Muthoot Finance Ltd’s shares have declined about 8% since its March quarter (Q4FY25) results were declared on Wednesday. Interestingly, it is difficult to find a fault in the results, making the sharp reaction from the Street inexplicable. Perhaps, there could be some temptation for profit booking as the stock has doubled over the past two years.
But before analysing the possible reasons for the stock price correction, let’s take a look at key Q4 numbers. Standalone net interest income (NII) increased 36% year-on-year and 7% QoQ to ₹2,904 crore. The NII growth came through as assets under management (AUM) increased 43% year-on-year and 11% QoQ to ₹1.09 trillion.
Profit after tax increased 43% year-on-year and 11% QoQ to ₹1,508 crore. The asset quality improved sequentially as gross stage 3 loans (equivalent of gross NPA for banks) dropped 81 basis points (bps) QoQ to 3.41% even though they were marginally higher 13bps year-on-year.
Some media reports have highlighted the stress in microfinance credit etc. for Muthoot. However, it is worth noting that 95% and 85% of Muthoot’s standalone and consolidated AUM is in gold loans. Elara Capital values Muthoot’s microfinance business under Belstar Micro at just about 1% of its sum-of-the-parts valuation. So, it is unlikely that the stress in microfinance drove the fall in the stock.
Also Read: Gold loan rates not likely to come down: George Alexander Muthoot
Threat from competition
“With high growth, competition in the sector is set to increase—IIFL Finance has resumed gold loan growth, a tad below its last peak. Bajaj Finance has delivered 81% loan growth to ₹8,300 crore (about 8% of Muthoot’s gold loan book). Three NBFCs plan to re-enter the business, viz., Chola, Poonawalla and L&T Finance,” a report by Kotak Institutional Equities said.
To be sure, the threat from competition had persisted in view of the lucrative margin in secured lending against gold and low entry barrier in the business. Moreover, there is enough room for growth as the gold loan market size is big enough and likely to expand given the widespread gold holding in almost every household of India.
According to PwC (PricewaterhouseCoopers) India report, India’s organized gold loan market is projected to double to ₹14 trillion in the next five years to FY29.
It is true that RBI’s draft guidelines for lending against gold are marginally negative as the loan-to-value ratio is to be maintained at 75% throughout the loan tenure for the total amount of principal and interest. But those are just draft guidelines and now, more than a month old, which means the Street had enough time to react to them.
Also Read: Brisk growth in gold loans likely behind RBI warning
So why did Muthoot shares fall?
This leaves us with perhaps the only logical explanation for the correction in Muthoot’s shares: the recent drop in gold price to about $3,177 per ounce from the intraday peak of $3,500 on 22 April. Notably, the decline in Muthoot’s shares in percentage terms is equal to the drop in gold price from the peak.
The concern here is that a sharp decline in gold price would leave lenders holding a lower collateral and potential delinquencies. However, lenders have the option of liquidating gold through auction if the borrower fails to top up the collateral and gold loan recovery is generally quicker than loans against property.
Over the past eight quarters, Muthoot has maintained return on average assets (RoAA) in the range of 5-6%, which is superior to many NBFCs and banks. Return on average equity (RoAE) has also been strong in the range of 17-22%.
So, its current valuation at price-to-earnings multiple of 12x (price-to-adjusted book value of 2.2x) based on FY27 estimates of Elara Capital does not appear expensive in the context of the robust return ratios. But investors might be waiting for gold prices to bottom out before betting on Muthoot.
Also Read: After a glittery rally, gold may be about to make way for stocks
