MUTHOOT FINANCE Growth softens; GNPLs rise on lower auctions

Transcription

1 RESULT UPDATE MUTHOOT FINANCE Growth softens; GNPLs rise on lower auctions India Equity Research Banking and Financial Services Muthoot Finance s (Muthoot) Q2FY16 PAT of INR1.75bn (up 2% YoY, down 5% QoQ) was lower than our estimate following slower thanexpected revenue momentum a function of declining NIMs and relatively lower AUM traction (up 1.9% QoQ, a derivative of slower demand). A large part of growth was volume driven as gold tonnage grew 4.3% QoQ to 144 tonnes while overall LTV/gram declined to INR1,720. Key highlights were: (1) continuing trend of decline in NIMs to 9.27% on lower lending rates (over >35bps QoQ fall in Q1FY16 as well); (2) GNPLs inching up to 2.55% (2.13% in Q1FY16) due to delayed recovery and auctions; and (3) with rise in branch and employee base, opex/aum rising to 4.77%. Despite cutting earnings by 10% following NIM pressure and lower growth trajectory in H1FY15, it will still generate RoE of >15% by FY17E. Given limited asset quality risk due to collateralized nature of lending, we believe emerging certainty in AUM growth following customer acquisition push at branch level and stabilising gold price will lead to valuation re rating. Maintain BUY with TP of INR275. This report also contains Q2FY16/Q1FY16 concall highlights AUM: Build up slower than expected; outlook positive One of the key monitorables for Muthoot is accretion to AUMs, which over the past couple of quarters were on expected lines. However, the pace seems to have moderated during Q2FY16 with accretion of INR4.7bn (versus addition of INR10 13bn AUM over past 2 quarters), growing 2% QoQ. The slower growth was largely a function of lower demand. While volume grew 4.3% QoQ to 144 tonnes, LTV/gram declined further. Management expects growth to improve going ahead and estimates to track 10 15% AUM spurt with stability in gold price lending viable support. Outlook and valuations: Retracing growth path; maintain BUY The gold loan industry has been bogged by various regulatory pressures. However, with most negatives now waning several regulatory hurdles are now behind leading to strengthened practices, the RBI is acknowledging the systemic importance of gold loan companies and macros are improving we expect this space to gather momentum going ahead. Muthoot, being a lead player in the sector underpinned by sound brand, extensive franchise and superior operations, will be key beneficiary of improving environment and bolster its market share. We maintain BUY/SO. Financials (INR mn) Year to March Q2FY16 Q2FY15 Growth (%) Q1FY16 Growth (%) FY15 FY16E FY17E Net revenue 5,747 5, ,756 (0.2) 22,182 24,676 28,741 Net profit 1,745 1, ,832 (4.7) 6,705 7,574 9,062 Dil. EPS (INR) (4.8) Adj. BV (INR) Price/ Adj book (x) Price/ Earnings (x) Edelweiss Research is also available on Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. EDELWEISS 4D RATINGS Absolute Rating Rating Relative to Sector Risk Rating Relative to Sector Sector Relative to Market BUY Edelweiss Securities Limited Outperformer Medium Overweight MARKET DATA (R: MUTT.BO, B: MUTH IN) CMP : INR 180 Target Price : INR week range (INR) : 255 / 151 Share in issue (mn) : M cap (INR bn/usd mn) : 72 / 1,101 Avg. Daily Vol.BSE/NSE( 000) : SHARE HOLDING PATTERN (%) Current Q1FY16 Q4FY15 Promoters * MF's, FI's & BK s FII's Others * Promoters pledged shares (% of share in issue) PRICE PERFORMANCE (%) Stock Nifty : NIL EW Banks and Financial Services Index 1 month months (7.7) (3.1) (4.8) 12 months (1.2) Kunal Shah kunal.shah@edelweissfin.com Nilesh Parikh nilesh.parikh@edelweissfin.com Prakhar Agarwal prakhar.agarwal@edelweissfin.com October 30, 2015

