Markets
Muthoot Fin’s AUM is growing, but what about asset quality?
Summary
Muthoot Finance's Q4 results saw an increase of 9% in gold loan assets under management, leading to an 8.6% rise in the company's stock.
The Muthoot Finance Ltd stock has regained some lost charm, following its March quarter (Q4FY23) results. Shares of the gold loan provider rose 8.6% on the National Stock Exchange (NSE) on Monday. Investors are excited about the much-awaited revival in the company’s gold loan assets under management (AUM) growth.
Gold loan AUM rose 9% sequentially in Q4, aided by higher gold prices and moderating competition. Consequently, overall AUM improved after remaining subdued in recent quarters. Gold loans comprise a lion’s share of the company’s portfolio.
In a post earnings call, management said a reduction in competitive intensity in the market has helped AUM growth. “We continue to believe that worst is over on the competitive front, even as improvements may be gradual," said analysts at Kotak Institutional Equities. The management expects over 15% gold AUM growth from FY24.
While gold loan AUM outlook provides some comfort, there were some dampeners in Q4 result. Deterioration in asset quality came as a negative surprise to analysts. The Gross Stage III assets ratio inched up to 3.8% in Q4 from 2.6% and 1.7% in Q2. However, management expects asset quality metrics to improve going forward. It stated that non-performing assets have increased because select customers have paid partial interest and have requested time to redeem their gold jewellery. Gold lending companies such as Muthoot Finance, can auction gold and recover principal amount. Even so, analysts are watchful about asset quality. Stage III loans are those that are overdue for more than 90 days.
Another point of concern was net interest margin (NIM). Though it saw a sequential improvement of 40 basis points to 12.26% in Q4, it may contract going ahead as cost of funds rise. “With the management expecting to maintain gold loan yields at the current levels, and considering competition in market, NIMs could come under pressure as cost of funds is expected to go up in near term," Bunty Chawla, AVP (BFSI), IDBI Capital Markets & Securities, said.
Meanwhile, in the past year, the stock of Muthoot Finance was down about 3.07%, largely underperforming Nifty Financial Services Index. Intense competition, especially from banks and cyclical nature of gold lending business have kept the stock under pressure lately.
The improvement in gold loan AUM is positive, however, a sharp re-rating from current levels would depend on sustainability of earnings performance.
