Target: ₹1,550
CMP: ₹1,082.10
Muthoot Finance Ltd (MFL) will continue to benefit from its long-standing presence and deep knowledge of the gold loan segment. Increasing share of non-gold loans would de-risk its portfolio concentration and provide cushion to AUM growth. Also, the same infrastructure would be utilized to cross sell products leading to lower cost-income ratio.
After strong growth during FY 2020 to FY 2022. Last two quarters had weak growth largely due pressure from the banks. We expect pressure to ease by Q4 of FY 2023.
In our view, it has strong moats with reasonably high entry barriers. Thus, it has generated superior return ratios consistently over the past decade. The threat of competition from banks is high similar during the phase between 2012-14 scenario.
The company will continue to be No.1 in gold financing business. This will be mainly driven by its strong business model led by lean cost structure and high standards of collection and operational efficiencies, resulting in best-in-class margins along with negligible ALM & NPA issues.
This would help maintain strong RoEs of over 25 per cent and RoAs of greater than 7 per cent by FY24. Strong promoter pedigree with a legacy of more than 100 years along with healthy capital adequacy of 25%+ with Tier-1 provides comfort. Thus, we have upgraded the stock to ‘Buy’.