Geojit Recommends Accumulating Muthoot Finance Stock with ₹2,140 Target

Geojit Financial Services has given an “Accumulate” rating on Muthoot Finance, recommending buying and holding the stock with a target price of ₹2,140, according to their report dated October 10, 2024.

About Muthoot Finance Muthoot Finance is India’s largest non-banking financial company (NBFC) offering gold loans. It operates over 6,759 branches across the country. Apart from gold loans, it also provides other financial services like loans, insurance, money transfers, and gold coin sales through its subsidiaries.

Growth Projections

• Geojit expects Muthoot Finance’s loan assets under management (AUM) to grow at a compound annual growth rate (CAGR) of 16% from FY24 to FY26. This growth is likely to be driven by rising gold prices, reduced competition in the gold loan sector, and fewer unsecured lending options as credit risks increase.
• The company’s yields (the return it earns on loans) are expected to stay steady at around 18%, thanks to less competition. With higher loan growth and better efficiency, Muthoot is expected to see its profits grow at a rate of 19% per year during the FY24 to FY26 period.

Branch Expansion

• Muthoot is planning to expand its network by opening 150 to 200 new branches each year. This expansion will help attract more customers and drive loan growth, boosting the company’s future performance.

Risk Management

• Muthoot follows a conservative approach by maintaining higher provisions (reserves) compared to its closest competitors, which helps protect customer relationships. Even with these higher provisions, the company’s risk remains low due to its lower loan-to-value (LTV) ratio of around 63% in Q1FY25 and the recent rise in gold prices.

Valuation and Recommendation

• Gold is seen as a safe investment, and with Muthoot’s expected improvement in return on equity (ROE) by FY26, the company deserves a higher valuation. Geojit has valued the company at 2.4 times its estimated book value per share for FY26, which is slightly above the 5-year average of 2.3 times. As a result, they give an “Accumulate” rating and set a target price of ₹2,140, using a sum-of-the-parts (SOTP) valuation method.

Gold Loan Business Thriving

• Muthoot Finance’s gold loan operations continue to grow, thanks to the rise in gold prices. The company lends at lower interest rates compared to its competitors, which helps attract more customers and compete effectively in the market. Geojit expects Muthoot’s gold loan book to grow by 16% annually from FY24 to FY26.

Financial Strength

• Muthoot Finance maintains a strong capital adequacy ratio (CAR) of 30.4%, well above the regulatory requirement of 10%. The company also has healthy return ratios, with a return on equity (ROE) of 18.1% and a return on assets (ROA) of 5.1% in FY24.

Final Thoughts

• With gold being a stable investment and Muthoot’s ROE expected to increase to 19.1% by FY26, Geojit believes the stock should be valued at a premium. They have set a target price of ₹2,140 for Muthoot Finance and recommend accumulating the stock.

Summary of Key Points:

• Muthoot Finance is India’s leading gold loan NBFC with over 6,759 branches.
• Loan assets are expected to grow at 16% annually from FY24 to FY26.
• Profit growth is projected at 19% per year due to higher loan growth and better efficiency.
• The company is expanding with 150-200 new branches each year.
• Muthoot maintains low risk by having higher provisions and lower LTV ratios.
• Geojit has set a target price of ₹2,140 for Muthoot Finance and recommends accumulating the stock.