Home / Markets / Mark To Market /  Muthoot Finance’s asset quality in Q4 brings cheer, but jury is still out

Gold loan lender Muthoot Finance Ltd fell short of market expectations on not just net profit but also on the core income front for the March quarter (Q4FY21). The company’s growth metrics too were a bit tempered after a strong run in the past two quarters.

The lender reported a standalone net profit of 995.7 crore for the March quarter, which narrowly missed the Street expectations even though it showed a year-on-year rise of 22%. Net interest income grew by 16% year-on-year, but again missed the Street estimates.

Slowing down
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Slowing down

A deceleration was visible on the lender’s growth metrics too. Average monthly disbursements in the March quarter were 24% down sequentially. However, overall loan growth expanded by a slower 26% year-on-year. Of course, gold loans grew faster than the total portfolio, but the pace seems to have cooled off. Considering that the second covid-19 wave had begun to manifest in March, collections of Muthoot Finance seem to have been hit too.

Average monthly collections were lower at 7,000 crore in the fourth quarter of FY21 compared to 9,000 crore in the previous quarter. In short, the company witnessed a tempering of its earlier robust growth metrics.

What then explains the near 9% jump in the share price after the results were announced on Wednesday?

The sharp reduction in stressed loans stood out for the lender. Its stage three assets have halved from the previous year. Gross stage three assets were just 0.88% of the loan book, a sharp drop from 2.16% a year ago and 1.3% in the previous quarter.

What this shows is that Muthoot Finance has been able to keep its asset quality pristine. Ergo, its provisions too showed a decline. Further, assets under management growth was 4% on a sequential basis. Granted, it was slower than before, but it met analysts’ expectations.

Further, the slowdown in growth was guided by the management earlier. Gold loans are emergency borrowings and the sharp rise in these loans had coincided with the hit on revenues of small businesses and individual incomes. Q4FY21 had seen a revival in business activity and reduction in stress on household balance sheets.

But the second wave has intensified in the current quarter and investors need to be watchful of falling collections and even rising stress. As such, there is a second round of impact from the pandemic on incomes and earnings again.

Muthoot Finance’s shares have gained 18% since April, and trade at a little over three times estimated book value for FY22.

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