Financial Services News

For beaten down stock of Muthoot Finance, the worst may be over

The stock of gold loan provider Muthoot Finance Ltd has lost its sheen in the recent quarters, falling nearly 34%, so far in this calendar year. In comparison, sector index Nifty Financial Services has declined around 3%.

Weakness in its core gold loan business, which contributes more than 90% to its overall assets under management (AUM), has been a key dampener.

But after a dismal performance in Q1FY23, the company’s prospects are likely to get better. There are a couple of reasons for that. First of all, the withdrawal of teaser loans is expected to give the company’s near-term net interest margin (NIM) a boost. Remember, to beat the rising competition and retain high-value customers, the company launched teaser loans in December 2021, which were discontinued in April 2022. A teaser loan offers lower interest rates for a fixed duration of time. 

Analysts note that the entire portfolio was shifted to higher-yielding loans by June 2022, so NIM is expected to rise from here on.

Secondly, a depreciating rupee is expected to support domestic gold prices, auguring well for gold loan growth as well as underlying loan-to-values, said analysts at Kotak Institutional Equities.

Further, the activation of new branches will also act as a catalyst for Muthoot, they said. Note that the company could not add any new branches during 4QFY21-1QFY23, since it was awaiting approvals from the Reserve Bank of India.

“Muthoot’s stock has underperformed significantly over the past few months due to pressures on yields and large auctions that pulled down its loan growth. We don’t expect any sharp bounce-back on business parameters, but believe that the worst may be behind us,” said the Kotak report dated 27 September.

Meanwhile, the company’s management has reiterated its 10-15% AUM growth guidance for FY23. In the light of rising interest rates, the company’s credit cost would be one of the key monitorables in the Q2FY23 earnings performance.

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