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The stock of Muthoot Finance rallied 50 per cent in the past month, thanks to a number of triggers — the most important being the relaxation of loan-to-value norms by the RBI. This brought gold loan NBFCs such as Muthoot Finance on a level-playing field with banks.
Lending that declined by 12 per cent in the December quarter could recover and grow 13-15 per cent over the next two years, after the recent relaxation.
But the stock may not continue its scorching run. After the recent rally, it now trades at 1.2 times its one-year forward book value. Its historical valuation average is 1.6 times, but then times were different.
The company was nearly doubling its loan book year-on-year between 2009 and 2012. This pace is unlikely to be revisited as other restrictions on raising funds and branch expansion continue. The return on equity (ROE) was robust at 40-50 per cent during 2009 and 2012. The ROE is now down to 19 per cent, and is expected to remain at similar levels over the next two years. Also, the RBI’s recent approval to Muthoot Finance to set up white label ATMs has benefited the stock. But this may benefit the company more on the branding front, and not significantly add to its bottomline.
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