Investors may be overplaying Muthoot Finance's growth prospects

Pace of new customer addition is slowing; lending to existing customers is on the rise

Muthoot Finance, the country’s leading gold loan company, has emerged the most popular option among non-banking financial companies (NBFCs), with over 80 per cent of analysts polled by Bloomberg optimistic on the stock. Its stock price has increased over 67 per cent in a year, while its peers haven’t fared well. The stock rose by 6.9 per cent on the BSE on Wednesday, in response to its decent December quarter (Q3) results.

However, there are some points that need monitoring.

The lender’s customer pool declined marginally to 1.5 million from 1.6 million a year ago, while it increased sequentially from 1.4 million in Q2. At eight million, total loan accounts have rebounded to FY20 level, though still a bit lower than 8.1 million seen in FY19. 

The share of fresh loans to existing customers against new collaterals stood at 47 per cent in Q3, as against 44 per cent in Q2. With average loan per customer in the segment steadily increasing to Rs 64,000 in Q3, this indicates the heavy dependence on the segment for growth. Dependence on fresh loans to inactive customers is also on the rise, and so is the average ticket size.  

A secular trend is yet to return on quarterly disbursements. For instance, disbursements grew by 12 per cent year-on-year (YoY) and declined by 39 per cent sequentially. Therefore, while the overall portfolio increased by 32 per cent YoY in Q3, much of it was due to favourable gold prices in the quarter. 

With gold prices declining since January, analysts at Kotak Institutional Equities project that the sequential growth in assets under management may reduce to five per cent here on as against 7 per cent in Q3. “With stable gold prices and favourable base waning, we expect growth to revert to mid-teen levels from FY22,” they note. Gold tonnage declined for the third consecutive quarter by four per cent YoY in Q3 to 166 tonnes.

The other factor to note is of reducing yield on loan, which fell to 22.7 per cent in Q3, as against 25 per cent a year ago. Given that this is despite a significant drop in cost of funds, lower yields indicate that the increasing competition is visible from pricing of loans.

Also, at 1.3 per cent gross stage-3 assets, the lender’s asset quality appears to be in check. However, in the absence of pro-forma numbers, Shweta Daptardar of Prabhudas Lilladher expects the gross stage-3 ratio at 2.4 per cent. Therefore, with some key aspects needing attention, investors should not rush to buy Muthoot Finance stock at 2.8x FY22 valuations.