Gold-price volatility likely to cap gains for Muthoot Finance's stock

Muthoot Finance posted robust Q2FY26 earnings driven by higher gold prices and strong AUM growth, but analysts flag risks from yield pressure, NIM compression and regulatory uncertainty

Muthoot Finance had excellent Q2FY26 (second quarter of 2025-26) results which is unsurprising since its prospects are directly linked to gold price trends. The company has decent asset quality and good growth prospects. But competition in gold finance is intense. There’s likely to be pressure on yields and net interest margin (NIM) compression in the medium term.

 

While the bull-run in gold continues, the earnings trajectory is good. While most analysts are positive on the stock, with some advocating caution on the basis of the vulnerability to gold price trends and the anticipation of NIM and yield compression.

 

Muthoot reported net profit of ₹2,340 crore was up 87 per cent year-on-year (Y-o-Y) with loan growth at 10 per cent quarter-on-quarter (Q-o-Q) and 47 per cent Y-o-Y to ₹1.32 trillion. Net interest income or NII growth was strong at 59 per cent Y-o-Y, driven by 47 per cent assets under management or AUM growth and 111 basis points Y-o-Y NIM expansion. The NIM was at 12.7 per cent, up 50 basis points Q-o-Q and yield around 20 per cent in Q2FY26 compared to 18.5 per cent in Q1FY26.  

 

Core yield (excluding ARC collections) was at 18.3 per cent in Q2FY26 with the rest from recovery of written-off loans. Management has guided for another ₹90 crore recoveries from the ARC pool in the next 2-3 quarters with potential for more.

 

The ability to set up branch networks and to raise debt at reasonable rates is crucial in order to maintain market share. Cost of borrowings may moderate due to the lagged impact of rate cuts, but NIM will also compress. 

 

The loan-to-value or LTV ratio was assessed at 56 per cent, which is lower than the LTV of 60 per cent plus a year ago – as gold prices rose, the average LTV fell. Credit costs were up 21 basis points Q-o-Q to 0.4 per cent. Gross non-performing loans or GNPLs were down 23 per cent Y-o-Y and 4 per cent Q-o-Q at ₹3,000 crore.

 

The gross stage 3 (GS3) improved during the quarter to 2.26 per cent vs 2.58 per cent in Q1FY26 due to customers redeeming gold after extension of repayment time. Asset quality is comfortable even if gold prices do see sharp correction.

 

Regulatory intervention, given overheating in gold, is a potential risk which is hard to assess. The average ticket size of loans was up 33 per cent Y-o-Y, driven by gold appreciation. Gold tonnage was up just 5 per cent Y-o-Y. The low LTV gives headroom for growth but other players offering high LTV may cut into market share.  

 

Customer acquisition (which is running at 400,000-500,000 new clients/quarter) depends on branch expansion. The company opened 133 branches in H1FY26 and the gold loan book of Muthoot Money (vehicle finance) and Belstar (microfinance) subsidiaries is also scaling up. The subsidiaries have 2,272 branches and the expansion of gold loans into these branches will also support growth.

 

The gold loan business started in the vehicle finance subsidiary Muthoot Money a few quarters ago and it has expanded into the microfinance subsidiary Belstar. Subsidiaries contributed 13 per cent to overall consolidated AUM and 12 per cent of net worth.

 

In home finance, Muthoot Homefin, loan book growth is strong at 33 per cent Y-o-Y in Q2FY26. NIM is up 30 basis points Q-o-Q to 6.2 per cent. Net profit was down 13 per cent Y-o-Y and cost-to-income was at 47 per cent. In microfinance, Belstar reported flat AUM of ₹7,700 crore Q-o-Q in Q2FY26, and management said the business will be in consolidation mode for H2FY26. In Muthoot Money, profitability has improved as the vehicle finance subsidiary has also entered the gold loan business.

 

For FY26, gold loan growth guidance has been upgraded from 30 per cent to 30-35 per cent. The non-gold loan portfolio such as personal loans and micro finance constitutes 15 per cent of the consolidated loan book. A decline of 15 to 20 basis points in borrowing rates is anticipated by Q1FY27 and Muthoot is also looking to increase ECB funding to 25-30 per cent from the current 15 per cent.

 

Valuation of the stock is tricky, given the link to gold prices with built-in volatility. Analyst perspective depends to a large extent on where they think gold prices are going. As of now, consensus is bullish but price targets range from ₹3,000 (downside of ₹400) to ₹4,000 (upside of ₹600).