Muthoot Finance shares jumped 3 per cent on Thursday after brokerages reiterated bullish stance on the stock. Domestic research firm Motilal Oswal has a buy call on Muthoot Finance stock with a target of Rs 1,750, implying an upside of 26 per cent as they believe that the company is well placed to build on its competitive heft and continues to create strong value for its stakeholders. The stock was trading at Rs 1,433.35, up 3.21 per cent on BSE.
According to analysts at Motilal Oswal, Muthoot Finance has a strong brand and well-entrenched distribution that will help it gain incremental share in the expanded market pie for gold loans. Meanwhile, Edelweiss also has a buy call on Muthoot Finance with a target price of Rs 1,460.
15% AUM CAGR expected over FY22-24E
Muthoot Finance’ standalone AUM clocked 17% CAGR over FY16-21. Even before the COVID-19 outbreak and the sharp run-up in gold prices in FY21, the company had delivered a four-year CAGR of 14% as of March 2020. “Though higher gold price aid demand for Gold loans, franchises like MUTH have a strong brand and well-entrenched distribution that it will help it gain incremental share in the expanded market pie for Gold loans,” said Motilal Oswal.
Operational efficiency to mitigate any NIM pressure
According to Motilal Oswal analysts, Muthoot Finance has achieved a remarkable improvement in operating efficiency. While it has not been adding branches, employees aggressively, its AUM/employee has almost doubled to Rs 20.3 million over FY16-21. The same is also true for AUM/branch as well. Analysts believe that the current cost ratios of around 3.3% (as a percentage of average loans) are sustainable over the next two financial years.
“Though NIM has already witnessed a sharp contraction due to the burgeoning challengers (particularly aggressive Banks and Fintechs) in Gold Financing, we believe the same has bottomed out at current levels of ~13% and should remain stable in the near-to-medium term,” Motilal Oswal said.
Top Pick among lending NBFCs
Muthoot Finance is Motilal Oswal’s top stock pick among lending NBFCs, given strong execution track record of the management and the next generation of the family being groomed to take up leadership positions in the future. Its strong brand presence and deep penetration, which enhances customer confidence in the franchise is another positive. The brokerage is also bullish on the stock because of Muthoot Finance’s robust risk management control and processes to further scale up the operationally intensive Gold Lending business.
It believes that the credit rating of AA+ and consequently lower cost of borrowings will enable Muthoot Finance to offer competitive interest rates to customers. Additionally, its ability to keep driving operating efficiencies can lead to 15% AUM and PAT CAGR over FY22-24E. “The company appears strongly positioned to deliver standalone RoA/RoE of ~6%/22% over the medium term. MUTH is our top pick among NBFCs, with a TP of Rs 1,750 (2.7x FY24E standalone BVPS) and a potential upside of ~26%,” Motilal Oswal report said.
“Muthoot Finance 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,” the brokerage said.
