Result update of Muthoot Finance - ICICI Securities

Muthoot Finance's (MUTH) Q1FY13 performance allays multiple fears with respect to the ongoing realignment process. It indicates that AUM decline need not necessarily be disruptive and that yields are more likely to suffer from competition rather than realignment. Both these pointers are visible in the numbers reported for Q1FY13: AUM declined 5% QoQ (I-Sec: 9% decline) while yield compression was arrested at 20bps sequentially. This, together with the 41bps benefit in cost of funds, led to a healthy NII, which was 9% ahead of our estimate. GNPAs spiked on a QoQ basis by 83bps as the company chose to auction fewer loans. Auctions during the quarter were for just Rs170mn vs Rs1bn in Q4FY12. However, given that these loans would be collateralised at an average LTV of 60-62%, we are not unduly worried about the impact on core capital. We maintain our extremely positive stance on this business, with our target price for MUTH at 1.9x FY13E BV or Rs190/share.

* AUM declines marginally, spreads sustain:

Given the realignment of its business model to comply with the lower LTV regime, MUTH's AUM as well as gold stock under possession declined 5% each QoQ to Rs233bn and 130te respectively (I-Sec: 9% decline in AUM). Borrowing profile tilted heavily in favour of NCDs (~Rs24bn mobilised via this route in Q1FY13), as MUTH retired some of its bank borrowings and its securitised book continued to run off. Spreads improved 20bps QoQ to 9.85% as the 41bps QoQ decline in costs offset the 21bps yield compression.

* Operating expenses contained through subtle changes, GNPAs rise:

Operating expenses were under control with the cost-to-income ratio (adjusting for the Rs220mn provisions in the 'other expenses' line) stood at 33.6%, much lower than the 36% for FY12. New branches were limited to 102, advertisement expenses were contained and overall employee a strength fell by 338 during Q1FY13. We have maintained that gold companies have the ability to be flexible on costs. MUTH's GNPAs increased 115% QoQ as it abstained from auctioning gold in overdue accounts in Q1FY13. We consider this an outcome of the RBI diktat to appoint independent auctioneers. We expect this to normalise over time.

* Maintain extremely positive stance, gold cos will gain from regulatory clarity:

We maintain our positive stance on the business model of gold companies and acknowledge that 1.35x FY13E ABV is not a justified valuation for a business generating 3.5-3.8% RoA and ~25% RoE. We expect the K.V.B. Rao Committee report to bring some regulatory clarity on the sector, and expect the relevant stocks - MUTH and Manappuram Finance - to rerate thereafter.

Source : Equity Bulls

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