2 Banking and Financial Services NIMs under pressure on lower yields; cost benefit restricts slide Continuing the downward trend (>35bps QoQ decline in Q1FY16), NIMs were lower at 9.27% (down further 32bps QoQ). The dip was largely on account of substantial ~63bps fall in lending yields to 18.4% following reorientation of some products (launched lower yielding products to capture old customers). On the other hand, the slide was restricted due to 48bps dip in cost of funds. Incrementally, given the launch of new low yielding products management has guided for some pressure on yield to continue while cost benefit will restrict the slide. GNPLs up on delayed recoveries/auctions GNPLs during the quarter inched up to 2.55% (from 2.13% in previous quarter). This was largely on account of delayed recovery and auctions. Incrementally, with implementation of 75% gold loan LTV, improved processes and management s focus on recoveries and collections, concerns on asset quality and auction under recoveries (hurting profitability) are off the radar now. We are building in higher GNPLs following transition to early recognition norms. Other highlights Yield on advances for Q2FY %, for H1FY %. On a quarterly basis, yield on advances have dipped by 60bps since company has passed on benefit derived from fall in borrowing cost to the customers. Muthoot has entered into agreement to acquire an insurance broking company. Post acquisition, Muthoot will infuse capital of INR200mn into that insurance boking company. Home loan book should pick up once company receives RBI approval for the same. Chart 1: Sequential uptick in AUMs, though pace is lower 260 (AUM in INR bn) Q114 Q214 Q314 Q414 Q115 Q215 Q315 Q415 Q116 Q216 Source: Company 2 Edelweiss Securities Limited

3 Muthoot Finance Chart 2: Branch rationalization continues; outlook hinged on need based approach 4,400 4,250 (No. of branches) 4,100 3,950 3,800 3,650 Q114 Q214 Q314 Q414 Q115 Q215 Q315 Q415 Q116 Q216 Chart 3: Employee strength rationalization continues by reducing fresh recruitments 26 No. of employees (in '000) Q114 Q214 Q314 Q414 Q115 Q215 Q315 Q415 Q116 Q216 Chart 4: NIMs under pressure owing reorientation of loan book (%) (%) Q114 Q214 Q314 Q414 Q115 Q215 Q315 Q415 Q116 Q216 Yields Cost of funds NIMs Source: Company 3 Edelweiss Securities Limited

4 Banking and Financial Services Chart 5: Increase in borrowings through Banks and CPs (%) Q113 Q213 Q313 Q413 Q114 Q214 Q314 Q414 Q115 Q215 Q315 Q415 Q116 Q216 Secured NCDs Bank borrowings CP Bilateral assignment Other loans Chart 6: GNPLs inch up on account of delayed recovery and lower auctions (%) Q114 Q214 Q314 Q414 Q115 Q215 Q315 Q415 Q116 Q216 Gross NPA Net NPA Source: Company 4 Edelweiss Securities Limited

5 Muthoot Finance Financial snapshot (INR mn) Year to March Q2FY16 Q2FY15 % change Q1FY16 % change YTD16 FY16E FY17E Operating income 11,361 10, ,401 (0.3) 22,762 46,681 53,516 Interest expanded 5,652 5, ,670 (0.3) 11,322 22,180 24,976 Other income Total income 5,747 5, ,756 (0.2) 11,504 24,676 28,741 Operating expenses 2,797 2, , ,503 11,747 13,360 Pre provision profit 2,950 2, ,051 (3.3) 6,001 12,929 15,380 Provisions & write offs NA ,003 Operating profit 2,827 2, ,975 (5.0) 5,802 12,223 14,377 Depreciation (32.5) Profit before tax 2,684 2, ,835 (5.3) 5,519 11,564 13,835 Tax ,003 (6.4) 1,942 3,989 4,773 PAT 1,745 1, ,832 (4.7) 3,577 7,574 9,062 Diluted EPS (INR) (4.8) Other information Branches (No.) 4,249 4,265 4,242 4,249 4,295 4,370 Employees (No.) 22,929 23,390 22,785 22,929 23,623 24,035 AUM 248, , , , , ,680 Ratios Gross NPA Gold loan (%) Net NPA Gold loan (%) Tax rate (%) B/V per share (INR) Adj book value / share Price/ Book (x) Price/ Adj. book (x) Price/ Earnings Change in Estimates FY16E FY17E New Old % change New Old % change Comments NII 24,501 25,758 (4.9) 28,541 30,539 (6.5) Pressure on NIMs along with PPOP 12,270 13,527 (9.3) 14,838 16,836 (11.9) moderation in growth Provisions (9.1) 1, Lower AUM growth leading to PAT 7,574 8,351 (9.3) 9,062 10,376 (12.7) NIMs decline in provisioning cost expectation 5 Edelweiss Securities Limited

