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Muthoot Finance Q4FY16 Result Update report from Edelweiss
We see growth levers in place: a) stabilising gold prices; b) lower LTV/gram (INR1,714 versus incremental lending at INR1,900-2,000); and c) lower auctions and now expect better traction in AUM growth (~22% CAGR over FY16-18).
Muthoot Finance’s (Muthoot) Q4FY16 PAT of INR2.65bn (up >60% YoY) was much higher than our and Street’s estimates, commendable given accelerated standard asset provisioning (up from 50bps to 100bps).
The beat was on superior revenue momentum benefitting from higher auction recoveries and sharpened focus on collection (launch of one-time settlement scheme Muthoot Lifeline), cumulatively augmenting interest income by INR 2.5-3.0bn. AUM growth was optically lower at 4% YoY on higher auctions and higher settlements; however, stepping into FY17 we see growth tailwinds given higher gold price and lower auctions. This, along with valuation of 1.3x FY18E P/ABV, lends comfort. Maintain ‘BUY’
This report also contains Q4FY16/Q3FY16 concall highlights
Superior revenue traction drives profitability
Q4FY16 was characterised by superior revenue traction (NII up >55% YoY). We believe large part was attributable to rise in gold price which enabled the company to have better auction recoveries. Further, Muthoot launched new scheme Muthoot Lifeline encouraging one-time settlement for customers to repay overdue interest and intensified collection efforts at branch level which led to collection of overdue interest for 15-18 months on INR3.85bn of loan principal. With recovery efforts underway supported by rising gold prices, we estimate some benefit of this to flow through for next couple of quarters. Additionally, management has increased lending rates across a few products which along with funding cost benefit led to NIM improvement. While AUM growth was optically lower at 4% YoY on higher auctions (INR33bn in FY16) and higher settlements (INR4bn), with rising gold pricing we expect AUM growth upwards of 20% over FY17.
Outlook and valuations: Growth improvement key; maintain ‘BUY’
We see growth levers in place: a) stabilising gold prices; b) lower LTV/gram (INR1,714 versus incremental lending at INR1,900-2,000); and c) lower auctions and now expect better traction in AUM growth (~22% CAGR over FY16-18). This, along with normalized auction and controlled cost, will lead to ~20% earnings CAGR. The stock is trading at 1.3x FY18E P/ABV with potential to generate RoE of 16-18%. We revise our FY17/FY18 earnings estimates up 8.1%/11.7% and raise our target price to INR290 (1.8x FY18E P/BV; earlier INR275). We maintain ‘BUY/SO’.
