Motilal Oswal Suggests Buying This Largecap Retail Stock For 28% Potential Return, Pursuing Aggressive Growth

Brokerage firm Motilal Oswal in a recent report recommends investors to buy the stocks of Muthoot Finance. The company is re-pricing its teaser rate gold loans disbursed at 6.9% p.a. between December 2021 and March, 2022 to higher interest rates of 9.9%-11.9%. This is expected to have multiple implications with the most obvious being the potential for an increase in the portfolio yields of the gold loan book.

Target Price, Current Market Price, and Company Performance

The Current Market Price (CMP) of Muthoot Finance is Rs. 1062. Motilal Oswal has estimated a Target Price for the stock at Rs. 1220. The stock has potential to give a 15% return, in the upcoming 1 year. This is a large-cap company with a market capitalization of around Rs. 42,249 crore.

Stock Outlook
Current Market Price (CMP)	Rs. 1062
Target Price	Rs. 1220
Potential 1 year return	15.00%
52 week high share price	Rs. 1,721.95
52 week low share price	Rs. 1,023.00

Motilal Oswal on the stock advantages and risks

Motilal Oswal choose to call the 9.9%-11.9% gold loan products as teaser rate products because the products are being offered at ticket sizes above Rs. 50K (albeit with a lower LTV of 65%), and they believe that if Muthoot Finance continues to offer these interest rate products, there is a risk to the compression in the blended portfolio yields (in FY23E) despite the sequentially higher disbursement yields in 1QFY23E.

However, there are some key risks to the firm's BUY rating, despite a ~25% stock price correction over the last 3 months. Muthoot Finance has not been able to procure the RBI approval for new branch openings over the last 2 years. But Motilal Oswal remains positive on the stock's potential. "We expect MUTH to deliver a standalone AUM growth of ~8%/13% in FY23/FY24, respectively. RoA/RoE is likely to decline (to ~5%/18%) over the next 2 years. Our FY23/FY24 EPS estimates are largely unchanged. The current stock valuation of 1.7x FY24E P/BV reflects concerns on tepid gold loan growth and a consequent impact on margins and profitability," the brokerage firm added.

Company profile: Muthoot Finance

Muthoot Finance provides gold loans on extremely easy terms and conditions to people of each segment of the society. Their gold loan range begins from Rs. 1500 and there is no maximum limit. They provide gold loans, home loans, personal loans, and insurance products.

About Southern India for gold loan NBFCs segment, the firm thinks that teaser rates have not gone away - just that the 6.9% teaser rate has been replaced by 9.9%-11.9% teaser rates, banks and gold loan fintechs have still not reduced their aggression. Additionally, gold loan demand was weak in May, 2022 and redemptions were high because of the wedding season; but the demand has swiftly recovered in the first 10 days of June, 2022 and gives hope to salvage the quarter.

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.