Muthoot Finance Ltd

August 13, 2019

Q1FY20 Result Update Accumulate

Industry Gold NBFC Result Highlights
CMP (Rs) 600 Muthoot Finance Ltd (Muthoot) reported a standalone net profit of
FY21E Target Price (Rs) 729 Rs 5300mn as against our expectation of Rs 5098mn, due to better
52 Week H/L (Rs) 656/356 than expected growth in non-interest income. Muthoot belongs to
Volumes (BSE+NSE)* 8,42,710 rare category of NBFCs where operating performance was in-line
Shares O/S (mn) 400.7 with expectations, thanks to reasonable loan demand, coupled with
Market Cap (Rs mn) 2,40,361 rising gold prices.
Free Float (%) 26.5
Bloomberg MUTH IN Confident to achieve 15% growth in Gold Loan AUM in FY20E
Reuters MUTT.BO Consolidated Assets Under Management (AUM) reported healthy
*Three month daily average growth of 17.2% YoY to Rs 402bn driven by 15.5% growth in
standalone AUM and 32.9% growth in subsidiaries’ AUM. Gold loans
Share Holding Pattern (30/06/2019)
grew by 15.1% YoY and by 4.7% QoQ to Rs 352bn. Gold loans per
Shares Holding
Particulars branch increased to Rs 78.12mn from Rs 74.97mn in Q4FY19.
(mn) (%)
Promoters 294.5 73.5
FIIs 55.7 13.9 The cost of borrowings of the company decreased to 9.17%
DIIs 33.2 8.3 from 9.22% in Q4FY19. Total borrowings grew by 21.2% YoY to
Others 20.2 4.3
Rs 281bn. YoA declined by 110bps QoQ to 20.87% in Q1FY20.
Total 400.7 100.0
Consequently, the spreads have come under pressure by 105bps
Source : BSE
during Q1FY20 to 11.70%. Company’s access to Commercial Paper
(CP) continues to remain unaffected, with CP contributing 17% of
the total liabilities. However, company wants to limit the
dependence on CP going forward. Management highlighted that
Financial Highlights
funding from banks is not available due to bank’s risk aversion to
(Rs bn) FY19 FY20E FY21E
NBFC exposure.
Operating Income 46.4 51.6 56.6
NIM (%) 12.9 12.7 12.0
Operating cost was under control. Total operating cost for the
PAT 19.7 20.9 22.5 quarter increased by 6.3% YoY and declined by 12.7% QoQ to
PAT Growth (%) 10.9 6.2 7.7 Rs 3971.7mn. Consequently, the cost-to-income ratio decreased
ABV (Rs) 224.5 256.5 283.6 by 319bps on QoQ basis to 32.6% in Q1FY20.
P/ABV (x) 2.7 2.3 2.1
RoAE (%) 22.4 20.0 18.9 Asset quality headline numbers witnessed pressure with
RoAA (%) 5.7 5.2 5.0 Stage-III Assets increasing to 3.2% from 2.7% QoQ and after ECL
provisions, the Net Stage-III ratio increased to 1.3% from 0.9%
QoQ. Management does not expect it to be a matter of worry as
Share Price Trend Gold loans are secured products with ~70% LTV as long as the
Muthoot Share Price Trend (Rs) write-offs remain negligible. Further, company has excess provisions
700
in the books to the tune of Rs 1.2bn.
600

500
Key Highlights on Subsidiaries Performance
400
Muthoot Homefin (India) Ltd (MHIL), the wholly owned subsidiary,
300
increased its loan portfolio to Rs 19.9bn as against Q4FY18 of
200
Rs 19.1bn, a muted YoY increase of 4.2% due to tight liquidity.
100
Total revenue for Q1FY20 stood at Rs 620mn (Vs 487mn in
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Q1FY19). Net profit declined to Rs 62mn (Vs Rs 105mn in Q1FY19)

due to higher provision cost. Asset quality was under pressure with
GNPA of 0.81% in Q1FY20 (Vs 0.51% YoY). The Capital Adequacy
remains very comfortable at 45%.

M/s. Belstar Investment and Finance Private Limited (BIFPL),

Analyst: Amit N Rane 70.01% Subsidiary, grew its loan portfolio to Rs 19.4bn as against
+91- 22- 40287022 Rs 12.4bn, a YoY increase of 56%. It achieved a profit after tax of
amit@qsmail.com
Rs 229mn in Q1FY20, as against Q1FY19’s profit after tax of
Rs 124mn. Asset quality remained under control with Stage III
Asset ratio of 1.16% at end of Q1FY20.
 Quantum Securities

Muthoot Insurance Brokers Pvt Limited (MIBPL), an IRDA registered Direct Broker in insurance
products and a wholly owned subsidiary company, generated a total premium collection
amounting to Rs 606mn in Q1FY20 as against Rs 495mn YoY. It generated a Profit after Tax of
Rs 27mn in Q1FY20 as against Rs 24mn in Q1FY19.

