2QFY19 Result Update Institutional Equities Muthoot Finance 10 December 2018 Reuters: MUTT.BO; Bloomberg: MUTH IN Weak quarter not structural in any way Muthoot Finance (MFL) reported its 2QFY19 results with the key takeaways being: (1) Margin contracted 75 bps QoQ but MFL has taken a 100 bps gold lending rate hike post 2QFY19 (2) Gold loan AUM grew 5% QoQ indicating return to growth of gold business has sustained (3) Traction for non-gold loans continues to be strong with share of non-gold AUM standing at 10% of total AUM. (See comprehensive conference call takeaways below; see initiating coverage report here). Per se, on the results front, MFL posted NII de-growth of 4.7% YoY at Rs10,962mn, PPOP de-growth of 13% YoY at Rs7,473mn and PAT growth of 8.6% YoY at Rs4,838mn. We have revised our estimates for FY18/FY19 and retained Buy rating on MFL, revising our target price on it to Rs547 (from Rs501 earlier) and valuing the stock at 1.8x 1HFY21E P/BV. Margin contracted 75 bps QoQ but MFL has taken a 100 bps gold lending rate hike post 2QFY19: Systemic liquidity crisis would impact those parts of the wider NBFC sector where there is minimal recourse to passing on rise in cost of funds to the borrower, owing to competitive pressure. However, the gold loan NBFC segment has great recourse to passing on rise in cost of funds since the marginal borrower has low sensitivity to interest rates. Secondly, the yield compression of 66 bps QoQ was due to lower interest collections during the quarter and management indicated that this would bounce back. Hence, the -5% YoY de-growth in net interest income is one-off and would normalize. Gold loan AUM grew 5% QoQ indicating return to growth of gold business has sustained: The most key reason for bearishness on key gold loan NBFCs was a theory that the business had saturated. Over the past 4 quarters, Muthoot Finance has emphatically demonstrated that growth numbers do not indicate anything remotely resembling a plateauing of business. Gold loan AUM grew 4.8% QoQ and 16.4% YoY, which is reasonably attractive growth for the gold lending business, which is a lending business of high sustainable margin and negligible loss given default. Traction for non-gold loans continues to be strong with share of non-gold AUM standing at 10% of total AUM: Management indicated that their gold loan customer base is a good place to source affordable housing customers at the average ticket size they operate (~Rs 1mn). There is also sharing of branch and other infrastructure. This implies high operating leverage for MFL s housing business. Valuation and outlook: We have revised our NII estimates by 0.4%/0.4%/0.4%, PPOP estimates by 0.5%/0.5%/0.5% and PAT estimates by 0.6%/0.5%/0.5% for FY19/FY20/FY21, respectively, valuing the stock at 1.8x 1HFY21E P/BV and revising our TP to Rs547 (from Rs501 earlier). BUY Sector: NBFC CMP: Rs471 Target Price: Rs547 Upside: 16% Shivaji Thapliyal Research Analyst shivaji.thapliyal@nirmalbang.com +91-22-6273 8068 Raghav Garg Research Analyst raghav.garg@nirmalbang.com +91-22-6273 8192 Key Data Current Shares O/S (mn) 400.2 Mkt Cap (Rsbn/US$bn) 189.2/2.7 52 Wk H / L (Rs) 484/356 Daily Vol. (3M NSE Avg.) 1,375,064 Price Performance (%) 1 M 6 M 1 Yr Muthoot Finance 5.7 22.8 8.7 Nifty Index 0.9 (0.7) 5.2 Source: Bloomberg Y/E March (Rsmn) 2QFY19 2QFY18 1QFY19 YoY (%) QoQ (%) Interest income 16,316 16,431 16,108 (0.7) 1.3 Interest expenses 5,354 4,933 5,016 8.5 6.7 Net interest income 10,962 11,498 11,093 (4.7) (1.2) NIM (%) 13.8 16.6 14.9 (278) bps (115) bps Fee & other income 181 188 222 (3.9) (18.5) Operating income 11,143 11,686 11,314 (4.6) (1.5) Staff costs 2,086 1,947 2,169 7.1 (3.8) Other operating expenses 1,584 1,172 1,569 35.1 0.9 Total operating expenses 3,669 3,119 3,738 17.6 (1.8) Cost to-income (%) 32.9 26.7 33.0 624 bps (11) bps Cost-to-AUM (%) 4.61 4.49 5.03 12 bps (42) bps Operating profit 7,473 8,567 7,577 (12.8) (1.4) Provisions 25 1,170 27 (97.8) (4.4) Credit costs (%) 0.03 1.68 0.04 (165) bps 0 bps PBT 7,448 7,397 7,550 0.7 (1.4) Tax 2,610 2,940 2,634 (11.2) (0.9) -Effective tax rate 35.0 39.7 34.9 (471) bps 15 bps PAT 4,838 4,457 4,916 8.6 (1.6) Other comprehensive income -26 10 10 (373.1) (353.9) Total comprehensive income 4,812 4,467 4,926 7.7 (2.3) EPS (Rs) 12.1 11.2 12.3 8.4 (1.6) BV (Rs) 219.6 183.3 207.6 19.8 5.8 AUM (Rsmn) 323,186 276,080 309,966 17.1 4.3
Comprehensive Conference Call Takeaways The company had restricted lending for a month, starting 20th September. Consequently, growth since 20 th September till date is broadly flat. However, there has been resumption of growth with business getting back to normal since the last 2-3 weeks. FY19 loan book/aum targets: o Muthoot Homefin (home finance): Rs 24-25 bn o Belstar (MFI): Rs 19 bn o Asia Asset Finance PLC (Sri Lanka): Rs 6 bn The company has started a new subsidiary/business, under the name of Muthoot Money which is engaged in diversified vehicle finance such as used/new CVs and used/new cars/pvs. The subsidiary has an AUM of Rs 1 bn as of now and will start getting consolidated Q3FY19 onwards. Muthoot Money is a 100% owned subsidiary, based out of Hyderabad. Within the parent company, ie, Muthoot Finance, the company has started personal loans to salaried class (AUM: Rs 0.6 bn currently). The average ticket size is Rs 1-3 lacs. As of now, the management is going slow on this front. The salaried personal loan team is currently working out of Bangalore. Despite the home finance subsidiary, Muthoot Homefin, being highly and adequately capitalized, the management was of the opinion that the leverage (of 7x) was high and hence they went in for a capital infusion., The Rs 1.5 bn infusion would support the management s target/guidance of achieving Rs 25 bn AUM by March 2019. The management expects NIMs of 3-3.5% in the housing finance business. Currently, the HFC is conducting purely housing finance (home loan) business, no LAP or construction finance. In terms of ALM mismatch amidst the recent liquidity tightening, the management does not see any stress points. Infact, the company has been availing of funds from banks and also, continues to stay well capitalized. During the quarter, Belstar (MFI business) had a capital infusion of Rs 0.65 bn post which Muthoot maintains its 66% stake in the company. However, the company also has the option of infusing further money in order to take up their stake by another 400 bps to 70%. In terms of growth, the management has guided for a 15% plus growth in gold loan AUM by March 2019. This does not factor in any gold price increases. In terms of customer acquisition related to the housing finance business, the management is of the view that their existing customer base from the gold loan business provides a good opportunity due to the commonalities between the two types of customers. Further, in this regard, the housing finance business would leverage the branch infrastructure and capital support of the parent company in order to expand (sharing branch network would enable expansion in a low cost manner). Parent support has also helped in securing a good credit rating for the HFC, at par with that of the parent company (AA). The HFC s average ticket size is Rs. 10 lacs. This, relatively lower average ticket size demonstrates that the gold loan customer pool is a reasonable source for smaller-ticket size affordable housing customers, which they are currently focused on. The management of the HFC is completely separate and operates out of Mumbai. 2 Muthoot Finance