6 Banking and Financial Services Muthoot Finance Q2FY16 earnings call takeaways With respect to growth metrics AUM growth should be ~10% for FY16. If overall economy picks, then AUM accretion should be ~ 15% for FY16. Company will be able to break out of the narrow PAT range and ~10% AUM growth only by adding branches substantially. Company doesn t feel that there has been a shift of borrowers from Banks to NBFCs. Overall tonnage growth is on the back of redemption of older loans with higher LTV. With respect to margins Yield on advances for Q2FY %, for H1FY %. On a quarterly basis, yield on advances have dipped by 60bps since company has passed on benefit derived from fall in borrowing cost to the customers. Cost of funds for Q2FY %, for H1FY %. Incremental bank borrowing is at 10.5%; Average cost of borrowing is 10%. Overall lending yields range between 12 24%. Lower rate loans are teaser loans with lower LTV Reduction in cost of borrowing will come in only once older NCDs are redeemed. Borrowing mix may tilt towards NCDs and money market instrument upto 10%. NIMs trajectory should be in the range of 9%. RoA target is at 3%. Other Key highlights Muthoot has entered into agreement to acquire an insurance broking company. Post acquisition, Muthoot will infuse capital of INR200mn into that insurance boking company. GNPLs on 90dpd basis is INR16.34bn compared to INR6.34bn on 180 dpd. Company will move to 150dpd from Q4FY16. GNPLs during the quarter inched up to 2.55% (from 2.13% in previous quarter). This was largely on account of delayed recovery and lower auctions owing to festive season in Kerala Operating expense should remain in the same range going forward in FY16 since company is not expanding its branches. Home loan book should pick up once company receives RBI approval for the same. Muthoot s Srilankan subsidiary has touched AUM of INR76mn Srilankan rupees. Srilankan subsidiary primarily does SME, housing as well as gold loan. Outstanding gold bonds stands at >11%. Number of customers INR6.8mn 6 Edelweiss Securities Limited

7 Muthoot Finance Q1FY16 earnings call takeaways With respect to growth metrics AUM growth clocked in 14% growth, per branch growth has gone up to INR57.4mn (versus INR50mn earlier) this is the result of the focussed effort at branch level. Management still continues to maintain guidance of 10 15% for FY16. Number of gold loan accounts has increased to 6.5mn (versus 5.6mn same quarter last year and 6.2mn in FY15). No such branch target, if the need be company is more than willing to open the branches. Last one year company has merged few branches and opened new branches but there was net decline last year. Despite the slowdown in the overall credit growth, the growth in the gold loans has been stable thus indicating that demand for the gold loans will be there. Online payment of interest for loan gold loan customers was introduced during this quarter and company is seeing good traction on this With respect to margins The scheme started in February (relatively lower yields) to push sales is still continuing with different formats which is having some pressure on the yields. NIMs guidance of 9 9.5%, Trying to stabilize RoAs at % levels. Incremental NCD cost at %. Daily average cost of borrowing at 11.25% Average lending yields during the quarter 18.8% (versus 19.12% in previous quarter). Average funding cost at 9.49% (versus 9.38% in previous quarter) Other Key highlights Muthoot finance investments in housing finance yet to happen. Team is in place but another board meeting is scheduled to decide on the investments (investment likely be done by end of this quarter). Asia asset finance has activated gold loan business (started in 7 branches) good potential in that geographies. Have less than 200 White label ATMs, yet to break even on standalone basis. However it is providing branding and is helping the business momentum. Most of the ATMs are on lease so no major capital Not very much concerned on gold price volatility as these are short duration products ( 4 5 months), and the new loans are given on the current price. Additional to fixed assets is low which has resulted in lower depreciation. However overall depreciation in FY16 will likely be lower than what was there in FY15 (under old methodology). Credit losses at INR30mn during the quarter. Current LTV of 71% (which can take care of fluctuation of gold price). 7 Edelweiss Securities Limited

