HEM Securities Limited, a prominent stockbroker and award-winning investment banker in India's small and medium enterprises (SME) sector has recommended buying Muthoot Finance Limited's shares with a target price of Rs. 1910. The stock is expected to increase 30% from its current market price of Rs. 1465, according to the brokerage. Muthoot Finance is the nation's largest gold loan provider and the most reputable non-banking financial company (NBFC) in the financial services industry.
Q2FY22 results of Muthoot Finance Ltd.
According to the brokerage, the company's "Q2FY22 saw a good growth traction compared with Q1FY22. Gold loan AUM grew 5% QoQ and 18% YoY to INR54700. Increased QoQ tonnage (178 tonnes), increased share of online gold loan customers (29.4% of total) assisted growth momentum and total customers reached 8.8 million."
Based on the management commentary "The company expects NIM to be in the 12-13% range and have a good budget for sales and promotion. Employee costs should be at the same run rate as FY21. The company seeing cost of borrowing coming down. The management is taking steps to bring down the elevated levels of Stage 2 assets. The management expects at least 5% QoQ growth over the next two quarters and 15% in FY22. Gold Loans is approximately 99% of the total Gross loan assets under management and the remaining 1% in other loans."
According to the brokerage's research report, the "Company currently operates 4,619 gold loan branches. Branch addition has averaged around 100 per annum in the last three years, partly slowed down by the recent pandemic. The company targets to open 100-150 new branches per annum. Muthoot has become increasingly focused on driving loan growth to old, inactive customers in recent quarters. Company targets >20mn of its old, inactive customers for driving new loans."
Buy Muthoot Finance Ltd with a target price of Rs. 1910
HEM Securities has claimed that "An average branch of 5-6 employees handles around 1800 loan accounts for Muthoot Finance. Increase in demand for gold loans as economy recovers, sales outreach to inactive clients and increased digitization of processes (e.g. online loan repayment, loan top-ups, etc.) is enabling these branches to handle a higher number of loan accounts."
According to the brokerage's call "The average ticket size has grown at 15% CAGR in the past five years to reach Rs62k in FY21. This compares to an average ticket size of around Rs0.15- 0.20mn reported by private sector banks for their gold loan portfolios. Muthoot's ticket size has room to grow at 8-10% per annum for the next three years to reach Rs82-85K. We value the company at 14.9x FY23 EPS to arrive at the target of 1910."
HEM Securities in its research has also commented that "Leading gold NBFCs like Muthoot Finance have between 3.5-4.5k branches spread across India, much higher than other NBFCs and small private banks and eclipsed only by some of the largest banks in India. We expect the large extensive branch network and a large number satisfied customers (drives repeat business) is a key source of competitive edge for the specialized gold NBFCs."
The brokerage has also noted 3 risk factors for the stock which are "Changes in domestic gold prices have an impact on the near-term growth in Muthoot's AUM as higher gold prices allow customers to borrow more against their collateral and vice versa. A significant decline of more than 15% in gold prices could impact Muthoot's AUM near-term growth negatively, the permissible loan to value (LTV) in gold lending is capped at 75% by the Reserve Bank of India. Any adverse changes related to the defined LTV or upper caps on lending rates/ NIMs could impact the company negatively and higher than expected increase in competitive intensity could impact company growth estimates negatively. Gold loan industry has attracted interest from several large banks and NBFCs in the last 1-2 years large margin."
The stock has been picked from the brokerage report of HEM Securities Limited. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article.