Muthoot Finance: A Golden Opportunity for Investors in FY23

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Stock in Action: Muthoot Finance - A Gold Standard in NBFC Sector

Muthoot Finance is one of the leading non-banking financial companies (NBFCs) in India, with a focus on gold loans. The company has a strong presence across the country, with over 5,000 branches and a customer base of more than 2.5 crore. Muthoot Finance has been growing steadily over the years, despite the challenges faced by the NBFC sector due to liquidity crunch, regulatory changes, and competition from banks.

In this blog post, we will look at some of the key factors that make Muthoot Finance a stock worth considering for your portfolio.

Robust growth in loan book and assets

Muthoot Finance reported a robust 9% sequential growth in its loan book that drove close to a 10% sequential growth in overall assets in the third quarter of FY23. The gold loan disbursement in the quarter was strong, as the company leveraged its existing customer base and network to reach out to new customers.

The company’s gold loan portfolio accounts for more than 88% of its total assets, which gives it an edge over other NBFCs that are exposed to various asset classes such as microfinance, housing finance, vehicle finance, etc. Gold loans are relatively safer and more profitable than other loans, as they have lower delinquency rates, higher yields, and lower cost of funds.

Muthoot Finance has also been diversifying its product mix by increasing its share of non-gold loans, which stood at close to 12% of its total assets at the end of FY23. The company has entered into segments such as home finance, vehicle finance, unsecured small business loans, and micro-personal loans, which offer higher growth potential and margins.

Strong capital adequacy and liquidity position

Muthoot Finance is well-capitalized and has access to diversified sources of funding, which gives it an advantage over smaller NBFCs that are facing liquidity constraints. The company’s capital adequacy ratio (CAR) was at 26.4% as of December 2022, well above the regulatory requirement of 15%. The company also has a comfortable liquidity coverage ratio (LCR) of 312%, which means it has enough liquid assets to meet its short-term obligations.

The company’s cost of funds has also been declining over the years, as it has been able to raise funds from various sources such as banks, non-convertible debentures (NCDs), commercial papers (CPs), securitization, etc. The company’s average cost of funds was at 8.9% in Q3 FY23, down from 9.4% in Q3 FY22.

Healthy profitability and return ratios

Muthoot Finance has been maintaining healthy profitability and return ratios, despite the impact of the Covid-19 pandemic on its operations. The company’s net interest margin (NIM) was at 14.6% in Q3 FY23, up from 14.1% in Q3 FY22. The company’s operating expenses ratio was at 6.1% in Q3 FY23, down from 6.5% in Q3 FY22.

The company’s net profit grew by 22% year-on-year to Rs 1,006 crore in Q3 FY23, while its earnings per share (EPS) increased by 21% year-on-year to Rs 25.1. The company’s return on assets (ROA) was at 5.4% in Q3 FY23, up from 5.1% in Q3 FY22. The company’s return on equity (ROE) was at 28.7% in Q3 FY23, up from 27.7% in Q3 FY22.

Attractive valuation and dividend policy

Muthoot Finance is trading at an attractive valuation compared to its peers and historical averages. The company’s price-to-earnings (P/E) ratio was at 11.8x as of March 2023, while its price-to-book (P/B) ratio was at 2.7x. The company’s P/E ratio is lower than the industry average of 14x, while its P/B ratio is lower than the industry average of 3x.

The company also has a consistent dividend policy, with a payout ratio of around 30%. The company declared an interim dividend of Rs 20 per share for FY23, which translates into a dividend yield of 2.8% at the current market price.

Conclusion

Muthoot Finance is a gold standard in the NBFC sector, with a strong track record of growth, profitability, and resilience. The company has a dominant position in the gold loan market, with a diversified product portfolio, a wide branch network, and a loyal customer base. The company is well placed to benefit from the pick-up in economic activity, firm gold prices that increase borrowing capacity, and the waning competitive intensity from banks. Muthoot Finance is a stock that can add value to your portfolio in the long term.

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