8 Banking and Financial Services Company Description Muthoot is the largest gold financing NBFC with operating history of more than 70 years when M George Muthoot (the father of Promoters) founded a gold loan business in At present, it is a closely held family owned business with promoters (sons of M. George Muthoot and their family) continuing to hold substantial stake of ~75% even post the recent fund raising of INR4.2bn. Headquartered in Kerala, the gold loan NBFC has a network of 4,249 branches, 65% located in southern India as of September, Muthoot has created leadership position in lending against gold jewellery with ~INR249bn AUMs comprising more than 6.8mn customers. In addition to gold loan business, it also provides money transfer services through branches as sub agents of various registered money transfer agencies, and recently has commenced providing collection agency services as well. Its other recent initiatives include sale of gold coins, insurance products and housing finance amongst various other services. The Muthoot group has interests in a diverse range of business in areas of hospitality, media, education, healthcare, information technology etc. However, gold loans continue to be the mainstay and hence Muthoot Finance continues to be the flagship company Investment Theme Muthoot has been reeling under various regulatory pressures in past few quarters. However, with most negatives now waning most regulatory hurdles are passé (leading to strengthened practices), the RBI is acknowledging the systemic importance of gold loan companies and macros are improving we expect this space to gather momentum going ahead. We expect the company to be a key beneficiary and bolster its market share, as it is a lead player in the sector (underpinned by sound brand, extensive franchise and superior operations) and level playing field is emerging for all players (LTV at par for all). Key Risks Gold loan dynamics of regions beyond South India is bit different Pressure on growth in case of slower ramp up of new branches or decline in gold price. 8 Edelweiss Securities Limited

9 Muthoot Finance Financial Statements Key Assumptions Year to March FY14 FY15 FY16E FY17E Macro GDP(Y o Y %) Inflation (Avg) Repo rate (exit rate) USD/INR (Avg) Sector Credit growth Deposit growth Bank's base rate (%) Wholesale borr. cost (%) G sec yield Company Yield on advances Net interest margins Cost of funds employee cost advertisement 21.2 (7.3) rent Tax rate (%) Number of branches 4,270 4,245 4,295 4,370 Disbursement growth Gold loan tenure AUMs (in tonnes)/branch Average INR per gm 1, , , ,782.0 Average LTV Gross NPLs Prov Cov Income statement (INR mn) Year to March FY14 FY15 FY16E FY17E Interest income 49,265 43,096 46,681 53,516 Interest expended 26,260 21,064 22,180 24,976 Net interest income 23,005 22,032 24,501 28,541 Fee & forex income Net revenues 23,214 22,182 24,676 28,741 Operating expense 10,841 11,533 12,405 13,903 Employee exp 5,917 6,304 7,027 8,151 Depn /amortisation Other opex 4,449 4,403 4,720 5,210 Preprovision profit 12,374 10,649 12,270 14,838 Provisions ,003 Profit Before Tax 11,936 10,278 11,564 13,835 Less: Provision for Tax 4,135 3,573 3,989 4,773 Profit After Tax 7,801 6,705 7,574 9,062 Reported Profit 7,801 6,705 7,574 9,062 Shares o /s (mn) Basic EPS (INR) Diluted shares o/s (mn) Adj. Diluted EPS (INR) Dividend per share (DPS) Dividend Payout Ratio(%) Growth ratios (%) Year to March FY14 FY15 FY16E FY17E Revenues (9.6) (4.4) NII growth (9.3) (4.2) Opex growth PPP growth (22.7) (13.9) Provisions growth (51.1) (15.3) Adjusted Profit (22.3) (14.0) Operating ratios Year to March FY14 FY15 FY16E FY17E Yield on advances Net interest margins Cost of funds Spread Cost income Tax rate Edelweiss Securities Limited

