Stock To Buy: This Large Cap NBFC Gets Buy Call For 43% Gains, Gave 125% Returns In 5 Years

Muthoot Finance Limited gets a buy call in the ICICI Securities' report. The brokerage suggests buy the stocks of the company for an estimated target price of Rs 1487 apiece. Muthoot Finance is the largest gold financing company in India in terms of the loan portfolio. It is a large cap NBFC engaged in the Gold Loan business in the country. Considering the stock's current market price and the brokerage's estimated target price, stocks could surge up to 43% in 12 months.

Stock Outlook

The current market price of the stock is Rs 1,044.05 apiece. On Friday, the stocks slid 1.16% from their previous close. The 52 week low of the stock was recorded on 29 June 2022 at Rs 960.40 apiece and the 52 week high was recorded on 15 November 2021 at Rs 1721.95 apiece. The current market price is trading at Rs 83.65 above its 52-week low. Whereas on intraday, it is trading only Rs 3.6 above its low.

Returns of Investments

Last week, the shares of the company fell nearly 12.07%, giving a negative return. However, in the past 1 month, the shares surged roughly 0.68 and gave a positive return. Over the past 3 and 1 years, the shares of the company gave negative returns of 10.04% and 29.43%, respectively. Whereas, in the past 3 years, the shares gave a positive return of 65.83%. In the past 5 years, the shares gave a multibagger return of 125%.

Possibility of yield bottoming out; high-RoE nature and industry leadership remain strong positives

Muthoot Finance's gold loan yield declined for the second successive quarter (contrary to our expectations), reducing to 17.3% in Q1FY23 from 18.7%/20.7% in Q4FY22/Q3FY22. Consequently, Muthoot's consolidated PAT fell 18% QoQ in Q1FY23 to Rs8.3bn. While teaser schemes enabled the company to acquire new high-value customers, it focused on migrating such teaser loans to higher-rate schemes during Q1FY23, which it successfully completed. Going ahead, discontinuation of teaser loans, migration to higher rates, and higher rates for new loans, should improve yields. In this context, management targets >10% gross interest spreads in the remaining period of FY23 vs 9.4% in Q1FY23. Based on gold loan companies' commentary, it seems lower-rated schemes have been withdrawn industry-wide. However, uncertainty remains around the future course of action on yields if the heightened competitive scenario were to come again. Given the large customer base (4-5 times of 5mn current live customers), management remains confident about growth potential. Hence, it continues to guide for 10-15% gold AUM growth depending on the economic scenario.

FY23E gold loan yield

The brokerage said, "We cut FY23E gold loan yield estimates to 18% from 18.5% while maintaining 19% in FY24E. We now factor-in 10% (vs 13%) / 13% gold AUM growth in FY23E/FY24E. We keep opex / credit cost to AUM estimates unchanged at 3.6-3.7% / 0.2%. This should lead to standalone RoE of 18% / 19.6% in FY23E / FY24E. We now model decreased yield / funding cost and increased opex / credit cost estimates in FY23E for Belstar and Muthoot Homefin considering the trend. Hence, we factor-in RoE of 8.8% / 17% for Belstar, and 4.3% / 5.2% for Muthoot Homefin, in FY23E / FY24E."

Branch addition is now an additional growth lever

Muthoot targets to open 150 new branches for which approval has been received from RBI by Oct'22, upon which additional business will be generated. It takes some time for new branches to mature; however, on reaching the existing average branch level productivity, it could lead to ~3% yearly gold AUM growth.

Key comparison with Manappuram Finance (Manappuram)

Manappuram's standalone gold AUM grew 1% QoQ whereas Muthoot's declined 2%. Where Manappuram is giving new loans at higher rates while maturing the teaser rates book, Muthoot is migrating its existing teaser rate customers to higher rates. Muthoot's yields dropped 144bps QoQ whereas Manappuram's increased by 63bps. Muthoot's auctions remained elevated at around Rs13.7bn in Q1FY23 vs Rs1.5bn done by Manappuram.

Maintain Buy for A Target Price of Rs 1,487

Commenting on the valuation of the stocks, ICICI Securities said, "We maintain our BUY rating on the stock with a revised target price of Rs 1,487 (earlier: Rs1,509) based on 2.5x P/B on FY24E book value for gold business and 1.0x for other businesses. Strengths of the company include: inherent low credit cost, high-RoE nature and operating efficiency, industry leadership and execution track record. We expect consolidated RoA/RoE of 5.4%/19.7% in FY24E. Risks include continued decline in yields leading to further compression of RoE and overall lower demand for gold loans."

Disclaimer

The stock has been picked from the brokerage report of ICICI Securities. Greynium Information Technologies, the Author, and the respective Brokerage House are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before taking any investment decision.