The company has raised rates on gold loans (~100 bps incrementally) due to increase in cost of borrowings in recent quarters. The company expects to see full impact of higher yields in Q4FY19. Yield guidance is for 2HFY19 is ~21%. Given the recent increase in rates (+100 bps impact on fresh borrowings), the management expects overall cost of borrowings to increase by 35-50 bps. The company does not see any increase of CoF in the MFI business but there could be some 50-60 bps increase in CoF in the housing finance business. Main source of new customers in the gold loan business is the unorganized sector (money lenders) and not small-sized NBFC as much. The company has not seen any impact of Kerala floods. In terms of annual branch expansion plans, the company would be adding 200-250 branches. The expenditure that would be incurred in terms of establishing the branches would be compensated by more than proportionate increase in business. Branch saturation from a gold holdings capacity perspective is not an issue for them as the average branch has the capacity to handle Rs 0.15-20bn gold loan AUM compared with the current average AUM per branch of ~Rs 0.07bn. Being an NBFC, the company cannot buy back its own shares. As the company has excess capital, the management has not gone in for fresh subordinated debt (tier II capital) as they cost higher. Hence, the level of tier II capital has come down. On why Muthoot has performed far better than its closest rival and few other banks, the management is of the view that they are inducing their staff to sell more which is what has helped. In order to motivate them, the management is incentivizing the staff. Getting Amitabh Bachan as brand ambassador has certainly helped too in terms of building appeal and customer confidence. During the quarter, the company did Rs 2 bn worth of auctions and accrued interest worth Rs 13.36 bn. The company has been able to bring down NPA numbers by fully getting rid of the technical NPAs. Going forward, the management has guided for NPAs to be in the range of 2%. The management would be reluctant in carrying out auctions as long as the value doesn t deteriorate since it would help in building customer trust and confidence. Insurance broking business is delivering good profitability. 3 Muthoot Finance
Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Institutional Equities Exhibit 1: Financial summary Y/E March (Rsmn) FY17 FY18 FY19E FY20E FY21E Net interest income 33,609 41,174 43,137 48,326 56,821 Pre-provision profit 22,026 29,967 31,076 35,057 42,348 PAT 11,798 17,203 17,810 20,736 25,319 EPS (Rs) 29.5 43.0 44.5 51.8 63.3 BV (Rs) 163.1 194.0 231.3 275.9 332.0 P/E (x) 16.0 11.0 10.6 9.1 7.4 P/BV (x) 2.9 2.4 2.0 1.7 1.4 Gross NPAs (%) 2.1 7.0 3.0 2.5 2.5 Net NPAs (%) 1.7 6.2 1.9 1.5 1.5 RoA (%) 4.1 5.5 5.2 5.1 5.3 RoE (%) 19.4 24.1 20.9 20.4 20.8 Exhibit 2: Actual performance versus our estimates (Rsmn) 2QFY19 2QFY18 1QFY19 YoY (%) QoQ (%) 2QFY19E Devi. (%) Net interest income 10,962 11,498 11,093 (5) (1) 10,988 0 Pre-provision profit 7,473 8,567 7,577 (13) (1) 7,772 (4) PAT 4,838 4,457 4,916 9 (2) 4,259 14 Exhibit 3: Change in our estimates Revised estimates Earlier estimates % revision FY19E FY20E FY21E FY19E FY20E FY21E FY19E FY20E FY21E NII (Rsmn) 43,137 48,326 56,821 42,983 48,149 56,612 0.4 0.4 0.4 NIM (%) 14.0 13.7 13.6 14.0 13.6 13.6 5 bps 5 bps 5 bps PPOP (Rsmn) 31,076 35,057 42,348 30,922 34,880 42,140 0.5 0.5 0.5 PAT (Rsmn) 17,810 20,736 25,319 17,711 20,623 25,186 0.6 0.5 0.5 Exhibit 4: One-year forward P/BV (x) 3.0 2.5 2.0 1.5 1.0 0.5 - P/BVPS Mean +1 SD -1 SD -2 SD 4 Muthoot Finance
