Muthoot Finance. Institutional Equities. 1QFY18 Result Update. Gold Loan Business Continues To Glitter BUY. 10 August 2017

Transcription

1 1QFY18 Result Update Institutional Equities Muthoot Finance 10 August 2017 Reuters: MUTT.BO; Bloomberg: MUTH IN Gold Loan Business Continues To Glitter Strong profitability numbers of Muthoot Finance (MFL) with net interest income or NII growth of 17% (10% above our estimate) and PAT growth of 30% (23% above our estimate) for 1QFY18 was a big outperformance. While loan growth was in line with our expectation, the surprise came in from higher-than-expected net interest margin or NIM. Gross nonperforming assets or GNPAs marginally increased by 19bps sequentially to 2.3%, but they are not a cause for concern as the loans are completely secured. All the subsidiaries are witnessing healthy traction, accounting for 5% of overall loan book, and the management is targeting 9% by the end of FY18. Gold loans rose 8% YoY, and 2% QoQ. Gold holdings grew 4% on YoY basis to 152tn, whereas loan per 1gm of gold was stable sequentially at Rs1,832. Given the lower base post demonetisation last year, we have retained our loan growth estimates at 15% for FY18/FY19 each. NIM expanded 77bps YoY, whereas it dipped 477bps QoQ to 12.2%. The sequential dip in NIM can be attributed to one-off interest income during the previous quarter. Net loan yield dipped 40bps YoY to 19.9%, whereas cost of funds eased 170bps YoY to 9.9% as the repricing of its borrowing accelerated. The management has given guidance of further easing in the cost of funds to below 9%. Cost-to-AUM ratio improved sequentially by 37bps to 4.5%. The management expects the ratio to slip to 4.0% in the medium term. Credit costs (annualised) for the quarter stand very low at 10bps. We have increased our NIM estimate by 62bps/41bps to 11.6%/11.3% for FY18/FY19, respectively. We have increased our ABV estimate by 3% for FY19. We have not assigned any value to MFL s subsidiaries as their total business size is insignificant in the overall scheme of things. We have retained Buy rating on MFL with a target price of Rs590, valuing the stock at 3.0x FY19E P/ABV. Valuation and outlook: With the worst-case scenario behind, regulatory environment turning favourable and gold prices stable, the management is targeting healthy growth going forward. Challenge on higher non-cash disbursement as per the regulator needs to be managed well. Its de-risking strategy helped in keeping credit costs at a lower level. MFL has made an additional provision of Rs2.3bn which can be used against any erratic gold price fluctuations. Tier I capital of 23% ensures unhindered growth along with no need to raise capital for the next two years. MFL has the potential to deliver RoA ~4% and RoE ~19%-20% consistently. We are participating in AsiaMoney s Brokers Poll We would be pleased if you vote for us as the feedback helps us align our equity research offerings to meet your requirements. Click Here BUY Sector: NBFC CMP: Rs457 Target Price: Rs590 Upside: 29% Hatim Broachwala, CFA Research Analyst hatim.broachwala@nirmalbang.com Key Data Current Shares O/S (mn) Mkt Cap (Rsbn/US$bn) 182.7/ Wk H / L (Rs) 489/261 Daily Vol. (3M NSE Avg.) 825,125 Price Performance (%) 1 M 6 M 1 Yr Muthoot Finance Nifty Index Source: Bloomberg Y/E March (Rsmn) 1QFY18 1QFY17 4QFY17 YoY (%) QoQ (%) Interest income 13,758 12,752 16, (19.0) Interest expenses 5,326 5,571 5,460 (4.4) (2.5) Net interest income 8,432 7,181 11, (26.9) NIM (%) bps (477bps) Fee & other income (10.9) 66.4 Operating income 8,660 7,437 11, (25.8) Staff costs 1,773 1,849 1,802 (4.1) (1.6) Other operating expenses 1,303 1,175 1, (15.8) Total operating expenses 3,076 3,024 3, (8.2) Cost to-income (%) (514bps) 683bps Cost-to-AUM (%) (37bps) (47bps) Operating profit 5,584 4,413 8, (32.9) Provisions ,430 (62.5) (97.3) Credit costs (%) (19 bps) (348bps) PBT 5,518 4,237 5, (6.4) Tax 2,007 1,534 2, (25.0) -Effective tax rate bps (902bps) PAT 3,511 2,703 3, EPS (Rs) BV (Rs) AUM (Rsmn) 278, , ,

