Muthoot Finance likely to stand tall despite the many challengers; here's why

Non-banking lender Muthoot Finance had declined over 20 percent from its 52-week high, however, it still remains the top pick for 2022 in the NBFC lending space for domestic brokerage house Motilal Oswal. The brokerage has a 'buy' call on Muthoot Finance with a target of ₹1,750, indicating an upside of 26 percent.

The investment idea is premised on the thesis of a structural opportunity in Gold lending as the market pie expands with customers evolving, noted the brokerage. It also stated that the company appears strongly positioned to deliver a standalone return on equity (RoE) of around 22 percent over the medium term.

The stock has risen only 5 percent in the last 1 year and is down 7 percent just in February making its underperformance, an opportunity for investors.

The rationale

"Taboo around Gold loans fading away, and apprehensions regarding Gold loans addressed through customer education. Around 55 percent of Muthoot's Gold loan portfolio has a ticket size of over ₹1 lakh, which leads to higher stickiness and lesser churn feeding into Gold loan growth," the brokerage said.

Further, the management has built-in adequate safeguards through appropriate combinations of tenure and LTV (average Gold loan tenure is in the six-to-nine month's range), which protects it against any significant volatility in gold prices, added MOSL. Muthoot ticks all the right boxes, claims the brokerage.

Firstly, it has a strong execution track record of the management and the next generation of the family being groomed to take up leadership positions in the future.

Secondly, it has a strong brand presence and deep penetration, which enhances customer confidence in the franchise.

Thirdly, its robust risk management control and processes to further scale up the operationally intensive Gold Lending business.

Lastly, the credit rating of AA+ and consequently lower cost of borrowings will enable it to offer competitive interest rates to customers.

As per the brokerage, Muthoot is well placed to build on its competitive heft and continues to create strong value for its stakeholders. The operationally intensive nature of the business and a strong brand provide business moats, added MOSL.

The numbers

Further, Muthoot's Standalone AUM stood at 17 percent CAGR over FY16-21. Even before the COVID-19 outbreak and the sharp run-up in gold prices in FY21, the NBFC had delivered a double-digit CAGR in the previous 2,3 and 4 years.

"Though higher gold price aid demand for Gold loans, franchises like MUTH have a strong brand and well-entrenched distribution that it will help it gain incremental share in the expanded market pie for Gold loans," said MOSL.

Given the kind of RoE that MUTH is able to churn out (relative to loan growth), it is able to generate surplus cash, which can be deployed for diversification into non-Gold product segments. MOSL expects the proportion of non-Gold businesses to improve to 14-15 percent (v/s 10 percent at present) over the next three years.

The gold loan lender posted a 4 percent rise in its net profit at ₹1,029 crore in Q3FY22 against ₹991 crore in the corresponding period of the previous fiscal. Its loan assets in Q3 stood at ₹54,688 crore as compared to ₹50,391 crore last year, up 9 percent.

Post the earnings, George Jacob Muthoot, Chairman said, “Despite Covid situation, our company was able to maintain the consolidated AUM at ₹60,896 crore, focusing more on loan recovery. Now with the decline in the Covid positivity rates, the overall recovery in economic activity seems optimistic. Hence with the economic growth gradually picking up and consumers realising that gold loans are all-weather loans, we remain optimistic about growth in gold loans."