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Investors are quite disappointed by the June quarter earnings (Q1FY23) of gold loan provider Muthoot Finance Ltd, sending the stock slumping over 12% on Tuesday. Weakness in its core gold loan business, which contributes more than 90% to its overall assets under management (AUM), troubled investors. Gold loan AUM declined 2.4% sequentially in the June quarter. That, along with lower yields because of teaser loans, weighed on overall earnings, dragging consolidated net profit down from a year earlier and sequentially.

“For a gold loan company, a sequential drop in AUM is negative. Also, competitor Manappuram Finance Ltd saw its gold loan AUM rise quarter-on-quarter. Muthoot’s sharp stock price reaction is, therefore, not surprising," said Akshay Ashok, an analyst at Prabhudas Lilladher.

Not shimmering
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Not shimmering

Despite a miserable quarter, the management reiterated its 10-15% AUM growth guidance for FY23. It expects AUM on gold loans to improve in the next few quarters.

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However, the road is unlikely to be smooth. An immediate worry is the impact of the withdrawal of teaser loan schemes on the company’s customer base and, consequently, gold loan growth. A teaser loan offers lower interest rates for a fixed duration. The company launched teaser loans in the December quarter to attract high-value customers. “During the quarter, we focused on migrating such teaser loans to higher rate schemes and completed this exercise on 30 June 2022," said the company. Simply put, while discontinuing teaser loans could mean better yield and net interest margin (NIM), it may come at the cost of customer loss.

Besides, there are concerns about incremental demand for gold loans, especially in the absence of teaser loans. Motilal Oswal Financial Services Ltd noted that the demand for gold loans is not buoyant.

“There is a trade-off between spreads/margins and growth in gold loans. The stance of gold loan NBFCs has now reverted to restoring spreads and margin. We believe this will translate into muted gold loan growth. Striking an appropriate balance between loan growth and margin will be important," the broking firm said in a report.

All said, the near-term outlook for the company is dull and investors seem to be acknowledging that. So far this year, the stock is down 30.5% versus the Nifty Financial Services index’s nearly 5% gain.

“Yields and NIMs should start showing improvement in the upcoming quarters and a lot of pain is factored in," Ashok pointed out.

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