2 Institutional Equities Exhibit 1: Financial summary Net interest income 21,639 25,552 33,615 33,905 37,885 Pre-provision profit 10,651 14,791 22,026 21,412 24,036 PAT 6,705 8,095 11,799 13,119 14,740 EPS (Rs) ABV (Rs) P/E (x) P/ABV (x) Gross NPAs (%) Net NPAs (%) RoA (%) RoE (%) QFY18 conference-call highlights Despite challenges to the economy, assets under management or AUM grew 8% YoY to Rs27bn. MFL has made an additional Rs1bn investment in Muthoot Home Finance which is now a wholly-owned subsidiary. Its loan book stood at Rs6.0mn, with Rs192mn in revenues and Rs37mn of PAT. Muthoot Home Finance is scaling up its business with a target AUM of Rs13.5bn, and is opening additional branches in Andhra, Telangana and Haryana. It currently has 29 branches, and plans to expand to 40 branches this year. Average ticket size is Rs0.2mn. The management gave NIM guidance of 3% and RoA of 2.5%-3.0%. Approximately 5% of the total loans disbursed are being refinanced from other banks, while the rest are fresh loans. In MFI business, the average ticket size stands at Rs17,500. The company s subsidiary, Belstar Investment and Finance, reported AUM of Rs6,280mn, and PAT of Rs50mn. The insurance business has done well with branches of the parent company supporting its business. 90% of the business is based on the self help group or SHG model. PAR stood at less than 2%. Subsidiaries account for 5% of total business, and should contribute ~9% to total business in the next few years. Legacy NCDs issued are coming down, which will lead to cost of borrowings slipping below 9%. The management gave guidance of 10%-15% growth in AUM as well as PAT for FY18. The company is increasingly focusing on periodic interest collection. For this purpose, the company s employees are utilising call centres, meeting customers personally, and also educating them. Demonetisation had helped the fuel online platform, but post demonetisation, online usage has fallen to 6% from 15% earlier. High cost of transacting online is the likely reason for the decline. Most of the customers have come back for cash disbursal. ~80-90% loan disbursements are now made in cash. Six-month products now form ~30% of total loans. To increase efficiency, the company plans to reduce/relocate lesser-performing branches. 2 Muthoot Finance

3 Nov-11 Feb-12 May-12 Aug-12 Nov-12 Feb-13 May-13 Aug-13 Nov-13 Feb-14 May-14 Aug-14 Nov-14 Feb-15 May-15 Aug-15 Nov-15 Feb-16 May-16 Aug-16 Nov-16 Feb-17 May-17 Aug-17 Institutional Equities Exhibit 2: Actual performance versus our estimates (Rsmn) 1QFY18 1QFY17 4QFY17 YoY (%) QoQ (%) 1QFY18E Devi. (%) Net interest income 8,432 7,181 11, (26.9) 7, Pre-provision profit 5,584 4,413 8, (32.9) 4, PAT 3,511 2,703 3, , Exhibit 3: Change in our estimates Revised estimates Earlier estimates % revision FY18E FY19E FY18E FY19E FY18E FY19E Net interest income (Rsmn) 33,905 37,885 32,101 36, Net interest margin (%) bps 41bps Operating profit (Rsmn) 21,412 24,036 19,017 21, Profit after tax (Rsmn) 13,119 14,740 11,937 13, EPS (Rs) ABV (Rs) Exhibit 4: One-year forward P/ABV (x) P/Adj. BVPS Mean +1 SD -1 SD 3 Muthoot Finance