10 Banking and Financial Services Balance sheet (INR mn) As on 31st March FY14 FY15 FY16E FY17E Share capital 3,717 3,980 3,980 3,980 Reserves & Surplus 38,929 46,855 51,170 56,740 Shareholders' funds 42,646 50,835 55,150 60,719 Short term borrowings 132, , , ,292 Long term borrowings 69,046 58,394 63,125 76,839 Total Borrowings 201, , , ,131 Long Term Liabilities 8,994 15,172 22,037 24,760 Def. Tax Liability (net) (210) (348) (348) (348) Sources of funds 252, , , ,262 Gross Block 4,991 5,277 5,403 5,666 Net Block 3,120 2,568 2,035 1,756 Capital work in progress 144 Intangible Assets Total Fixed Assets 3,270 2,573 2,039 1,759 Non current investments Cash and Equivalents 20,489 17,366 13,329 15,884 Loans & Advances 218, , , ,680 Current assets (ex cash) 12,288 11,539 12,263 13,809 Other assets 1,019 Trade payable ,175 1,321 Other Current Liab 2,178 4,248 6,170 6,933 Total Current Liab 2,830 5,057 7,346 8,253 Net Curr Assets ex cash 9,457 6,482 4,917 5,555 Uses of funds 252, , , ,262 BVPS (INR) RoE decomposition (%) Year to March FY14 FY15 FY16E FY17E Net int. income/assets Non int. income/assets Net revenues/assets Operating expense/assets (4.3) (4.8) (4.9) (4.8) Provisions/assets (0.2) (0.2) (0.3) (0.3) Taxes/assets (1.6) (1.5) (1.6) (1.7) Total costs/assets (6.1) (6.5) (6.8) (6.8) ROA Equity/assets ROAE (%) Valuation parameters Year to March FY14 FY15 FY16E FY17E Adj. Diluted EPS (INR) EPS growth (%) (22.3) (19.7) BV per share (INR) Adj. BV per share (INR) Diluted P/E (x) P/B (x) P/Adj. BV (x) Peer comparison valuation Market cap Diluted P/E (X) P/B (X) ROAE (%) Name (USD mn) FY16E FY17E FY16E FY17E FY16E FY17E Muthoot Finance 1, Dewan Housing Finance 1, HDFC 30, Indiabulls Housing Finance 4, LIC Housing Finance 3, Magma Fincorp Mahindra & Mahindra Financial Services 2, Manappuram General Finance Power Finance Corp 4, Reliance Capital 1, Repco Home Finance Rural Electrification Corporation 3, Shriram City Union Finance 1, SKS Microfinance Median AVERAGE Source: Edelweiss research 10 Edelweiss Securities Limited

11 Additional Data Muthoot Finance Directors Data M G George Muthoot Chairman George Alexander Muthoot Managing Director George Thomas Muthoot Joint Managing Director George Jacob Muthoot Joint Managing Director John K Paul Director K John Mathew Director K George John Director Auditors Rangamani & Co. *as per last annual report Holding Top10 Perc. Holding Perc. Holding Birla Sun Life Asset Management 4.93 Baring India Investments 2.51 GIC 2.03 Welcome Trust 1.74 Goldman Sachs Asset Management 1.55 Reliance Capital Trustee 1.37 Acacia Partners LP 1.03 Prudential ICICI Asset Mgmt 0.96 IDFC Mutual Fund 0.51 Alliancebernstein LP 0.50 *as per last available data Bulk Deals Data Acquired / Seller B/S Qty Traded Price No Data Available *in last one year Insider Trades Reporting Data Acquired / Seller B/S Qty Traded No Data Available *in last one year 11 Edelweiss Securities Limited