Muthoot Money Pvt Ltd (MMPL), became a wholly owned subsidiary of Muthoot Finance Ltd in
October 2018. MMPL is a RBI registered Non-Banking Finance Company engaged mainly in
extending loans for vehicles. The operations are now centered in Hyderabad. Recently,
Company has started extending loans for Commercial Vehicles and Equipments. As on Q1FY20,
the loan portfolio of the company stood at Rs 3927mn and it was almost near break-even during
Q1FY20.

Outlook and Valuations

Based on Q1FY20 performance of the company, our estimates for Muthoot remained
unchanged. We expect bank funding to normalize for companies like Muthoot much earlier than
other category of NBFCs.

At cmp, Muthoot (on a standalone basis) trades at a multiple of 2.1xFY21E ABV, We value
Muthoot at 25% premium to our target multiple for Manappuram Finance (which we assign 2.0x
P/ABV multiple) due to its superior operating efficiencies compared to the latter.

Valuing Muthoot Finance Ltd at 2.5x (unchanged) its FY21E standalone ABV of Rs 283.6
(unchanged), we derive our standalone value per share of Rs 709. After adding subsidiary value
per share of Rs 20, we derive our FY21E price target of Rs 729 (unchanged). At our standalone
value per share of Rs 709, the stock should trade at 12.6x FY21E EPS. Maintain Accumulate.

Q1FY20 Results Summary (Standalone)

Particulars (Rs mn) Q1FY20 Q1FY19 % YoY Change Q4FY19 % QoQ Change
Net Interest Income 11,858.2 11,092.7 6.9 12,208.4 -2.9
Non-Interest Income 312.7 221.7 41.1 485.2 -35.6
Total Operating Income 12,170.8 11,314.3 7.6 12,693.6 -4.1
Operating Cost 3,971.7 3,737.8 6.3 4,547.0 -12.7
Cost-to-Income Ratio 32.6 33.0 -40 bps 35.8 -319 bps
Operating Profit 8,199.1 7,576.5 8.2 8,146.6 0.6
Provision Cost 33.0 26.5 24.3 204.5 -83.9
Profit Before Tax 8,166.2 7,550.0 8.2 7,942.1 2.8
Tax 2,865.9 2,634.4 8.8 2,827.1 1.4
Tax Rate 35.1 34.9 +20 bps 35.6 -50 bps
Profit After Tax 5,300.3 4,915.6 7.8 5,115.0 3.6

Balance Sheet Details

Particulars (Rs bn) Q1FY20 Q1FY19 % YoY Change Q4FY19 % QoQ Change
Assets Under Management (Consolidated) 402 343 17.2 383 5.0
Assets Under Management (Standalone) 358 310 15.5 342 4.6
Gold AUM 352 306 15.1 336 4.7
Subsidiaries AUM 44 33 32.9 41 8.7
Borrowings 281 232 21.2 269 4.6

Key Ratios (Standalone)

Key Ratios Q1FY20 Q1FY19 Q4FY19
Gross NPA (%) 3.2 2.9 2.7
Net NPA (%) 1.3 0.9 0.9
Capital Adequacy Ratio (%) 24.7 26.4 26.1

Muthoot Finance Ltd – Q1FY20 Result Update Page 2

 Quantum Securities

Income Statement (Standalone)

Y/E March (Rs mn) FY17 FY18 FY19 FY20E FY21E
Interest Income 56,369 60,440 67,570 77,938 89,507
Interest Expenses 22,938 19,399 22,368 27,583 34,729
Net Interest Income 33,431 41,040 45,202 50,355 54,778
Other Income 1,098 1,992 1,236 1,211 1,846
Operating Income 34,529 43,033 46,438 51,566 56,623
Operating Expenditure 12,503 13,066 15,394 17,382 19,637
Operating Profit 22,026 29,967 31,044 34,184 36,987
Provisions and Contingencies 2,816 2,397 275 413 620
Profit Before Tax 19,210 27,571 30,768 33,771 36,367
Tax 7,411 10,368 11,047 12,833 13,819
Profit After Tax 11,798 17,203 19,721 20,938 22,547

Balance Sheet (Standalone)

