2QFY18 Result Update Institutional Equities Muthoot Finance 10 November 2017 Reuters: MUTT.BO; Bloomberg: MUTH IN Gold Loan Business Really Glitters Strong profitability numbers of Muthoot Finance (MFL) with net interest income or NII growth of 51% (39% above our estimate) and PAT growth of 53% (46% above our estimate) in 2QFY18 came as a big positive surprise. While assets under management or AUM growth was 5% below our expectation, the surprise came in from higher-than-expected net interest margin or NIM. Gross non-performing assets or GNPAs, however, witnessed a 50% or 231bps increase to 4.56% sequentially. Similarly, net non-performing assets or NNPAs also registered a 210bps sequential rise. This increase can be attributed to a six-month product launched in the previous quarter, wherein the management had allowed a threemonth extension to customers for repayment. The management does not expect any losses on such accounts, while at the same time it has discontinued the product. All the subsidiaries are witnessing healthy traction, although the overseas business, Belstar, is witnessing some slowdown because of economic challenges in Sri Lanka. Gold loan AUM and holdings were stagnant as the focus was more on collections (reflected in the rise in interest income by 21% YoY and fall in interest outgo by 18% YoY). Given the lower base post demonetisation last year, we have retained our loan growth estimates at 15% for FY18/FY19 each.net interest margin or NIM expanded 515bps YoY, and 434bps QoQ to 16.6% on the back of increased collection. Net loan yield rose 327bps YoY to 23.6%, whereas cost of funds eased 270bps YoY to 8.8% as the re-pricing of its borrowings accelerated. Cost-to-AUM ratio improved 22bps YoY to 4.5%, while it was stagnant sequentially. Credit costs (annualised) for the quarter witnessed an increase of 159bps sequentially to 1.7% because of accelerated provisioning. The company is maintaining a higher standard asset provisioning of 1.0% as against regulatory requirement of 0.35%, and of 0.88% for gold price fluctuation. We have retained our estimates for FY18/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 Rs633 (from Rs590 earlier), valuing the stock at 3.0x 1HFY20E 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 regarding higher non-cash disbursement, as required by 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 24% ensures unhindered growth along with no need to raise capital for the next two years. MFL has the potential to deliver RoA of ~4% and RoE of ~19%-20% consistently. BUY Sector: NBFC CMP: Rs491 Target Price: Rs633 Upside: 29% Shreesh Chandra Research Associate shreesh.chandra@nirmalbang.com +91-22-3926 8028 Key Data Current Shares O/S (mn) 399.6 Mkt Cap (Rsbn/US$bn) 195.9/3.0 52 Wk H / L (Rs) 526/261 Daily Vol. (3M NSE Avg.) 834,750 Price Performance (%) 1 M 6 M 1 Yr Muthoot Finance 0.9 23.8 36.8 Nifty Index 3.2 10.6 22.3 Source: Bloomberg Y/E March (Rsmn) 2QFY18 2QFY17 1QFY18 YoY (%) QoQ (%) Interest income 16,385 13,526 13,758 21.1 19.1 Interest expenses 4,889 5,937 5,326 (17.7) (8.2) Net interest income 11,496 7,589 8,432 51.5 36.3 NIM (%) 16.6 11.4 12.2 515bps 434bps Fee & other income 314 336 228 (6.5) 37.7 Operating income 11,810 7,925 8,660 49.0 36.4 Staff costs 1,884 1,896 1,773 (0.6) 6.3 Other operating expenses 1,231 1,234 1,303 (0.2) (5.5) Total operating expenses 3,115 3,130 3,076 (0.5) 1.3 Cost to-income (%) 26.4 39.5 35.5 (1,312bps) (914bps) Cost-to-AUM (%) 4.5 4.7 4.5 (22bps) 3bps Operating profit 8,695 4,795 5,584 81.3 55.7 Provisions 1,169 171 66 583.6 1,671.2 Credit costs (%) 1.7 0.3 0.1 143bps 159bps PBT 7,526 4,624 5,518 62.8 36.4 Tax 2,985 1,657 2,007 80.1 48.7 -Effective tax rate 39.7 35.8 36.4 383bps 329bps PAT 4,541 2,967 3,511 53.1 29.3 EPS (Rs) 11.4 7.4 8.8 52.9 29.3 BV (Rs) 183.3 155.1 171.9 18.2 6.6 AUM (Rsmn) 276,080 274,564 278,517 0.6 (0.9)
Institutional Equities Exhibit 1: Financial summary Net interest income 25,552 33,609 34,009 37,983 42,482 Pre-provision profit 14,791 22,026 21,577 24,133 27,132 PAT 8,095 11,798 13,225 14,802 16,624 EPS (Rs) 20.3 29.5 33.1 37.1 41.6 ABV (Rs) 125.8 151.6 171.1 196.7 225.8 P/E (x) 23.9 16.4 14.7 13.1 11.7 P/ABV (x) 3.9 3.2 2.8 2.5 2.1 Gross NPAs (%) 2.9 2.1 2.5 2.5 2.5 Net NPAs (%) 2.5 1.7 2.1 2.1 2.1 RoA (%) 3.0 4.1 4.0 3.9 3.8 RoE (%) 15.1 19.4 18.9 18.4 18.0 2QFY18 conference-call highlights Challenges in the economy hindered AUM growth to 1% YoY at Rs27.6bn. The home finance loan book stood at Rs8.3mn, with Rs256mn in revenues and Rs45mn of PAT. Muthoot Home Finance arm is scaling up its business with a target AUM of Rs15bn for FY18 and Rs30bn by the end of FY19. It has branches in Maharashtra, Gujarat, Rajasthan, Madhya Pradesh, Haryana, Telangana, and Kerala. The most active states are Gujarat and Maharashtra. GNPAs stood at 0.5%. The company s subsidiary, Belstar Investment and Finance, reported AUM of Rs7.9bn, and PAT of Rs66mn. The insurance business has done well with branches of the parent company supporting its business. The management gave guidance of 10%-15% growth in AUM as well as PAT for FY18. The company has launched a new product for MSME customers who want to avail loans of Rs100mn and above at 12% interest. While the management stated that the product will rake in lower profits, it will help to garner customers and increase AUM. A six-month product introduced in the previous quarter was discontinued as it led to higher nonperforming assets or NPAs during 2QFY18. The company lent ~Rs75bn against this product. For the customers who were unable to pay, the company gave them an additional three-month time to repay their dues, leading to a rise in GNPAs. The management stated in its commentary that the company is customer-centric and does not believe in auctioning their gold immediately. 2 Muthoot Finance
Nov-11 May-12 Nov-12 May-13 Nov-13 May-14 Nov-14 Institutional Equities May-15 Nov-15 May-16 Nov-16 May-17 Nov-17 Exhibit 2: Actual performance versus our estimates (Rsmn) 2QFY18 2QFY17 1QFY18 YoY (%) QoQ (%) 2QFY18E Devi. (%) Net interest income 11,496 7,589 8,432 51.5 36.3 8,257 39 Pre-provision profit 8,695 4,795 5,584 81.3 55.7 5,116 70 PAT 4,541 2,967 3,511 53.1 29.3 3,115 46 Exhibit 3: Change in our estimates Revised estimates Earlier estimates % revision FY18E FY19E FY18E FY19E FY18E FY19E Net interest income (Rsmn) 34,009 37,983 33,944 37,912 0.2 0.2 Net interest margin (%) 11.6 11.3 11.6 11.3 2bps 2bps Operating profit (Rsmn) 21,577 24,133 21,450 24,062 0.6 0.3 Profit after tax (Rsmn) 13,225 14,802 13,143 14,756 0.6 0.3 EPS (Rs) 33.1 37.1 32.9 36.9 0.6 0.3 ABV (Rs) 171.1 196.7 170.9 196.4 0.1 0.2 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 +1 SD -1 SD -2 SD 3 Muthoot Finance