12 RATING & INTERPRETATION Company Absolute reco Relative reco Relative risk Company Absolute reco Relative reco Relative Risk Allahabad Bank BUY SP M Axis Bank BUY SO M Bajaj Finserv BUY SO L Bank of Baroda BUY SP M DCB Bank REDUCE SU M Dewan Housing Finance BUY SO M Federal Bank BUY SO L HDFC HOLD SU L HDFC Bank BUY SO L ICICI Bank BUY SO L IDFC BUY SO L Indiabulls Housing Finance BUY SO M IndusInd Bank BUY SO L Karnataka Bank BUY SP M Kotak Mahindra Bank HOLD SU M LIC Housing Finance BUY SO M Magma Fincorp BUY SO M Mahindra & Mahindra Financial Services HOLD SU M Manappuram General Finance BUY SP H Max India BUY SO L Multi Commodity Exchange of India BUY SO M Muthoot Finance BUY SO M Oriental Bank Of Commerce BUY SP L Power Finance Corp BUY SO M Punjab National Bank BUY SP M Reliance Capital BUY SP M Repco Home Finance BUY SO M Rural Electrification Corporation BUY SO M Shriram City Union Finance BUY SP M Shriram Transport Finance HOLD SO L SKS Microfinance HOLD SP M South Indian Bank BUY SP M State Bank of India BUY SO L Union Bank Of India BUY SP M Yes Bank BUY SO M ABSOLUTE RATING Ratings Expected absolute returns over 12 months Buy More than 15% Hold Between 15% and - 5% Reduce Less than -5% RELATIVE RETURNS RATING Ratings Sector Outperformer (SO) Sector Performer (SP) Criteria Stock return > 1.25 x Sector return Stock return > 0.75 x Sector return Stock return < 1.25 x Sector return Sector Underperformer (SU) Stock return < 0.75 x Sector return Sector return is market cap weighted average return for the coverage universe within the sector RELATIVE RISK RATING Ratings Low (L) Medium (M) High (H) Criteria Bottom 1/3rd percentile in the sector Middle 1/3rd percentile in the sector Top 1/3rd percentile in the sector Risk ratings are based on Edelweiss risk model SECTOR RATING Ratings Overweight (OW) Equalweight (EW) Criteria Sector return > 1.25 x Nifty return Sector return > 0.75 x Nifty return Sector return < 1.25 x Nifty return Underweight (UW) Sector return < 0.75 x Nifty return 12 Edelweiss Securities Limited

13 Muthoot Finance Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai Board: (91 22) , Nirav Sheth Head Research Coverage group(s) of stocks by primary analyst(s): Banking and Financial Services Allahabad Bank, Axis Bank, Bajaj Finserv, Bank of Baroda, DCB Bank, Dewan Housing Finance, Federal Bank, HDFC, HDFC Bank, ICICI Bank, IDFC, Indiabulls Housing Finance, IndusInd Bank, Karnataka Bank, Kotak Mahindra Bank, LIC Housing Finance, Max India, Multi Commodity Exchange of India, Manappuram General Finance, Magma Fincorp, Mahindra & Mahindra Financial Services, Muthoot Finance, Oriental Bank Of Commerce, Punjab National Bank, Power Finance Corp, Reliance Capital, Rural Electrification Corporation, Repco Home Finance, State Bank of India, Shriram City Union Finance, Shriram Transport Finance, South Indian Bank, SKS Microfinance, Union Bank Of India, Yes Bank Recent Research Date Company Title Price (INR) Recos 29 Oct Oct 15 Shriram City Union Finance Shriram Transport Finance Growth pick up and NPL transition key monitorables; Result Update Growth recovering; asset quality continues to be soft; Result Update 29 Oct 15 Yes Bank Yet another strong quarter; granularity build up on track; Result Update 1,842 Buy 942 Hold 744 Buy Distribution of Ratings / Market Cap Edelweiss Research Coverage Universe Buy Hold Reduce Total Rating Interpretation Rating Expected to Rating Distribution* * stocks under review > 50bn Between 10bn and 50 bn < 10bn Market Cap (INR) Buy Hold Reduce appreciate more than 15% over a 12 month period appreciate up to 15% over a 12 month period depreciate more than 5% over a 12 month period One year price chart Oct 14 Nov 14 Dec 14 Jan 15 Feb 15 Mar 15 Apr 15 May 15 Jun 15 Jul 15 Aug 15 Sep 15 (INR) Muthoot Finance 13 Edelweiss Securities Limited

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