Motilal Oswal Suggests Buying This Finance Stock For 26% Return

Brokerage firm Motilal Oswal suggests investors buying the stock of Muthoot Finance for a 26% return. Around 55% of the company's Gold loan portfolio has a ticket size of over Rs. 100k, which leads to higher stickiness and lesser churn feeding into Gold loan growth.

Target Price

The Current Market Price (CMP) of Muthoot Finance (MUTH) is Rs. 1389. Motilal Oswal has estimated a Target Price for the stock at Rs. 1750. The stock is expected to offer a 26% upside, in 1 year.

Stock Outlook
Current Market Price (CMP)	Rs. 1389
Target Price	Rs. 1750
1 year return	26.00%

Company performance

Over the past five years, MUTH has exhibited an improvement in efficiency, with AUM per branch rising to ~ Rs. 110m in FY21 from ~ Rs. 60m in FY16. This traction in operating efficiency has led to higher growth in revenue (relative to AUM growth). Standalone AUM clocked 17% CAGR over FY16-21. Non-Gold subsidiaries contribute ~10% to the consolidated AUM of MUTH, with their contribution to consolidated profit ~1% in 9MFY22. The key investment thesis for Gold Finance is the 13%-15% CAGR in Gold loans over the next 5 years, with MUTH best positioned to deliver across economic cycles.

Comments by Motilal Oswal

About the potential of the company, Motilal Oswal said, "Muthoot Finance ('MUTH') is our top pick for CY22 in the NBFC Lending space. Our investment idea is premised on our thesis of a structural opportunity in Gold lending as the market pie expands with customers evolving, taboo around Gold loans fading away, and apprehensions regarding Gold loans addressed through customer education. In this report, we list MUTH's competitive strengths vis-à-vis its peers and some of the challengers like Fintech Gold loan NBFCs. We model in 15% PAT CAGR over FY22-24E and a RoA/RoE of 6%/22% in FY24E."

About the company

Muthoot Finance provides gold loans on easy terms and conditions. Their gold loan range begins from Rs. 1500 and there is no maximum limit. Over the last decade, MUTH has delivered average credit costs of 40bp. MUTH has achieved a remarkable improvement in operating efficiency. While it has not been adding branches/employees aggressively, AUM/employee has almost doubled to Rs. 20.3m over FY16-21. With a six-to-twelve-month Gold loan product and an appropriate combination of LTV, MUTH has built adequate safeguards to guard against volatility in gold prices.

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Disclaimer

The above stock was picked from the brokerage report of Motilal Oswal. 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.