Muthoot Finance’s stock tanked as much as 10% on Monday after its reported net interest margin dropped sequentially by 297 basis points to 10.41% in the June quarter (Q1FY27), leading to downgrades in earnings estimates.
A lower yield on gold loans played spoilsport for the gold loan financier as prices of the yellow metal softened. The yield decline was due to lower lending rates and normalization, following strong interest recoveries and loan renewals in FY26, aided by a rally in gold prices, the management said.
Gold loan disbursements to new customers grew 41% year-on-year. Gold loan assets under management (AUM) rose 44% year-on-year, improving customer addition, uptick in tonnage, higher loan-to-value and stable asset quality. Gold loan AUM growth in Q1 seems decent in the current backdrop, though it was lower than the Q3FY26 peak of 50.2%.
Muthoot reiterated its AUM growth guidance of about 15% in FY27 but will revise the target after Q2FY27 earnings. The management acknowledged that competitive intensity has risen substantially, with the company taking calibrated pricing cuts to defend AUM growth.
To strengthen its distribution muscle, Muthoot added 86 branches in Q1 at the group level, taking the total count to 7,654. It plans to add 500-600 branches this year.
While Muthoot should continue to deliver industry-leading profitability of about 5.5% return-on-assets and about 25% return on equity, loan growth is expected to normalize from the exceptionally strong levels over the past year, said Nirmal Bang Institutional Equities.
Yield expectations
Yields are expected to stabilize at 18-18.5% versus 17.93% in Q1 and 19.56% in Q4FY26, supported by new product offerings and pricing initiatives. However, as per the management, sustaining FY26-level yields is unlikely. A downside risk to yields lurks as several large and well-capitalized NBFCs continue to scale-up their gold loan franchises.
Motilal Oswal Financial Services said there could be a brief period of aggressive customer acquisition in the industry, leading to persistent pressure on pricing, spreads and margins and so Muthoot may increasingly face a trade-off between protecting market share and preserving profitability despite robust demand.
Monday’s sharp fall means the stock is down about 30% from its 52-week high of ₹4,149 on the BSE on 29 January. Muthoot is highly exposed to the cyclicality in gold prices, making it more vulnerable to moderation/consolidation in prices.
At the FY28 price-to-book, Muthoot trades at an expensive 1.98x, showed Bloomberg data.