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Gold loan financier Muthoot Finance Ltd has given enough reasons for its investors to cheer. Its March quarter net profit was above estimates collated by Bloomberg, growing by 59% year-on-year (y-o-y).

But that is not the sole reason for the sharp 18% surge in its stock price on Thursday.

The factors behind this profit surge are also important. The southern India-based lender’s assets under management grew 22% y-o-y. Besides, a 15% fall in provisions helped boost net profit. The fall in provisions is an outcome of a drop in bad assets.

Graphic: Satish Kumar/Mint
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Graphic: Satish Kumar/Mint

The company’s loans under stage three of estimated credit loss dropped for the second straight quarter and formed just 2.16% of total loans. Stage three assets are those loans where the repayments are overdue beyond 90 days.

What’s more, the non-banking financial company (NBFC) doesn’t seem to be adversely affected by the coronavirus pandemic to the extent its peers are. The lender said its current provisions are enough to cover any risks arising from the pandemic. In fact, it has excess provisions totalling 295.4 crore, the lender said. In a call with analysts on Wednesday, the management said that the initial pent-up demand for gold loans is now normalizing.

The going wasn’t tough for Muthoot Finance during the pandemic as gold loan firms tend to do well in a crisis. Gold as an asset class gains value during crisis and makes borrowing against it easier. Moreover, since the tenures of gold loans are short-term, borrowers do not see the need to avail of moratorium and lengthen the repayment schedule, the management said.

That said, social distancing is bound to affect collection efficiencies of the company. Even so, the confidence of reasonably better times comes from the fact that the lender was able to collect repayments from 87% of its customers in the March quarter. That is marginally higher than the previous quarter. In other words, Muthoot Finance improved on collections despite a week’s strict lockdown, while its peers saw collections plummet.

While Muthoot Finance is expected to do well, its subsidiaries that extend non-gold loans are expected to suffer. That could put pressure on group level net profit in the coming quarters, according to analysts. Its housing finance arm saw disbursements decline 40% in the March quarter and the pandemic has resulted in even lower levels during April and May. Nevertheless, for the lender, the outlook remains buoyant. “Over the next 12 months, the company is likely to benefit from sharp run-up in gold prices, and higher gold loan demand due to the impact of the lockdown on customers. Thus, we increase our EPS (earnings per share) estimates by 8-12%," analysts from Motilal Oswal Financial Services Ltd wrote in a note.

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