Y/E March (Rs mn) FY17 FY18 FY19 FY20E FY21E
SOURCES OF FUNDS
Equity Capital 3,995 4,000 4,007 4,007 4,007
Reserves and Surplus 60,948 74,120 93,921 1,07,622 1,22,934
Shareholders’ Funds 64,943 78,120 97,927 1,11,629 1,26,940
Borrowings 2,10,960 2,12,680 2,69,223 2,93,695 3,37,750
Current Liabilities and Provisions 31,228 17,123 13,537 14,890 16,380
Total Equity and Liabilities 3,07,131 3,07,923 3,80,687 4,20,215 4,81,070
APPLICATION OF FUNDS
Net Block 2,182 1,980 2,095 2,200 2,310
Investments 2,091 3,954 9,826 9,275 12,111
Advances 2,81,180 2,95,068 3,49,329 3,96,489 4,55,962
Cash & Bank Balances 15,340 4,870 17,355 9,857 7,934
Other Assets 6,337 2,051 2,082 2,394 2,754
Total Assets 3,07,131 3,07,923 3,80,687 4,20,215 4,81,070

Muthoot Finance Ltd – Q1FY20 Result Update Page 3

 Quantum Securities

Key Ratios (Standalone)

Key Ratios - Y/E March FY17 FY18 FY19 FY20E FY21E
Valuation
EPS (Rs) - Calculated 29.5 44.4 49.2 52.3 56.3
BVPS (Rs) - Calculated 162.6 195.3 244.4 278.6 316.8
Adj BVPS (Rs) 151.1 141.8 224.5 256.5 283.6
P/E (x) 20.3 13.5 12.2 11.5 10.7
P/BV (x) 3.7 3.1 2.5 2.2 1.9
P/ABV (x) 4.0 4.2 2.7 2.3 2.1
Payout (%) 24.5 27.1 24.5 34.6 32.1
Growth (%)
Borrowings 13.2 0.8 26.6 9.1 15.0
Advances 13.0 4.9 18.4 13.5 15.0
Net Interest Income 31.5 27.7 5.8 11.4 8.8
Operating Income 31.9 27.5 5.5 11.0 9.8
Operating Profit 48.9 40.0 0.6 10.1 8.2
Net Profit 45.7 50.7 10.9 6.2 7.7
Profitability (%)
Yield on Assets - Calculated 21.3 21.5 21.0 20.9 21.0
Cost of Funds - Calculated 11.5 9.1 9.3 9.8 11.0
Spreads - Calculated 9.7 12.4 11.7 11.1 10.0
NIM - Calculated 11.9 14.5 12.9 12.7 12.0
RoAE - Calculated 19.5 24.8 22.4 20.0 18.9
RoAA - Calculated 4.1 5.8 5.7 5.2 5.0
Cost / Income 36.2 29.9 33.2 33.7 34.7
Cost to Average Assets 4.3 4.3 4.5 4.3 4.4
Balance Sheet Ratios
Leverage (Total Assets/Networth) (x) 4.8 4.3 3.9 3.8 3.8
Leverage (Borrowings/Networth) (x) 3.2 2.7 2.7 2.6 2.7
Asset Quality (%)
Gross NPA 2.0 6.9 2.7 2.8 2.9
Net NPA 1.6 6.1 0.8 1.1 1.3
Provision Coverage 18.1 11.7 68.2 60.5 55.0
Capital Adequacy (%)
Capital Adequacy Ratio 24.9 26.6 26.1 25.9 25.4
Tier I Capital Ratio 20.9 24.8 25.7 25.5 25.1

Disclaimer: Quantum Securities Pvt. Ltd. (QSPL) offers discount and full service brokerage services and is not involved in any investment banking or
merchant banking activities. This document is based on information obtained from sources believed to be reliable and due diligence has been conducted
to that effect. We do not have any other material conflict of interest at the time of publication of the research report. Opinions & theories expressed are
based on present circumstances & judgment and are subject to change without notice. Quantum Securities Pvt. Ltd. accepts no liability whatsoever for
any direct or consequential loss arising from any use of this document or further communication given in relation to this document.

If annualized returns are greater than 15%, then the stock is rated as BUY, between a range of 10-15% is rated as Accumulate. If annualized returns
are lower than -15%, then the stock is rated as SELL and between a range of -10% to -15% is rated as Reduce. In the range of +/ (-) 10%, the stock
is rated as Hold. However, within this zone we may choose to give an Accumulate, Reduce or Hold rating.

Quantum Securities Pvt. Ltd. does not have any financial interest in the subject company and has not been engaged in market making activity for the
subject company; QSPL or any of its associates have not received any compensation or other benefits from the subject company or third party in
connection with the research report or any other compensation from the subject company in the past twelve months. Further, Amit N Rane has not
served as an officer, director or employee of the subject company; QSPL does not have actual/beneficial ownership of one per cent or more of
securities of the subject company, at the end of the month immediately preceding the date of publication of the research report.

Muthoot Finance Ltd – Q1FY20 Result Update Page 4