Muthoot Finance - Business model exhibits signs of normalcy - Edelweiss

Muthoot Finance's PAT of INR2.1bn (down 21% YoY), came in ahead of estimates driven by NIMs, up 100 bps QoQ to 9.5%. We were anticipating further pressure on NIMs from Q1FY14, however AUMs came off 5.6% to INR244bn (due to regulatory issues, volatile gold prices and focus on recoveries) negating the need of further borrowing. Also, yields have normalized back to sustainable levels of 20.6% compared to 19.7% in Q1FY14 when auction under-recoveries were a dampener. With focused efforts on recoveries and spike in gold prices, asset quality too showed signs of stability (GNPLs down from 2.08% to 1.91% QoQ with controlled credit costs). While branch addition continues we are moderating our AUM growth assumption for FY14E to INR241bn (8% decline YoY to factor in 60% LTV norms). However, with stability on NIMs (~9%) and better asset quality than earlier envisaged, we revise earnings by 9%/7% for FY14/FY15E. Maintain 'BUY' with revised TP of INR135 (INR118 earlier), now assigning 1x FY15E BV (against 0.9x earlier) as regulatory clarity emerges and asset quality/NIMs will stabilise with gold price rise.

AUMs register further decline; regulatory changes still to reflect

AUM came off both due to dip in quantum of gold pledged coming off by 3.6% to 137tonnes and average ticket size being lower by 2% to INR38,846. We expect pressure to continue on AUM growth as RBI has recently capped LTV at 60% of average 22K gold value (without making charges) eventually translating into ~INR1,700 per gram at current gold prices compared to average AUM per gram as of Q2FY14 at INR1,822. Also, cheque disbursal for disbursements >0.1mn (35% of AUM) will impact growth.

Outlook and valuations: Vigilant on asset quality; maintain 'BUY'

FY14 will be a year of consolidation as RBI's final guidelines gets implemented pertaining to LTV standardization, cheque disbursal for high ticket disbursements and verification for ownership of jewellery. Moreover, Muthoot's borrowing profile will need transition in favour of bank borrowings and listed NCDs due to RBI's restrictions. Incrementally, we believe gold loan NBFCs will emerge stronger on asset quality metrics, the key dampener over the past few quarters. Muthoot with its brand strength, wide franchise and superior operations will augur well. Assigning a target multiple of 1x FY15E book, we maintain 'BUY/SP'.

Source : Equity Bulls

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