Edelweiss report on Muthoot Finance with Buy recommendation and a Target Price of Rs. 652.
Please find below the preview of the report.
Muthoot Finance (Muthoot) reported a mixed Q4FY19—growth trajectory improved with a higher spread leading to PAT outperformance, whereas higher opex and rise in GNPLs disappointed. Key highlights: a) After a soft Q3FY19, gold AUM grew >5% QoQ to INR336bn. b) Better yields (stronger collections, lower discounts) along with a steady funding cost lifted NIM >100bps YoY. c) Opex cost rose sharply (up >22% YoY) across line items. d) Volatility in asset quality persisted with stage-3 assets rising to 2.72% (1.96% in Q3FY19). e) Other businesses – home finance, Belstar, insurance broking – are scaling up well, but current environment posed challenges. Systemic liquidity tightness did not impact Muthoot much, as evident from improved growth momentum and rising share of CP to 18% in H2FY19 (from 12% in H1FY19). We are raising EPS by 5% each for FY20/21E and expect Muthoot to generate RoA/RoE of >5%/21% by FY21. Factoring improved growth visibility, we revise our target multiple to 2.2x (2x earlier) September’2020 leading to TP of INR652 (earlier INR565). Maintain ‘BUY’.
Growth improvement plays through; sustainability key
After a soft Q3FY19 due to supply-side constraints, growth momentum picked up in Q4FY19 with gold AUM growing >5% QoQ. Both volume (gold holding up 1.8% QoQ) and value (AUM/gram up 3.8% QoQ) supported growth. Given the short-term nature of assets, reliance on commercial papers (18% borrowing) continued and improved bank credit lines coupled with public issue of debentures will support growth. Stepping into FY20, management aims to trace 15%-plus growth, which looks feasible.
Revenue momentum up; higher cost a red flag
Better NIM lifted revenue, but higher opex (up >22% YoY) restricted improvement in profitability. Operating expenses stiffened across most line items, including employee cost, advertisements, directors’ remuneration and business promotion expenses (a key variable). Asset quality continued to be volatile with higher GNPLs raising credit cost. While ultimate loss given default (LGD) is likely to be minimal, volatility is concerning.
Outlook and valuation: Superior return ratios; maintain ‘BUY’
Muthoot’s FY19 performance shows liquidity challenges did not disrupt business metrics. The company is making investments to open branches and beef up marketing & advertisement, which should support >15% growth. Limited LGD and stable funding cost
