led by increase in AUM/gram.
Branch expansion to gain pace FY14 onwards
Another 61 branches got added in Q3FY13 (236 branches in 9MFY13) to take the total
tally to 3,914. We expect it to add another 65‐70 branches in Q4FY13 and pace of
branch addition will pick momentum in FY14‐15 once the clarity emerges on final
guidelines. In our estimates, we are building in loan growth of 18% over FY13‐15E led
by improved productivity from branches added in last 18‐24 months.
Outlook and valuations: Rolling on growth; maintain ‘BUY’
The current fiscal will be a year of consolidation for the industry as well as Muthoot,
however, with the KUB Rao Report pointing to manageable business impact the stage
is all set for growth to return in FY14. This we believe will lead to rerating of Muthoot
to 2.2x FY14E P/BV from the current 1.7x. We maintain ‘BUY/Sector Outperformer’.



Margins moderate a bit given reduced yield on assets
Yields moderated by ~30bps to 22% due to slight mix change between schemes and also
due to some amount of interest income reversals on GNPAs. This reflected in NIM decline as
well to the tune of 15‐20bps to 10.5%, while the cost of funds stayed steady. Incrementally,
we expect the margin profile to settle at the current levels and anticipate no major
downside hereon.
Benefit from reduced cost of borrowing from the wholesale markets can flow in if the
company ramps up borrowings from Commercial Paper route which stands at a low of 1% of
the total borrowings. A major chunk of borrowings at 43% is via the banking channels.
Currently more than a third of the total borrowings at INR87.5bn are via the Secured NCD
route (unlisted). While we await further clarity on the final guidelines post the KUB Rao
Committee report, a mention of reviewing exemption available to secured debentures from
the definition of “deposit” can be an area of concern.
NPA continues to hold above the 1% mark due to technical reasons
GNPA at 1.5% continues to be relatively higher for the third quarter in a row. We believe
once the auctions pick up the numbers will ease in the presence of 100% realizable
collateral value NPA profile for the business. With the steady gold prices the loss given
default will be negligible.