Muthoot Finance shares: Nirmal Bang says 'Buy' stock, but lowers target price

Nirmal Bang Institutional Equities has retained its 'Buy' rating on Muthoot Finance Ltd  following its Q2 results. The domestic brokerage said the gold loan provider reported a beat at operating profit level, with net interest income (NII) and pre-provision operating profit (PPoP) exceeding estimates by 3.8 per cent and 6.5 per cent, respectively.

The Q2 numbers were supported by strong AUM growth (up 31 per cent YoY and improved yields on loans at 18.65 per cent against 18.26 per cent in the June quarter.

Nirmal Bang maintained 'Buy' rating on Muthoot Finance with a revised target price of Rs 2,239 against Rs 2,300 earlier.

Muthoot Finance shares are down 9 per cent in the past one month, but are up 22 per cent year-to-date. In its results note, Muthoot Finance said it has the highest average gold loan AUM per branch of Rs 17.75 crore among the peer NBFC group, We have. During the half year ended September 30, its gold loan portfolio grew 18 per cent to Rs 13,285 crore. It revised its earlier guidance for FY25 on gold loan growth from 15 per cent to 25 per cent. 

"We are also encouraged by the progress in our non-gold loan portfolio, with notable growth across microfinance, personal loans, and home loans, strengthening our position as a diversified financial services conglomerate,” Managing Director George Alexander Muthoot said.

Nirmal Bang said its target multiple for the core gold loan business is at a 12.5 per cent premium to the past 5-year average P/ABV multiple of 2.6 times. "Our September 2026E ABV (on which target multiple is based) has declined from Rs 762 to Rs 743 because we adjust the cost of investment in subsidiaries from standalone BV," Nirmal Bang said.

There was an increase in cost of investment in Muthoot Finance subsidiaries as per FY24 annual report because of capital infusion of Rs 350 crore and Rs 400 crore in Belstar Microfinance and Muthoot Money, respectively.

Nirmal Bang expects Muthoot Finance’s standalone profit to clock a CAGR of 18.3 per cent over FY24-FY27, led by 16.5 per cent CAGR in gold loan, stable margins and lower credit costs.

This is expected to lead to return on asset (RoA) and return on equity (RoE) of 5.1 per cent and 18.8 per cent over FY27.

"Our AUM estimates are based on the following assumptions: (1) Value growth impact of 10 per cent CAGR in 22 carat gold prices (2) 6.5 per cent CAGR in tonnage and (3) 9.5 per cent CAGR in client addition," it said.