Muthoot Finance Share: Is This a Growth Story or a Cyclical Trend?

Synopsis: Muthoot Finance has delivered strong growth, driven by its core gold loan business, supported by rising demand and favorable credit conditions. While higher gold prices and NPA recoveries have boosted near-term performance, underlying demand trends and operational strength indicate a sustainable growth trajectory, with cyclical factors acting as temporary accelerators.

It appears that Muthoot Finance has been experiencing excellent growth on account of its gold loan operation. This performance by the company can be attributed to an increase in demand, along with enhanced operational efficiency. Therefore, there has been a need to examine whether the performance being experienced by Muthoot Finance is sustainable or cyclical.

With a market cap of Rs 1.4 lakh crore, the shares of Muthoot Finance Ltd are trading at Rs 3,484 and are trading at a PE of 16 compared to their industry’s PE of 18. The shares have given a return of more than 180% in the last 5 years.

High Growth from Core Gold Loan Business

However, the growth that the firm has recorded in its gold loan segment has been impressive. The gold loan portfolio expanded by 50% year-on-year to reach an amount of Rs 1.39 lakh crore during the nine months. This rapid growth demonstrates how the company’s core business continues to grow, aided by high demand among customers.

The growth has positively impacted the earnings of the company, which saw its profit after tax jump by 91% to Rs 7,048 crore for 9 months. These earnings have benefited from higher disbursements and income generated from the firm’s core business activity. Management pointed out that the current year had been favorable to the gold loan business owing to rising demand during the festive season.

It should be highlighted that the customer segment for the gold loan segment is diversifying to include salaried, self-employed, and small business customers. Furthermore, management indicated that customers were beginning to view gold loans as a convenient and safe way to get credit, which was driving their interest.

Growing Demand for Gold Loans

Firstly, the demand for gold loans is fuelled by changes in the overall credit market environment, which has led to an increased tightening of access to unsecured loans. With more people opting to access secured loans due to faster access and lower eligibility criteria, gold loans have emerged as a viable option when credit markets are tight.

Secondly, gold is a readily available household asset, and its ownership makes it easier for borrowers to convert their existing wealth into cash. Unlike other assets that require upfront investment, gold is already in possession of many households. Therefore, gold loans are accessible to those who may need to access funds urgently.

Thirdly, gold loans are short-term and based on immediate financial need, leading to consistent demand for gold loans. As such, borrowers will keep taking out new loans while returning old ones within a few months, thus creating constant churn in the loan portfolio.

Role of Gold Prices in Business Expansion

Fluctuations in gold prices have been responsible for the growth of the gold loans business by affecting the underlying value of the collateral used. With rising prices, the same amount of gold is capable of meeting greater amounts eligible for the loan, resulting in bigger ticket sizes and ultimately leading to the overall growth of the portfolio.

However, the effect of gold prices continues to be secondary to the actions of the borrower. With the act of lending taking place below maximum capacity, the increased value of collateral serves merely as an enabler for the process.

Gold Prices Supporting but Not Driving Growth

The rise in gold prices has also seen a corresponding uptrend in gold loan prices. Increased gold prices enhance the value of the collateral, thus offering lenders better security in their transactions. Borrowers can therefore be allowed larger sums of money for the same amount of gold, thus helping in driving gold loan growth and improving the outlook in the segment. It has also been an important positive factor behind quick disbursements of loans.

Nonetheless, it is important to note that the growth in gold loan disbursement is not wholly dependent on price action. According to data from various studies, the loan-to-value ratio continues to remain well below the regulatory ceiling. It means that even though there has been a sharp uptick in the prices of gold, borrowers have not taken advantage of the opportunity to borrow more aggressively.

Most importantly, the demand for gold loans does not stem from price action but stems from the need for liquidity. Borrowers usually take out loans for immediate cash needs without regard to the gold prices prevailing at any particular time. Therefore, although the increase in gold prices helps drive growth through enhanced borrowing capability, it does not influence demand.

Short-Term Boost from NPA Recoveries

The asset quality held its stance over the period through the effectiveness of recoveries made and cautiousness on the part of credit disbursals. The company managed to recover about Rs 900 crore of NPA, with fresh NPAs amounting to approximately Rs 300 – Rs 342 crore being created. Hence, there was a net reduction of about Rs 556 crore in NPAs. Moreover, the security of gold loans and the low average LTV ratio of 57% provide an ample cushion for any possible collateral risks. The loan-to-value (LTV) ratio is the percentage of a loan given compared to the value of the asset pledged as collateral.

Profitability was bolstered not only by the growth in core operations but also the income generated from the recovery process. Income from interest from the recoveries amounted to about Rs 500 crore, while that from auctions stood at Rs 120 crore, whereas the income from ARC recoveries totalled approximately Rs 24 crore. The overall profitability was aided by these high yields along with significant growth in the loan portfolio. Profit after tax rose by 91% to Rs 7,048 crore for 9 months.   

Growth in Other Businesses

Apart from gold loans, the company reported growth across its subsidiaries for 9 months:

• Muthoot Home Loan AUM reached Rs 3,380 crore, growing 24% year-on-year, with revenue growth of 38%.
• Belstar Microfinance AUM stood at Rs 7,911 crore, with a turnaround in profitability during Q3.
• Muthoot Money AUM reached Rs 8,003 crore, growing significantly from the previous year, with revenue rising from Rs 268 crore to Rs 862 crore
• The insurance broking business reported a profit of Rs 23 crore
• Sri Lanka’s subsidiary reported 42% revenue growth

Regulatory Support Strengthening Growth Outlook

The one positive mentioned by the company about the recent regulatory change is the removal of prior approval requirements from the Reserve Bank of India before opening new branches. It will make the branch opening easier, and there won’t be any delay because of the procedure anymore. Earlier, it used to be an obstacle to the business.

According to the management, it demonstrates a positive attitude from the regulator regarding the business. Expansion of branches will enable the company to have increased freedom and help build its presence in the market.

Conclusion 

Analytically, what we see today regarding Muthoot Finance is far beyond the scope of just another cyclical upturn. Although things like growing prices for gold and increased income due to recovery may have helped, the dynamics themselves show that the company’s future success will depend on a higher demand for services. Growth in the gold loan portfolio along with borrower participation at higher levels is proof that the business is experiencing structural demand.

Another important factor here is the change in the lending environment when borrowers prefer secured loans. It has become harder to secure an unsecured loan, and the ease and simplicity of a gold loan make this form of borrowing more relevant. Moreover, prudent lending policies, good asset quality thanks to recovery efforts, and flexible operations in the current environment thanks to regulatory assistance serve as a firm base for further development.

These aspects collectively point to the fact that Muthoot Finance is benefiting from more than just a good cycle; rather, it operates in a niche where there is a constant and repetitive demand. Considering the analyst’s point of view, it can be concluded that at the very heart of Muthoot Finance lies a story of growth, wherein the cycle factors like gold prices and recovery income only act as accelerators.

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