The year 2013 has brought cheer to India’s largest gold lender – Muthoot Finance (Muthoot) on multiple fronts. News about the possibility of a stake sale of up to Rs 550 crore and removal of regulatory overhangs have rubbed off positively on the Muthoot scrip. On Monday as well, post-results the stock rallied five per cent, driven by revival in loan growth for the recently-concluded quarter and strong management commentary on future growth. Overall, the stock is up 8.8 per cent in January so far vis-à-vis 2.5 per cent surge in the Sensex and two per cent in the Bankex.
At current levels of Rs 227 though, the stock trades at 1.7 times its FY14 estimated book value, which isn’t cheap and could limit further upsides, believe analysts. Its smaller peer, Manappuram Finance is trading at 1.1 times FY14 estimated book value. Thus, investors looking to enter the stock should wait for reasonable declines from current levels.
Closing in on stake sale
The company, which is in talks with institutional investors to raise funds, aims to garner Rs 400-550 crore by issuing 20-25 million new shares. The move is aimed at complying with the Securities and Exchange Board of India’s guidelines of having minimum 25 per cent public shareholding (the deadline being June 2013), and will see the promoter’s stake decline from the current levels of 80.12 per cent. However, it will also provide capital, which the company can use for securing future growth.
Regulatory concerns easing
The risk of tighter regulatory norms has been looming large on gold loan companies, such as Muthoot over the past year. However, the recommendations of the KUB Rao Committee are largely beneficial for gold loan companies. Apart from ruling out any possible systematic risk to the financial system from gold loan companies, the committee has recommended increasing the loan-to-value (LTV) for such companies from 60 per cent now to 75 per cent. This will help boost growth rates for companies like Muthoot.
“We believe this is a strong positive as the long term concerns on pricing power are mostly addressed as the niche customer set demanding higher LTVs and willing to pay in higher yields are not crowded out,” says Santanu Chakrabarti, analyst at ICICI Securities.
| Q3: MUTED SHOW | ||||||
| in Rs crore | Year ended | 9 months ended | Quarter ended | |||
| Mar-12 | % Chg* | Dec-12 | % Chg* | Dec-12 | % Chg* | |
| Interest earned | 4,518 | 96.3 | 3,937 | 21.9 | 1,354 | 10.4 |
| Other income | 32.0 | 119.4 | 38.0 | 47.1 | 11.0 | 143.9 |
| Total income | 4,549 | 96.4 | 3,976 | 22.1 | 1,365 | 10.9 |
| Interest expended | 2,370 | 128.3 | 2,077 | 25.2 | 708 | 9.9 |
| Net interest income | 2,148 | 70.0 | 1,860 | 18.5 | 646 | 11.0 |
| Net profit | 892 | 80.5 | 784 | 19.4 | 270 | 7.6 |
| * y-o-y Standalone financials Source: Capitaline Data compiled by BS Research Bureau | ||||||
However, the Rao Committee has also recommended other measures, such as capping lending rates, funding via the non-convertible debenture (NCD) route and limiting branch expansion which, believe analysts, could impact near-term profitability of gold lenders. Notably, restrictions on fund raising via the NCD route will impact Muthoot more than Manappuram given the latter’s negligible funding via this route, as against about 37 per cent of Muthoot’s total funding.
Q3: Signs of pick up
For the quarter ended December 2012, Muthoot missed Street expectations on the loan growth as well as bottom line fronts. As against analysts’ expectations of 15-16 per cent loan growth, the figure stood at 12 per cent. The net profit growth of 7.6 per cent too, came in lower than expectations of about 10 per cent.
However, this growth comes on the back of muted performance in recent quarters. Importantly, the management is confident of maintaining this loan growth, going forward. Notably, the growth in its assets under management of Rs 1,969 crore was also the highest since the June 2012 quarter.
M G George Muthoot, chairman, Muthoot Finance, stated, “Muthoot Finance has been able to register a growth of Rs 1,969 crore in its assets under management, as against a de-growth of Rs 1,337 crore in the first quarter and a growth of Rs 405 crore in the second quarter, signifying the beneficial fallout of the strategic steps the company has taken to address the regulatory restrictions imposed on gold loan NBFCs. The result gives us the confidence to sustain growth in the coming quarters improving profitability metrics”.
