Muthoot Finance - Initiating Coverage Report - IDFC - Buy TP of Rs.290

Some of the key highlights from the reports are as follows:

Muthoot Finance (Muthoot) is India's largest, niche gold finance company. We believe the gold finance segment is ripe for a turnaround as: a) regulatory concerns have largely receded, b) international gold prices have fallen substantially, c) loan growth should revive with economic growth, and d) most of the asset quality pain is likely over. Muthoot, being the largest incumbent with 4,265 branches, Rs218bn of loans and strong asset quality, is best positioned to benefit from the improving business sentiment. We expect 13% loan CAGR, higher NIMs and 16-19% RoE over FY15-17E. At 1.3x FY16E P/BV and 8.4xP/E, the stock is among the few value picks in the sector. We initiate coverage with Outperformer and a and a 12-month price target of Rs290 - 48% upside from CMP.

Regulatory concerns largely behind; loan growth picking up: Recent RBI guidelines for NBFCs had little changes for gold financing NBFCs, indicating a largely stable regulatory regime ahead. Post a prolonged period of decline, Muthoot's loan book has grown modestly in Q2FY15 (+2% qoq). We expect loan growth to pick up to 10-12% over the next 12-18 months, driven by stability in gold prices, economic revival and a rationalization of the competitive landscape.

Better NIMs, operating leverage should drive RoE higher: NIMs (8.75% in FY14) are set to expand in the medium term as cost of funding eases and realized loan yields improve. Operating leverage will also increase with a growing loan book, leading to lower cost-income ratios. We believe the worst of asset quality pain is over and credit costs should stabilize going forward, leading to expansion in RoE to 19% by FY17E.

Among the few value picks in the sector; Outperformer: At 1.3x FY16E P/B, valuations are reasonable. We initiate coverage on Muthoot with Outperformer and a price target of Rs290 (2.0x FY16E P/BV) and is our top pick in the NBFC segment. A sudden, sharp reduction in gold prices and delayed growth recovery are the key risks.

Shares of MUTHOOT FINANCE LTD. was last trading in BSE at Rs.196.5 as compared to the previous close of Rs. 194.9. The total number of shares traded during the day was 533790 in over 1868 trades.

The stock hit an intraday high of Rs. 198.4 and intraday low of 195.5. The net turnover during the day was Rs. 104651426.

Source : Equity Bulls

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