Rivals may dull Muthoot’s shine | Mint

Rivals may dull Muthoot’s shine

So far in this financial year, Muthoot has lost some of its spark with sequentially declining gold loan assets under management (AUM) growth.
So far in this financial year, Muthoot has lost some of its spark with sequentially declining gold loan assets under management (AUM) growth.

Summary

  • The challenge for Muthoot is to maintain its loan growth and margin expansion simultaneously. Here, competition, rising cost of funds and elevated operating expenses pose as key hurdles.

Gold is a safe haven in tough times and the ongoing geopolitical tensions could keep the yellow metal pricey. In turn, this should drive demand for gold loan providers such as Muthoot Finance Ltd. But so far in this financial year, Muthoot has lost some of its spark with sequentially declining gold loan assets under management (AUM) growth and contracting net interest margin (NIM). The challenge for Muthoot is to maintain its loan growth and margin expansion simultaneously. Here, competition, rising cost of funds and elevated operating expenses pose as key hurdles.

(Graphics: Mint)
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(Graphics: Mint)

In this context, Muthoot’s September quarter (Q2FY24) results have failed to cheer. Among the key highlights, gross AUM of its mainstay gold loan business rose 21% year-on-year aided by a low base, but quarter-on-quarter growth was muted at 2% (versus 7% in Q1FY24) to 69,002 crore. The management is confident of achieving 14-15% AUM growth in FY24. Reported net interest margin (NIM) fell to 10.88% in Q2 from 11.58% in Q1 and 12.26% in Q4FY23 owing to rising cost of funds along with declining yields. The management expects cost of funds to inch up from 8.46% in Q2 to 8.6% ahead. Nonetheless, the management aims to maintain margin and spreads by passing higher interest cost to borrowers.

Interestingly, for the first time ever, Muthoot sold loans worth 700 crore from its total non-performing assets (NPAs) to Asset Reconstruction Company of India (ARC). This move would allow the customers more time to repay loans. The rationale behind the ARC transaction was to maintain NPA levels steady, with an aim that customers’ gold assets are not under auction and that the customers can get those assets back once the payment of dues (principal and interest) is cleared, the management explained.

But after a dull Q2, the road ahead may not be smooth for Muthoot. Competitive intensity is stiff. Post the covid-19 pandemic, due to lack of growth in other segments, banks entered gold lending. NBFCs followed suit. Muthoot’s management does not see increased competition as a threat yet. But analysts are wary, especially about competition from banks. “We see competition intensifying as banks scale down growth in unsecured loans in favour of higher-yielding secured loans," said Nuvama Research.

Against this backdrop, Muthoot will have to up its game on customer acquisition, which depends on its branch expansion strategy. “After Reserve Bank of India’s approval for opening 150 branches in Q1FY23, Muthoot opened 122 branches during Q2FY23-Q4FY23. We expect these branches to scale up, augmenting growth in H2FY24E, as it takes one-two years for new branches to ramp up disbursements," said a Kotak Institutional Equities report.

At the group level, it opened 331 new branches in H1FY24. Its measures to boost customer base are among the factors that have aided sentiment towards the stock. So far in 2023, the Muthoot stock has rallied by 21%, marginally ahead of close competitor Manappuram Finance Ltd, but outperforming Nifty50 by a wide margin.

Muthoot’s diversification to other lending segments will also be monitored, given the cyclical nature of the gold lending business. Its consolidated AUM rose 24% year-on-year in Q2FY24. The management aims at a gradual calibrated growth in non-gold loan business comprising microfinance, housing finance, vehicle loans, personal loans and corporate loans. Over the next five years, Muthoot is keen on increasing the proportion of non-gold businesses to 18% from present 13%, the management said. While the company is taking steps in the right direction, the measures would yield results over a period of time, leaving limited triggers for the stock in the near term.

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