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This Financial Stock Has A “BUY” Call From IDBI Capital With A Target Price of Rs 2000

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IDBI Capital, a brokerage company, has issued a buy call for Muthoot Finance with a target price of Rs 2000, implying a 20% gain from current market levels. The stock was advised for purchase by the brokerage at a market price of Rs 1,660, and it is currently trading at Rs 1678. Muthoot Finance has been named India's Most Trusted Financial Services Brand for the years 2016, 2017, 2018, 2019, and 2020, and it has shown lower gold AUM growth of 18% YoY vs. 29% YoY. (Q1FY22).

 

Q2FY22 results of Muthoot Finance

Q2FY22 results of Muthoot Finance

According to IDBI Capital Muthoot Finance (MUTH) reported lower growth in gold AUM at 18% YoY vs 29% YoY (Q1FY22), overall cons. AUM grew by 17% YoY; management maintained the guidance of 15% growth for FY22. Profitability growth was lower at 11% due to higher provisions. NII grew by 14.5% YoY led by a decline in margins; while PPoP grew by 17% YoY led by lower operating expenses.

The brokerage has said "Provisions of MUTH increased by 595% YoY (up 121% QoQ) due to asset quality deterioration. Stage III loan assets increased to 1.9% vs 1.2% QoQ, while the Company carries excess provision of Rs2.95bn in the balance sheet."

Key Highlights and investment rationale for Muthoot Finance according to IDBI Capital
 

Key Highlights and investment rationale for Muthoot Finance according to IDBI Capital

Gold AUM growth slows down: Gold Loan AUM growth slows down to 18% YoY (up 5% QoQ) vs 29% YoY (Q1FY22) due to high base effect (32% YoY Q2FY21). Gold holdings grew by 9% YoY (up 4% QoQ) to 178 tonnes, whereas loan per 1gm of gold has increased by 7% YoY (up 1% QoQ) to Rs3,098. Management continues to guide gold loan growth to 15% YoY for FY22 on a conservative basis.

Asset quality deteriorates: Stage III loans have increased during the quarter at 1.9% vs 1.2% QoQ, which is not a cause of concern because of being backed by higher collateral. The company carries an extra provision of Rs2.95bn and an overall of Rs9.45bn (standalone business).

Margins improved sequentially: NIMs improved by 53bps QoQ to 13.46% due to a rise in yields on loans along with a decline in the cost of funds during the quarter. Similarly, spreads have also risen to 12.64% vs 12.21% QoQ.

Outlook: Given the competitive environment, management maintained guidance of 15% YoY growth for FY22. The best part in Gold finance portfolio is although NPA may inch higher; the lender can auction and recover much better as compared to other asset classes.

IDBI Capital’s take on Muthoot Finance

IDBI Capital’s take on Muthoot Finance

Muthoot Finance plans to maintain its NIMs and spreads (current NIM at 13.46% and interest spread at 12.64%) and the Gold loan AUM currently stands at INR546,821mn as of September 2021. If the gold loan volume grows per branch, OPEX will not go up proportionately (certain expenses fixed), extra staff may increase, says the brokerage's report according to the management.

IDBI Capital has said that "We believe that MUTH with ~90% of AUM in the Gold loan portfolio has a lower risk of loss of assets versus other NBFCs. We have moved to FY24E estimates and maintained 'BUY' rating with a new TP of Rs.2,000 (earlier Rs.1,790), valuing it at 3x P/ABV FY24E."

Disclaimer

Disclaimer

The above stock is picked from the brokerage report of IDBI Capital. 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.

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