Prabhudas Lilladher has given Buy recommendation for Muthoot Finance with a target price of Rs. 1479 in its research report issued on Feb 09, 2021

Prabhudas Lilladher’s research report on Muthoot Finance

Defying pandemic challenges and pertinent competition in gold loan market, MUTH recorded robust loan and stable asset quality performance. What impressed us more is that not just the gold price comfort but gold loan traction (32%YoY/7%QoQ growth; 2%QoQ tonnage growth) was also supported by (a) 3.88 lakh new customer addition (b) 25 new branch addition (2% QoQ growth in network). Such fundamental growth would propel gold loan CAGR to 18% over FY21-23E. Asset quality stood stable with Co. beefing up provisions to Rs5.9bn (5x increase QoQ) despite no alarming signals ahead. Also, gold that contributed 90% to the overall mix saw NPA restricted to 1.3%. Although SC order lifting would spike this ratio, higher provisions, lower write-offs (<1% of book) and 14% on-BS liquidity provide confidence in asset quality of the Co. Yet we remain conservative maintaining high order NPA forecasts at 2.4% for FY21. Stable better spreads, lower incremental credit costs and high growth should offset the same enabling MUTH to clock industry best return profile (25%RoE/6.5%+RoA) for FY21. Resultantly, our EPS estimate stands marginally higher by 2%. MUTH’s ability to maintain growth despite underlying asset price fluctuations and the higher recoverability value of its key business would enable Co. to deliver 6%RoA/21%+RoE on steady-state basis over FY22-23. We, therefore, tweak FY22-23 EPS estimates by 4%.

Outlook

Our SOTP price now stands at Rs1,479 (earlier Rs1,471) as we value core business at 2.7x (Rs1460) and subsidiaries at Rs23. Maintain conviction BUY.

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