Financials Exhibit 5: Income statement Y/E March (Rsmn) FY17 FY18 FY19E FY20E FY21E Interest income 56,547 60,573 65,410 75,019 88,681 Interest expenses 22,938 19,399 22,273 26,693 31,860 Net interest income 33,609 41,174 43,137 48,326 56,821 Non-interest income 920 1,859 2,282 2,670 3,395 Net revenues 34,529 43,033 45,419 50,996 60,216 Operating expenses 12,503 13,066 14,343 15,939 17,868 -Employee expenses 7,280 7,715 8,457 9,465 10,746 -Other expenses 5,223 5,350 5,885 6,474 7,121 Operating profit 22,026 29,967 31,076 35,057 42,348 Provisions 2,816 2,397 3,248 2,657 2,787 PBT 19,210 27,571 27,828 32,400 39,561 Tax 7,412 10,368 10,018 11,664 14,242 PAT 11,798 17,203 17,810 20,736 25,319 Exhibit 7: Balance sheet Y/E March (Rsmn) FY17 FY18 FY19E FY20E FY21E Share capital 3,995 4,000 4,000 4,000 4,000 Reserves & surplus 61,170 73,604 88,527 106,377 128,810 Net worth 65,165 77,604 92,528 110,377 132,810 Borrowings 209,855 211,989 259,396 308,540 372,959 Other liability & provisions 32,111 24,223 20,328 15,690 8,923 Total liabilities 307,131 313,804 372,252 434,607 514,693 Fixed assets 2,182 2,062 2,268 2,495 2,745 Investments 2,091 3,828 3,828 3,828 3,828 Loans 272,199 288,484 325,987 381,404 452,727 Cash 15,343 4,868 19,559 22,884 27,164 Other assets 15,316 14,562 20,610 23,995 28,229 Total assets 307,131 313,804 372,252 434,607 514,693 Exhibit 6: Key ratios Y/E March (Rsmn) FY17 FY18 FY19E FY20E FY21E Growth (%) Net interest income 31.5 22.5 4.8 12.0 17.6 Operating profit 48.9 36.1 3.7 12.8 20.8 Profit after tax 45.8 45.8 3.5 16.4 22.1 Business (%) Advances growth 11.9 6.0 13.0 17.0 18.7 Spread (%) Yield on loans 21.9 21.6 21.3 21.2 21.3 Cost of borrowing 11.6 9.2 9.5 9.4 9.4 Spread 10.3 12.4 11.8 11.8 11.9 NIM 13.0 14.7 14.0 13.7 13.6 Operational efficiency (%) Cost-to-income 36.2 30.4 31.6 31.3 29.7 Cost-to-assets 4.9 4.7 4.7 4.5 4.3 Productivity (Rsmn) AUM per branch 63.2 66.7 76.7 88.2 101.4 AUM per employee 11.2 12.3 13.9 16.0 18.4 Employee per branch 5.6 5.4 5.5 5.5 5.5 CRAR (%) Tier I 21.8 24.8 23.7 22.3 22.6 Tier II 3.1 1.8 1.7 1.6 1.6 Total 24.9 26.6 25.4 23.9 24.2 Asset quality (%) Gross NPAs 2.1 7.0 3.0 2.5 2.5 Net NPAs 1.7 6.2 1.9 1.5 1.5 Specific provision coverage 18.1 11.7 36.0 40.0 40.0 Credit costs (excluding std. assets) 0.1 0.6 0.6 0.2 0.3 Credit costs (including std. assets) 1.1 0.9 1.1 0.8 0.7 Return ratios (%) RoE 19.4 24.1 20.9 20.4 20.8 RoA 4.1 5.5 5.2 5.1 5.3 Per share (%) EPS 29.5 43.0 44.5 51.8 63.3 BV 163.1 194.0 231.3 275.9 332.0 ABV 151.6 149.1 215.6 261.6 315.0 Valuation (x) P/E 16.0 11.0 10.6 9.1 7.4 P/BV 2.9 2.4 2.0 1.7 1.4 P/ABV 3.1 3.2 2.2 1.8 1.5 5 Muthoot Finance
Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Institutional Equities Rating track Date Rating Market price (Rs) Target price (Rs) 26 March 2018 Buy 381 471 18 May 2018 Buy 441 485 6 September 2018 Buy 437 514 9 October 2018 Buy 380 501 10 December 2018 Buy 471 547 Rating track graph 540 510 480 450 420 390 360 330 300 Not Covered Covered 6 Muthoot Finance
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