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Home >Markets >Mark To Market >IDBI AMC deal nix is a blip in Muthoot Fin’s growth-led journey
For the next 12 months, the company expects 15% growth in gold loans and 15-20% increase in profit, managing director George Alexander Muthoot said. Photo: HT
For the next 12 months, the company expects 15% growth in gold loans and 15-20% increase in profit, managing director George Alexander Muthoot said. Photo: HT

IDBI AMC deal nix is a blip in Muthoot Fin’s growth-led journey

The Reserve Bank of India has refused to give its nod to the transaction citing that mutual fund business is not in consonance with the primary business of NBFCs.

A new line of business holds the promise of a spurt in growth and is welcome especially during challenging times as the present. But the regulator shutting down gold financier Muthoot Finance Ltd’s efforts to enter the mutual fund business hasn’t perturbed investors.

Shares of the Kerala-based non-bank finance company (NBFC) slipped a modest 1.8% on Wednesday after the lender said on Tuesday evening that it would no longer pursue the acquisition of IDBI Asset Management Co. Ltd.

The Reserve Bank of India (RBI) had refused to give its nod to the transaction, citing that the mutual fund business is not in consonance with the primary business of NBFCs.

Analysts see this as a minor setback as far as valuations are concerned, although the acquisition would have strengthened the lender’s prospects of future earnings.

Going strong
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Going strong

“This is not a big setback for Muthoot Finance because the transaction as such would have been small," said Alpesh Mehta, analyst at Motilal Oswal Financial Services Ltd.

Indeed, IDBI AMC has assets under management (AUM) of just 3,396 crore as of March, while those of Muthoot Finance are at 41,600 crore. To be sure, the addition of this business would have increased the valuation of the lender.

For now, investors are content with the fact that the lender has reported strong quarterly earnings despite a raging pandemic. Even during the first quarter that was largely under lockdown, Muthoot Finance’s AUM growth did not suffer.

The lender’s AUM growth was an impressive 32% for the September quarter as gold loan disbursements recovered in a big way.

Analysts at Moody’s Investors Service pointed out that the lender’s disbursements and collections in the September quarter exceeded their averages for the past five years.

“While gold loans also are susceptible to a sharp drop in gold prices, we do not expect this to occur. Further, Muthoot’s robust profitability will help it maintain its capitalization and funding at the current strong levels," the Moody’s report said.

The lender’s capital adequacy ratios are also robust with tier-1 capital at 24.7% as of September-end.

Investors are betting that the NBFC would be able to sustain strong growth in disbursements in the coming quarters as well. Given that access to finance is still stymied for small businesses, the demand for gold loans may not abate.

On the back of such optimism, the gold financier’s shares have outshone those of peers, and also left the Nifty Financial Services Index far behind in gains so far in 2020.

With the stellar 49% gains so far, Muthoot Finance trades at a multiple of 2.6 times its estimated book value for FY22.

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