4 Institutional Equities Financials Exhibit 5: Income statement Interest income 42,703 48,129 56,553 56,938 64,475 Interest expenses 21,064 22,577 22,938 23,033 26,590 Net interest income 21,639 25,552 33,615 33,905 37,885 Non-interest income Net revenues 22,183 26,173 34,528 34,687 38,785 Operating expenses 11,532 11,382 12,502 13,276 14,748 -Employee expenses 6,304 6,419 7,281 7,532 8,431 -Other expenses 5,228 4,963 5,221 5,743 6,317 Operating profit 10,651 14,791 22,026 21,412 24,036 Provisions 371 1,625 2, ,006 PBT 10,280 13,167 19,210 20,499 23,031 Tax 3,575 5,072 7,411 7,379 8,291 PAT 6,705 8,095 11,799 13,119 14,740 Exhibit 7: Balance sheet Share capital 3,979 3,990 3,995 3,995 3,995 Reserves & surplus 46,855 52,202 61,170 71,043 82,176 Networth 50,834 56,192 65,165 75,038 86,171 Borrowings 194, , , , ,924 Other liability & provisions 22,498 28,626 31,007 31,861 33,063 Total liabilities 267, , , , ,157 Fixed assets 2,642 2,273 2,183 2,401 2,641 Investments ,091 2,091 2,091 Loans 233, , , , ,983 Cash 17,366 6,791 15,343 18,782 21,599 Other assets 13,800 17,085 15,315 17,255 19,843 Total assets 267, , , , ,157 Exhibit 6: Key ratios Growth (%) Net interest income (5.2) Operating profit (13.9) (2.8) 12.3 Profit after tax (14.0) Business (%) Advances growth Spreads (%) Yield on loans Cost of borrowings Spread NIM Operational efficiency (%) Cost to income Cost to assets Productivity (Rsmn) AUM per branch AUM per employee Employee per branch CRAR (%) Tier I Tier II Total Asset quality (%) Gross NPAs Net NPAs Provision coverage Credit cost (excluding std asset) Credit cost (including std asset) Return ratios (%) RoE RoA Per share (%) EPS BV ABV Valuation (x) P/E P/BV P/ABV Muthoot Finance

5 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Institutional Equities Rating track Date Rating Market price (Rs) Target price (Rs) 7 November 2016 Buy November 2016 Buy February 2017 Buy May 2017 Buy August 2017 Buy Rating Track Graph Not Covered Covered 5 Muthoot Finance

6 Institutional Equities Disclaimer Stock Ratings Absolute Returns BUY > 15% ACCUMULATE -5% to15% SELL < -5% This report is published by Nirmal Bang s Institutional Equities Research desk. Nirmal Bang group has other business units with independent research teams separated by Chinese walls, and therefore may, at times, have different or contrary views on stocks and markets. Reports based on technical and derivative analysis may not match with reports based on a company's fundamental analysis. This report is for the personal information of the authorised recipient and is not for public distribution. This should not be reproduced or redistributed to any other person or in any form. This report is for the general information for the clients of Nirmal Bang Equities Pvt. Ltd., a division of Nirmal Bang, and should not be construed as an offer or solicitation of an offer to buy/sell any securities. We have exercised due diligence in checking the correctness and authenticity of the information contained herein, so far as it relates to current and historical information, but do not guarantee its accuracy or completeness. The opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. Nirmal Bang or any persons connected with it do not accept any liability arising from the use of this document or the information contained therein. The recipients of this material should rely on their own judgment and take their own professional advice before acting on this information. Nirmal Bang or any of its connected persons including its directors or subsidiaries or associates or employees or agents shall not be in any way responsible for any loss or damage that may arise to any person/s from any inadvertent error in the information contained, views and opinions expressed in this publication. Nirmal Bang Equities Private Limited (hereinafter referred to as NBEPL ) is a registered Member of National Stock Exchange of India Limited, Bombay Stock Exchange Limited. NBEPL has registered with SEBI as a Research Entity in terms of SEBI (Research Analyst) Regulations, (Registration No: INH to ). NBEPL or its associates including its relatives/analyst do not hold any financial interest/beneficial ownership of more than 1% in the company covered by Analyst. NBEPL or its associates/analyst has not received any compensation from the company covered by Analyst during the past twelve months. NBEPL /analyst has not served as an officer, director or employee of company covered by Analyst and has not been engaged in market-making activity of the company covered by Analyst. The views expressed are based solely on information available publicly and believed to be true. Investors are advised to independently evaluate the market conditions/risks involved before making any investment decision. Access all our reports on Bloomberg, Thomson Reuters and Factset. Team Details: Name Id Direct Line Rahul Arora CEO rahul.arora@nirmalbang.com - Girish Pai Head of Research girish.pai@nirmalbang.com / 18 Dealing Ravi Jagtiani Dealing Desk ravi.jagtiani@nirmalbang.com , Pradeep Kasat Dealing Desk pradeep.kasat@nirmalbang.com /8101, Michael Pillai Dealing Desk michael.pillai@nirmalbang.com /8103, Atul Vitha Dealing Desk atul.vitha@nirmalbang.com / Nirmal Bang Equities Pvt. Ltd. Correspondence Address B-2, 301/302, Marathon Innova, Nr. Peninsula Corporate Park, Lower Parel (W), Mumbai Board No. : /1; Fax. : Muthoot Finance