Muthoot Finance shares jump 10% after strong Q4 results; should you buy?

Shares of Muthoot Finance surged 10 per cent during the trading session on Monday after the company reported a strong performance for the period ended on March 31, 2023. It clocked the highest-ever quarterly gold loan disbursement with all-time high gold loan growth in Q4.

The non-bank gold loan provider registered a net profit of Rs 3,474 crore in FY23 as against Rs 3,954 crore in FY22. Its net profit in Q4 stood at Rs 903 crore as against Rs 960 crore in Q4FY22. Consolidated profit after tax increased 8 percent to Rs 1,009 crore as against Rs 934 crore last quarter.

Loan assets stood at Rs 63,210 crore as compared to Rs 58,053 crore last year, registering a growth of 9 per cent. Gold loan assets rose 8 per cent to Rs 61,875 crore as compared with Rs 57,531 crore last year. The consolidated loan AUM of the company surged 11 percent on-year to Rs 71,497 crore in FY23, compared to Rs 64,494 crore last year.

Shares of Muthoot Finance surged about 10 per cent to Rs 1134 on Monday, before giving up their gains partially. The company was commanding a market capitalisation of close to Rs 45,000 crore. The scrip had settled at Rs 1,034.75 on Friday.

Brokerage firms are majorly positive on the counter and believe that the company may continue to deliver decent performance in the coming quarters. Re-rating can happen if the company sustains this growth momentum and shows improvement in asset quality, they said. However, a few of them have slashed their estimates for the company.

Muthoot reported an NIM expansion of 40bps QoQ to 12.3 per cent, as yields seem to have bottomed out. PAT came below estimates, on account of higher opex and provisions. Asset quality deterioration was a negative surprise because stage-III assets rose sharply as accommodation was given to customers for a few more months on the back of high collateral value, said Prabhudas Lilladher.

"Gold AUM will continue to see 15 per cent YoY growth in FY24 and FY25, as it managed to post its highest ever quarterly gold disbursement. Given strong gold AUM growth of 8.9 per cent QoQ amidst heavy competition from banks and new age fintech players we maintain our ‘buy’ rating and target price at Rs 1,315," it said.

Muthoot reported strong headline growth due to the rising gold price and stable competitive intensity. We continue to believe that the worst is over on the competitive front, even as improvements may be gradual. Gold lending remains a strong niche business that, if managed well, has negligible credit losses, said Kotak Institutional Equities.

However, it has lowered its estimates by 5-8 per cent to reflect lower margins, building almost flat margins versus improvements earlier. Growth is likely to revert to 13-14 per cent over the next two years. We continue to believe that gold loan remains a niche business, which is challenging for multi-product players to replicate, it added a buy rating with a fair value of Rs 1,225.

However, not all analysts are gung-ho over the counter. Some of them remain neutral on the counter hinting towards the challenges for the company with limited growth potential and concerns over challenges about margin expansion.

However, Motilal Oswal remains 'neutral' on the stock with a target price of Rs 1,125 on the stock as it sees limited upside catalysts, with an aggressive competitive landscape and the need for a shift in gold loan NBFCs’ business model.

"Muthoot reported a strong operational quarter, with a healthy sequential growth in gold loans without the associated trade-offs in spreads/margins. However, striking an appropriate balance between loan growth and margin will still remain an important deliverable in FY24," Motilal added.

ICICI Direct has a hold call on Muthoot Finance with a target price of Rs 1,150. The brokerage values the core business (gold loan) at about 1.8 times FY25E adjusted book value and assigned Rs 39 to subsidiaries, maintaining its target price to Rs 1,150."