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 2017. 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 +91-22-3926 8068 Key Data Current Shares O/S (mn) 399.5 Mkt Cap (Rsbn/US$bn) 182.7/2.9 52 Wk H / L (Rs) 489/261 Daily Vol. (3M NSE Avg.) 825,125 Price Performance (%) 1 M 6 M 1 Yr Muthoot Finance 1.9 34.9 20.4 Nifty Index 2.5 12.9 14.2 Source: Bloomberg Y/E March (Rsmn) 1QFY18 1QFY17 4QFY17 YoY (%) QoQ (%) Interest income 13,758 12,752 16,995 7.9 (19.0) Interest expenses 5,326 5,571 5,460 (4.4) (2.5) Net interest income 8,432 7,181 11,535 17.4 (26.9) NIM (%) 12.2 11.5 17.0 77bps (477bps) Fee & other income 228 256 137 (10.9) 66.4 Operating income 8,660 7,437 11,672 16.4 (25.8) Staff costs 1,773 1,849 1,802 (4.1) (1.6) Other operating expenses 1,303 1,175 1,547 10.9 (15.8) Total operating expenses 3,076 3,024 3,349 1.7 (8.2) Cost to-income (%) 35.5 40.7 28.7 (514bps) 683bps Cost-to-AUM (%) 4.5 4.8 4.9 (37bps) (47bps) Operating profit 5,584 4,413 8,323 26.5 (32.9) Provisions 66 176 2,430 (62.5) (97.3) Credit costs (%) 0.1 0.3 3.6 (19 bps) (348bps) PBT 5,518 4,237 5,893 30.2 (6.4) Tax 2,007 1,534 2,675 30.8 (25.0) -Effective tax rate 36.4 36.2 45.4 17bps (902bps) PAT 3,511 2,703 3,218 29.9 9.1 EPS (Rs) 8.8 6.8 8.1 29.8 9.1 BV (Rs) 171.9 147.6 163.1 16.5 5.4 AUM (Rsmn) 278,517 258,606 272,785 7.7 2.1
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) 16.9 20.3 29.5 32.8 36.9 ABV (Rs) 116.7 125.8 151.6 171.2 196.5 P/E (x) 27.1 22.5 15.5 13.9 12.4 P/ABV (x) 3.9 3.6 3.0 2.7 2.3 Gross NPAs (%) 2.2 2.9 2.1 2.5 2.5 Net NPAs (%) 1.9 2.5 1.7 2.1 2.1 RoA (%) 2.6 3.0 4.1 4.0 3.9 RoE (%) 14.3 15.1 19.4 18.7 18.3 1QFY18 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
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 11,535 17.4 (26.9) 7,700 9.5 Pre-provision profit 5,584 4,413 8,323 26.5 (32.9) 4,522 23.5 PAT 3,511 2,703 3,218 29.9 9.1 2,847 23.3 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 36,499 5.6 3.8 Net interest margin (%) 11.6 11.3 11.0 10.8 62bps 41bps Operating profit (Rsmn) 21,412 24,036 19,017 21,989 12.6 9.3 Profit after tax (Rsmn) 13,119 14,740 11,937 13,736 9.9 7.3 EPS (Rs) 32.8 36.9 29.9 34.4 9.9 7.3 ABV (Rs) 171.2 196.5 168.2 191.1 1.8 2.9 Exhibit 4: One-year forward P/ABV (x) 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 - P/Adj. BVPS Mean +1 SD -1 SD 3 Muthoot Finance
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 544 621 913 783 900 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 2,816 913 1,006 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 194,360 185,669 210,959 246,659 286,924 Other liability & provisions 22,498 28,626 31,007 31,861 33,063 Total liabilities 267,692 270,487 307,131 353,557 406,157 Fixed assets 2,642 2,273 2,183 2,401 2,641 Investments 385 983 2,091 2,091 2,091 Loans 233,499 243,355 272,199 313,029 359,983 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 267,692 270,487 307,131 353,557 406,157 Exhibit 6: Key ratios Growth (%) Net interest income (5.2) 18.1 31.6 0.9 11.7 Operating profit (13.9) 38.9 48.9 (2.8) 12.3 Profit after tax (14.0) 20.7 45.8 11.2 12.4 Business (%) Advances growth 8.0 4.2 11.9 15.0 15.0 Spreads (%) Yield on loans 19.0 20.2 21.9 19.5 19.2 Cost of borrowings 10.8 11.9 11.6 10.1 10.0 Spread 8.2 8.3 10.4 9.4 9.2 NIM 9.6 10.7 13.0 11.6 11.3 Operational efficiency (%) Cost to income 52.0 43.5 36.2 38.3 38.0 Cost to assets 5.1 4.8 4.8 4.5 4.4 Productivity (Rsmn) AUM per branch 54.9 57.0 63.2 72.7 83.6 AUM per employee 10.2 10.7 11.2 12.8 14.4 Employee per branch 5.4 5.3 5.6 5.7 5.8 CRAR (%) Tier I 20.0 20.9 21.8 21.8 21.8 Tier II 4.8 3.6 3.1 3.6 3.6 Total 24.8 24.5 24.9 25.4 25.4 Asset quality (%) Gross NPAs 2.2 2.9 2.1 2.5 2.5 Net NPAs 1.9 2.5 1.7 2.1 2.1 Provision coverage 14.2 14.5 18.1 15.0 15.0 Credit cost (excluding std asset) 0.1 0.2 0.1 0.2 0.2 Credit cost (including std asset) 0.2 0.7 1.1 0.3 0.3 Return ratios (%) RoE 14.3 15.1 19.4 18.7 18.3 RoA 2.6 3.0 4.1 4.0 3.9 Per share (%) EPS 16.9 20.3 29.5 32.8 36.9 BV 127.8 140.8 163.1 187.8 215.7 ABV 116.7 125.8 151.6 171.2 196.5 Valuation (x) P/E 27.1 22.5 15.5 13.9 12.4 P/BV 3.6 3.2 2.8 2.4 2.1 P/ABV 3.9 3.6 3.0 2.7 2.3 4 Muthoot Finance
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 345 525 15 November 2016 Buy 340 530 15 February 2017 Buy 335 525 22 May 2017 Buy 379 535 10 August 2017 Buy 457 590 Rating Track Graph 500 450 400 350 300 250 200 150 Not Covered Covered 5 Muthoot Finance
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