Gold Loan NBFCs should not be clubbed together with other NBFCs- Muthoot Finance MD

Update on the Indian Equity Market:

On Friday, NIFTY50 ended marginally positive with a 0.2% rise. Bharti Infratel (+9.7%), Bharti Airtel (+9.2%) and SBI (+5.5%) were the top NIFTY50 gainers. Telecom stocks gained on talks of a minimum charge for all tariffs for telecom players. Indian Oil (-3.9%), Hero Motocorp (-1.9%) and BPCL (-1.9%) were among the worst-performing NIFTY50 stocks. NIFTY PSU BANK (+3.5%) recorded handsome gains after the Supreme Court’s verdict in the Essar Steel case in favour of financial lenders. NIFTY PHARMA (+1.6%), NIFTY MEDIA (+1.1%) and NIFTY BANK (+0.9%) were among the other gainers. NIFTY AUTO (-0.5%), NIFTY IT (-0.5%) and NIFTY FMCG (-0.5%) were among the top losing sectoral indices.

Muthoot Finance
Excerpts  from the interview of Mr George Alexander Muthoot, Managing Director,  Muthoot Finance; dated 14^th November 2019. Source: CNBC TV18

• Muthoot Finance had a somewhat tepid loan growth in 2QFY20 as the company faced some incremental funding issues.
• Funding problem has now been resolved. Muthoot Finance has collected Rs 4,600 mn last month via a private placement. The company is planning another issue of retail NCDs of similar amount. The company also holds ECB of Rs 4,500 mn. All this is sufficient to help Muthoot reach its FY20E target.
• Muthoot Finance had a funding problem despite having a good P&L and Balance sheet. Gold Loan NBFCs get clubbed with all other NBFCs. Muthoot suffered as banks/ other lenders have limits for issuing funding to particular sectors which get exhausted.  
• Mr George Muthoot said he is trying his best to get a separate classification for Gold Loan NBFCs. Gold Loan NBFCs do not have 2 major issues that other NBFCs/ banks face. These factors are: a) No NPA problem. None of NPAs have resulted in credit loss. b) No Asset Liability Mismatch (ALM) issues as the average loan period is 3-4 months.
• The first 6 weeks of 3QFY20 have already seen good growth with Rs 13,000 mn increase in Asset Under Management (AUM). Management expects good growth to continue in 2HFY20E.
• Muthoot Finance will be able to show good growth as there are funding issues for many small traders and retail customers because NBFCs are not able to fund them. For these people, gold loans are most convenient to tide over their needs in the next couple of quarters.
• Muthoot Finance is targeting to end FY20E with 15%+ AUM growth.
• Apart from Gold loans, Muthoot has exposure to Retail home loans and Vehicle loans. Management has toned down it’s FY20E projection for home loans AUM from Rs 27,000-30,000 mn earlier to Rs 23,000 mn. Management is cautious on the growth in retail home loans as many projects are stuck due to funding issues at builders’ end.
• Muthoot has a Rs 4,500 mn vehicle finance portfolio. As per management, now is not the best of times to grow this segment aggressively.
• Muthoot benefitted from the rise in gold prices as customers were willing to take back gold, leading to lower auctions and higher interest collections. This led to higher NIMs in 2QFY20E.
• Muthoot increased interest rate by 1% 3 months back which also led to better yields in 2QFY20. This benefit will continue going forward.
• Management expects to maintain spread target of 11% and NIM target of 11%-12% in FY20E.

Consensus Estimate (Source: market screener website)

• The closing price of Muthoot Finance was ₹ 701/- as of 15-November-19 and traded at 2.4x /2.0x /1.8x the consensus BVPS for FY20E / 21E / 22E of Rs 287/344/400 respectively.
• Consensus target price of ₹ 726/- implies a PB multiple of 1.8x on FY22E BVPS of ₹ 400/-.