In the last one year, shares of Muthoot Finance have underperformed, losing nearly 27% of their value, falling from 1,495.65 to the current value of ₹1,081.75. The stock started to decline after hitting a 52-week high of ₹1,721, and it has since fallen 37.18% to date.
Despite such weak performance, domestic brokerage firm Chola Wealth Direct is bullish on the stock, citing strong growth opportunities ahead. The brokerage stated that the company will continue to benefit from its long-standing presence and deep knowledge of the gold loan segment.
Increasing the share of non-gold loans would de-risk its portfolio concentration and provide a cushion for AUM growth. Also, the same infrastructure would be utilized to cross-sell products, leading to a lower cost-income ratio, it stated.
The company has a comfortable liquidity position with ₹10,000 crore in cash and investments, the brokerage said, which it can utilize for its growth and should enable it to earn higher NIMs and return ratios.
The South-based NBFC experienced weak growth in the last two quarters, largely due to pressure from the banks. The threat of competition from banks has stood high in recent times, similar to the phase between the 2012-14 scenario.
However, the brokerage expects the pressure to be eased by the end of the fourth quarter of FY2023, and it also expects a return of double-digit growth in FY2024.
According to the brokerage, the company will continue to be No. 1 in the gold financing business. This will be mainly driven by its strong business model, led by a lean cost structure and high standards of collection and operational efficiencies, resulting in best-in-class margins along with negligible ALM and NPA issues.
In addition, the strong promoter pedigree with a legacy of more than 100 years, along with healthy capital adequacy of 25% or more in Tier 1, provides comfort, it said.
The company’s liability mix has undergone a significant tilt toward Bank and MFI which now account for 56% of the loan book. The brokerage underscored that the company generates an average ROE of 23% and RoA of 7.24%, which are the one of the best return ratios in the NBFC space.
Meanwhile, Muthoot has diversified its lending business over the last few years into home finance, microfinance, insurance broking, and asset finance verticals. The consolidated share of non-gold business has increased from 5% in FY17 to 10% at the end of FY22.
However, due to the pandemic, the management is currently focusing on growing the gold loan portfolio, which has a shorter tenure and higher safety., says Chola Wealth Direct.
Further, business expansion will be crucial for growth. RBI’s approval for opening 150 new branches last quarter rests on the street’s concern that the lack of new branches is constraining gold loan growth.
The Muthoot Group was among the first in the NBFC space to launch its AI-enabled chatbots - MATTU and MITTU. Through this launch, MFL aims to redefine seamless customer experiences by being present in the online space, the brokerage underlined.
Chola Wealth Direct has upgraded the stock to "buy" with a target price of ₹1,550 apiece, which reflects an upside potential of 43.25% from the stock's Thursday closing price.
For the September quarter, the company reported a 10% fall in its consolidated net profit of ₹901.6 crore from a net profit of ₹1,002.90 crore in the same period of the previous fiscal year.
The revenue from operations during the quarter fell marginally to ₹2,841.9 crore from ₹3,064.8 crore in Q2 FY22.
As of September 30, 2022, the company's gross loan assets under management (AUM) stood at ₹57,230.30 crore as against ₹55,146.80 crore in the year-ago period. Of this, gold loan AUM stood at ₹56,501.40 crore as against ₹54,682.10 crore a year ago.
The amount of gold jewellery kept as security with Muthoot Finance at the end of September 2022 stood at 177 tonnes as compared to 187 tonnes at the end of March 2022.
21 analysts polled by MintGenie on average have a 'buy' call on the stock.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.