We expect core NIM to expand by ~50bps over the next two years.

In a sharp contrast to its NBFC peers, Muthoot Finance reported a better-than-expected Q4FY20 owing to strong growth momentum. The key highlight is robust AUM growth of >20% y-o-y/8% q-o-q on the back of gold price tailwinds — a trend expected to sustain. This coupled with a superior NIM (albeit normalised vis-a-vis Q3FY20 following lower penal collections) supported strong revenue traction. Asset quality remains strong with gross-stage 3 assets falling to sub-2.2% (2.5% in Q3FY20). Other businesses — home finance, Belstar and insurance broking — have been understandably held back by adverse circumstances.

We believe the current environment offers a unique growth and asset tailwind to gold financing, forcing our hand to raise FY21/FY22E EPS by 16%/26% — a rarity in these times. We are also raising the target to 2.5x consolidated FY22E BVPS (from 2x), thereby leading to a revised TP of Rs 1,160 (earlier Rs 883). Frankly, our FY22E RoE of28% and the low asset quality risk could have justified an even higher multiple, but we recognise that gold financing is after all a mature credit category. Maintain ‘buy’.

AUM growth of >20% y-o-y/8% q-oq stands out (accretion of >Rs 3,000 crore being the highest in many quarters). Gold price tailwind helped, reflected in >16% y-o-y/6% q-o-q rise inAUM/g. We are raising FY21/FY22 loan growth estimates from 16%/15% to 23%/21%, given gold tailwinds. Despite lower penal interest and a negative carry of higher liquidity, >15% margins underscore pricing power. We expect core NIM to expand by ~50bps over the next two years.

Muthoot’s outlook supported by a gold price tailwind promises accelerated earnings momentum. We see a unique medium term combination of strong growth and an impressive RoE of 28%, not to mention the low asset quality risk. Retain ‘buy/SO’.