Top Brokerage Bullish On This Midcap NBFC Stock, Recommends Buy For 43% Upside

In a recent report on Muthoot Finance Ltd (MUTH), Chola Wealth Direct upgraded the stock to "BUY" with a target price of Rs 1,550 per share. If you buy the stock at the current market price, it would likely give a 43% robust return. With a market cap of Rs 43, 750.18 crores, it is a mid-cap NBFC sector stock.

 Stock Outlook & Returns

The current market price (CMP) of MUTH on NSE is Rs. 1,090.05 apiece. It recorded its 52-week low at Rs 950.20 apiece on 26 September 2022 and its 52-week high at Rs. 1,559.95 apiece on 5 January 2022, respectively.

 The stock has surged 1.1% in a week, and fallen 4.02% in 1 month, respectively. The stock surged 4.81% in 3 months. It has given a negative return of 28.91% over the last year. In the past 3 years, it gave 41.42% positive return and 135.97% multibagger return. 

Muthoot Finance continue to benefit

Muthoot Finance Ltd will continue to benefit from its long-standing presence and deep knowledge of the gold loan segment. Increasing share of non-gold loans would de-risk its portfolio concentration and provide cushion to AUM growth. Also, the same infrastructure would be utilized to cross sell products leading to lower cost-income ratio. 

Liability Mix Overhaul: After strong growth during FY 2020 to FY 2022. Last 2 quarters had weak growth largely due pressure from the banks. We expect pressure to ease by Q4 of FY 2023.We expect return of double-digit growth from FY2024. The company's liability mix has undergone significant tilt toward Bank and MFI which now account for 56% of the loan book. With an average 7.24% RoA/ 23% RoE, MUTH generates one the best return ratios in the NBFC space.

Valuation

The brokerage said, "In our view, MUTH has strong moats with reasonably high entry barriers. Thus, it has generated superior return ratios consistently over the past decade. The threat of competition from banks is high similar during the phase between 2012-14 scenario. The company will continue to be No.1 in gold financing business. This will be mainly driven by its strong business model led by lean cost structure and high standards of collection and operational efficiencies, resulting in best-in-class margins along with negligible ALM & NPA issues. This would help maintain strong RoEs of >25% and RoAs of >7% by FY24E. Strong promoter pedigree with a legacy of more than 100 years along with healthy capital adequacy of 25%+ with Tier-1 provides comfort. Thus, we have upgraded the stock to 'Buy' with a TP of INR1,550 (2.5x FY24E BVPS)."

Industry Overview

• Gold demand has been steady over past two decades.
• Significant gold loan opportunity as penetration levels less than 5%.
• According to the World Gold Council (WGC), India and China account for nearly half of the global gold demand. In 2019, India accounted for 16% of the global gold demand.
• Over the past two decades, gold demand has been steady, mostly ranging between 700-900 tons per year. While gold demand has been healthy, gold finance penetration has remained low at only 3.5% of gold owned.
• While gold prices may fluctuate in the medium term, they have been on a steady uptrend in the long term. Over the past 5/10/15 years, gold prices have delivered 12%/5%/11% CAGR.

Disclaimer

The stock has been picked from the brokerage report of Chola Wealth Direct. 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 consult with certified experts before making any investment decision.