Institutional Equities Financials Exhibit 5: Income statement Interest income 48,129 56,547 57,230 64,811 73,372 Interest expenses 22,577 22,938 23,222 26,828 30,890 Net interest income 25,552 33,609 34,009 37,983 42,482 Non-interest income 621 920 845 900 1,035 Net revenues 26,173 34,529 34,854 38,883 43,517 Operating expenses 11,382 12,503 13,277 14,750 16,385 -Employee expenses 6,419 7,280 7,531 8,430 9,433 -Other expenses 4,963 5,223 5,745 6,320 6,952 Operating profit 14,791 22,026 21,577 24,133 27,132 Provisions 1,625 2,816 913 1,006 1,156 PBT 13,167 19,210 20,664 23,128 25,976 Tax 5,072 7,412 7,439 8,326 9,351 PAT 8,095 11,798 13,225 14,802 16,624 Exhibit 7: Balance sheet Share capital 3,990 3,995 3,995 3,995 3,995 Reserves & surplus 52,202 61,170 71,029 82,225 95,002 Networth 56,192 65,165 75,024 86,220 98,997 Borrowings 185,669 209,855 245,525 285,787 332,089 Other liability & provisions 28,626 32,111 32,978 34,117 35,510 Total liabilities 270,487 307,131 353,528 406,123 466,596 Fixed assets 2,273 2,182 2,400 2,640 2,904 Investments 983 2,091 2,091 2,091 2,091 Loans 243,355 272,199 313,029 359,983 413,981 Cash 6,791 15,343 18,782 21,599 24,839 Other assets 17,085 15,316 17,226 19,810 22,781 Total assets 270,487 307,131 353,528 406,123 466,596 Exhibit 6: Key ratios Growth (%) Net interest income 18.1 31.5 1.2 11.7 11.8 Operating profit 38.9 48.9 (2.0) 11.8 12.4 Profit after tax 20.7 45.8 12.1 11.9 12.3 Business (%) Advances growth 4.2 11.9 15.0 15.0 15.0 Spreads (%) Yield on loans 20.2 21.9 19.6 19.3 19.0 Cost of borrowings 11.9 11.6 10.2 10.1 10.0 Spread 8.3 10.3 9.4 9.2 9.0 NIM 10.7 13.0 11.6 11.3 11.0 Operational efficiency (%) Cost to income 43.5 36.2 38.1 37.9 37.7 Cost to assets 4.8 4.9 4.5 4.4 4.2 Productivity (Rsmn) AUM per branch 57.0 63.2 72.7 83.6 96.1 AUM per employee 10.7 11.2 12.8 14.4 16.3 Employee per branch 5.3 5.6 5.7 5.8 5.9 CRAR (%) Tier I 20.9 21.8 21.8 21.8 21.8 Tier II 3.6 3.1 3.6 3.6 3.6 Total 24.5 24.9 25.4 25.4 25.4 Asset quality (%) Gross NPAs 2.9 2.1 2.5 2.5 2.5 Net NPAs 2.5 1.7 2.1 2.1 2.1 Provision coverage 14.5 18.1 15.0 15.0 15.0 Credit cost (excluding std asset) 0.2 0.1 0.2 0.2 0.2 Credit cost (including std asset) 0.7 1.1 0.3 0.3 0.3 Return ratios (%) RoE 15.1 19.4 18.9 18.4 18.0 RoA 3.0 4.1 4.0 3.9 3.8 Per share (%) EPS 20.3 29.5 33.1 37.1 41.6 BV 140.8 163.1 187.8 215.8 247.8 ABV 125.8 151.6 171.1 196.7 225.8 Valuation (x) P/E 23.9 16.4 14.7 13.1 11.7 P/BV 3.4 3.0 2.6 2.2 2.0 P/ABV 3.9 3.2 2.8 2.5 2.1 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 Sep-17 Oct-17 Nov-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 10 November 2017 Buy 491 633 Rating track graph 550 500 450 400 350 300 250 200 150 Not Covered Covered 5 Muthoot Finance
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