Muthoot Finance: Decoding the glitter and growth of the gold financier

At Rs 36,620 crore m-cap, the stock displaced AU Small Finance Bank, PNB and Shriram Transport among notable names

A stock price rally of over 75 per cent in a year has put Muthoot Finance, a gold financier headquartered in Kerala, in the league of top-rated financial services players such as Bank of Baroda, Bandhan Bank and HDFC AMC in terms of market capitalisation. What’s more, it has displaced names such as AU Small Finance Bank, Punjab National Bank (PNB) and Shriram Transport among notable names on the bourses.

Backing this surge in the stock are factors such as strong underlying growth, led by the gold price rally, the company’s ability to tap capital at reasonable rates and its diversification efforts.

For instance, after September quarter’s 9 per cent year-on-year growth in gold loan book, December quarter’s (Q3) 19 per cent growth number seems to have made good for the previous quarter’s dip, taking the stock up by 23 per cent in the past week. In Q3, Muthoot's gold holdings stood at 173 tonnes, up 4.2 per cent year-on-year. Financial year-to-date gold assets under management (AUM) have risen by 12 per cent as against 10 per cent growth seen in FY19, indicating that FY20 may close on a stronger note than anticipated.

The company’s near-leadership position in the gold loan business gives it the underlying strength to weather competition. While in Q3, gross non-performing assets (NPA) fell to 2.54 per cent from 3.43 per cent in Q2, analysts at IDBI Capital note that NPA isn’t really a matter of concern in the gold loan business.

That Muthoot Finance could bring down its cost of funds by 32 basis points sequentially to 8.98 per cent in Q3 also helped its financials. However, given that the company has always worked with cost of funds at 9-9.2 per cent, the Q3 decline could just be a one-off. What also supports Muthoot Finance, is ability to diversify into new avenues. Apart from picking stake in Belstar Investments and Finance, which is a microfinance business in 2016, Muthoot has branched out to affordable housing, vehicle finance and insurance broking and asset management.

The diversification move has helped Muthoot to somewhat reduce its dependence on gold loans, share of which stood at 88 per cent, with other businesses contributing 12 per cent of consolidated revenues.

A reasonably insulated business and decent asset quality puts Muthoot Finance in the shopping cart of 12 out of 13 analysts polled on Bloomberg. Valuations at 2.1x FY21 estimated book also appear reasonable in the context of strong growth prospects.

Financial services players with market value under Rs 1 trn
League table	Market-cap (Rs cr)
IndusInd Bank	81,947
HDFC AMC	71,970
Bandhan Bank	66,949
Bank of Baroda	38,027
Muthoot Finance	36,620
IDBI Bank	35,865
AU Small Finance	35,641
Punjab Nat. Bank	35,608
Power Fin. Corp.	34,915
Shriram Transport	30,448
Excludes holding companies; Source: Capitaline; Compiled by BS Reseach Bureau