Muthoot's strong Q1 show fails to cheer investors, stock sheds 4%

Concerns remain over asset quality of non-gold biz

Despite a strong pre-tax profit growth of 37.8 per cent year-on-year (YoY) in the June quarter (Q1) of financial year 2020-21 (FY21), gold finance major Muthoot Finance’s (Muthoot’s) stock fell over 4 per cent since it announced the results on Wednesday. Expensive valuation and concerns over asset quality of its non-gold businesses are hurting investor sentiment.

Rising gold prices are improving the overall outlook of gold finance companies like Muthoot in terms of loan book growth and asset quality. However, its current valuation at 3 times its FY22 estimated book value, which is higher than some major non-banking finance companies (NBFCs), offers little comfort.
 

Notably, analysts at Kotak Institutional Equities have downgraded the stock to ‘reduce’ from ‘add’. They say improving funding and stabilising Covid-19 cases are making them look at other inexpensive NBFCs like Cholamandalam Investment and Finance Company and Shriram Transport Finance, which are trading below 2 times their respective FY22 estimated book values.

In fact, valuation is also becoming a major concern as the asset quality of Muthoot’s home loan and microfinance subsidiaries — Muthoot Homefin (India) and Belstar Microfinance, respectively — could see some pressure in the near term. Analysts at Motilal Oswal Research, who have maintained a ‘neutral’ rating on the stock, are also cautious about the outlook for these subsidiaries. Both these businesses accounted for around 10 per cent of Muthoot’s consolidated loan assets in Q1. However, collection efficiency in these businesses was over 75 per cent in July.

 

 

This apart, the company also faced margin pressure, on a sequential basis, in Q1 led by higher funding costs and lower yield. Net interest margin was down 184 basis points sequentially to 13.9 per cent. Though the company’s loan book growth moderated in Q1, factors such as gold price rally and higher gold loan demand would help improve overall loan book growth in the ensuing quarters. The management also expects around 15 per cent loan book growth in FY21. Strong capital (tier-1 ratio around 25 per cent) and asset liability management are other positives for Muthoot. Overall, investors are advised to wait for some correction and till there is clarity on non-gold asset quality.