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Gold loan outlook upbeat for Muthoot Finance but weak subsidiaries weigh

Shares of Muthoot Finance have risen 24% since April and trade at a multiple of four times estimated book value for FY22. (Photo: Mint)Premium
Shares of Muthoot Finance have risen 24% since April and trade at a multiple of four times estimated book value for FY22. (Photo: Mint)

  • Muthoot Finance’s challenges stem from its subsidiaries. Its housing finance, microfinance and auto finance arms showed dismal performance and rise in delinquencies. Muthoot Home Finance showed a sharp rise in GNPAs to 5.9% of its book

Gold loan lender Muthoot Finance Ltd showed all signs of pressure from the second wave on its balance sheet in its June quarter metrics. No wonder investors were miffed at the lender, reflected in the near 3% drop in shares on Monday.

The firm released its June quarter earnings on Friday after market hours.

The non-banking finance company (NBFC) showed a rise in delinquencies for the reported quarter, an indication that borrowers were unable to repay even their emergency loans on time. To be sure, emergency is just one of the purposes albeit a dominant one for which a gold loan is typically taken in India. Average monthly collections dropped sequentially, fallout of staggered regional lockdowns witnessed during the quarter due to the second wave of the pandemic. Gross stage 3 assets rose 38% sequentially to 1.22% of the total book. Provisions trebled sequentially as a consequence of the rise in stress. Meanwhile, lockdowns meant that Muthoot Finance could not reach out to new customers for disbursements. That showed in the sequentially flat loan book of the firm and a fall in disbursements. Gold loan assets under management (AUM) remained steady at 52,100 crore as of June.

Despite these disappointments, analysts believe that the outlook is positive for the lender. “Gold prices rallied by 11% from March 2021 till May 2021 and moderated by 5% from the peak, yet are 9% above March 2021 levels. We believe that this rally should support Muthoot’s gold loan business; the benefit was not visible in 1Q due to the lockdown but may likely be reflected over the next few months," wrote those at Kotak Institutional Equities in a note. The management is confident of achieving 15% loan growth in FY22. With most restrictions being eased across states, collections are also likely to improve for the lender. Motilal Oswal Financial Services Ltd analysts point out that the rise in gold prices have augured well for Muthoot Finance as loan-to-value ratios reduced and prevented the company from auctioning gold in borrower accounts showing pain.

Muthoot Finance’s challenges stem from its subsidiaries. Its housing finance, microfinance and auto finance arms showed dismal performance and a rise in delinquencies. Muthoot Home Finance showed a sharp rise in gross bad loans to 5.9% of its book. Note that home loans are one of the safest segments of lending. Disbursements were down and the management has guided for a weak trajectory ahead, at least for one more quarter. Vehicle finance and microfinance too showed signs of stress with both Muthoot Money and Belstar reporting higher delinquencies.

Shares of Muthoot Finance have risen 24% since April and trade at a multiple of four times estimated book value for FY22. For these valuations to stick, the lender needs help from its subsidiaries even as the mainstay gold loan business outlook remains positive.

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