1QFY19 Result Update Institutional Equities Muthoot Finance 6 September 2018 Reuters: MUTT.BO; Bloomberg: MUTH IN Sequential Gold Loan AUM Growth Accelerates Further Muthoot Finance (MFL) reported its 1QFY19 results with the key strategic pointers being: (1) Gold loan segment is looking up and marketing initiatives are also bearing fruit, which resulted in faster 6% QoQ growth for gold loan AUM (2) Management is displaying increased nimbleness with regard to new initiatives and will launch (a) mutual fund business and (b) vehicle finance business in the near term. (3) IndAS transitioning has been reasonably smooth (4) Impact from Kerala floods has been minimal. (See comprehensive conference call takeaways below; see initiating coverage report here). Per se, on the results front, MFL posted NII growth of 30.8% YoY at Rs11,037mn, PPOP growth of 37% YoY at Rs7,576mn and PAT growth of 42.5% YoY at Rs4,916mn. We have revised our estimates for FY18/FY19 and retained Buy rating on MFL, revising our target price on it to Rs514 (from Rs485 earlier) and valuing the stock at 1.9x FY20E P/BV. Gold loan segment is looking up and marketing initiatives are also bearing fruit: The gold loan segment, as such, is seeing improved business conditions. This, combined with marketing initiatives such as hiring Mr. Amitabh Bachchan as the all-india brand ambassador and becoming a sponsor for the leading IPL team, Chennai Super Kings, helped drive gold loan AUM growth of 5.9% QoQ after 2.0%/2.7% QoQ growth in 3QFY18/4QFY18. Management raised gold loan AUM growth guidance for FY19 to ~20% from ~15% earlier. Consolidated AUM growth was expected to be ~20% and now, would be concomitantly faster. Non-gold loan AUM now occupies 10% of group AUM. Management is displaying increased nimbleness with regard to new initiatives: MFL has received inprinciple approval to launch asset management business and would do so within this financial year. MFL has a large base if loyal investors which participate in their NCDs, which could be tapped in this regard. The large branch distribution consisting of 4688 branches will also aid in running up mutual fund AUM. MFL has already a Rs0.5bn AUM in their vehicle finance business, which they plan to take to Rs3.5bn by year-end. Management plans to make loans for both new and used cars, CVs and CE. Management has earlier talked of entering the personal loans segment as well. IndAS transitioning has been reasonably smooth and impact from Kerela floods has been minimal: Impact on point-in-time Reserves and Surplus as of 1QFY18 due to IndAS was minimal with the Indian GAAP figure of Rs 65.16bn declining marginally to Rs 65.02bn due to IndAS. Negative impact of ECL methodology (Rs 382mn) and EIR for assets (Rs 101mn) was offset by positive impact from EIR for liabilities (Rs 234mn), fair valuing of investments (Rs 86mn) and tax adjustment (Rs 77mn). Impact from Kerala floods on MFL business is only marginal as Kerela contributed just 5.8% to its gold loan portfolio and ~95% of branches are above ground floor. Just three branches with a portfolio of ~Rs100mn were impacted in any manner. There was no loss or damage to gold loan collateral. Valuation and outlook: We have revised our NII estimates by 0.3%/1.7%, PPOP estimates by 0.9%/1.7% and PAT estimates by 0.2%/0.9% for FY19/FY20, respectively, valuing the stock at 1.9x FY20E P/BV and revising our target price to Rs514 (from Rs485 earlier). BUY Sector: NBFC CMP: Rs437 Target Price: Rs514 Upside: 18% Shivaji Thapliyal Research Analyst shivaji.thapliyal@nirmalbang.com +91-22-6273 8068 Key Data Current Shares O/S (mn) 400.1 Mkt Cap (Rsbn/US$bn) 174.8/2.4 52 Wk H / L (Rs) 526/360 Daily Vol. (3M NSE Avg.) 847,475 Price Performance (%) 1 M 6 M 1 Yr Muthoot Finance 2.7 14.5 (13.5) Nifty Index 0.8 12.0 15.7 Source: Bloomberg Y/E March (Rsmn) 1QFY19 1QFY18 4QFY18 YoY (%) QoQ (%) Interest income 16,053 13,560 15,223 18.4 5.5 Interest expenses 5,016 5,121 4,495 (2.1) 11.6 Net interest income 11,037 8,439 10,728 30.8 2.9 NIM (%) 14.7 12.2 15.0 244 bps (35bps) Fee & other income 277 213 857 30.0 (67.7) Operating income 11,314 8,652 11,585 30.8 (2.3) Staff costs 2,102 1,800 1,841 16.8 14.2 Other operating expenses 1,636 1,322 1,822 23.8 (10.2) Total operating expenses 3,738 3,122 3,663 19.7 2.0 Cost to-income (%) 33.0 36.1 31.6 (305bps) 142bps Cost-to-AUM (%) 5.03 4.52 5.1 51bps (8bps) Operating profit 7,576 5,530 7,922 37.0 (4.4) Provisions 26 106 597 (75.5) (95.6) Credit costs (%) 0.04 0.15 0.83 (12bps) (80bps) PBT 7,550 5,424 7,325 39.2 3.1 Tax 2,634 1,975 2,811 33.4 (6.3) -Effective tax rate 34.9 36.4 38.4 (152bps) (349bps) PAT 4,916 3,449 4,514 42.5 8.9 Other comprehensive income 10 10-7.6 NA Total comprehensive income 4,926 3,459 4,514 42.4 9.1 EPS (Rs) 12.3 8.6 11.3 42.3 8.9 BV (Rs) 207.6 171.9 194.0 20.8 7.0 AUM (Rsmn) 3,09,966 2,78,566 2,91,420 11.3 6.4 NB: 1QFY19 and 1QFY18 figures are as per Ind-AS
Comprehensive Conference Call Takeaways Muthoot Homefin, the wholly owned housing finance subsidiary of Muthoot Finance, registered Gross NPA and Net NPA at 0.51% and 0.43% respectively as of 1QFY19 end. Muthoot Finance increased it s stake in Belstar Investment and Finance (microfinance subsidiary) from 66.61% to 71.16%. They engaged into a secondary transaction, purchasing the stake from investors. Asia Asset Finance PLC, the Sri Lanka subsidiary of Muthoot Finance (in which it has a holding of 60%), hasn t performed as well as other subsidiaries due to political uncertainties in Sri Lanka. The management stated that they have received SEBI approval for their Mutual Fund business. They have a loyal customer base of 0.7mn-0.8mn on their existing liability portfolio of NCDs, which, coupled with their vast branch network, will help them in mobilising MF business. The management stated that the vehicle finance business which currently operates out of Andhra Pradesh and Telangana will become a wholly owned subsidiary by early next month. Currently, this loan portfolio stands at ~Rs.500mn. The management stated that Muthoot Finance s association with CSK and Amitabh Bachhan has paid them dividends in the form of building customer confidence on their products on both liability and asset side. These marketing initiatives along with improved gold loan market has helped them in attracting more customers. Kerala floods affected only three branches that cumulatively have an AUM of just Rs.100-150mn. There was no damage or loss of ornaments. Since, gold loans aren t EMI based and most customers have time up to 12 months, the management seems confident of securing repayments from them. 2.2% of the housing finance gross loan book amounting to Rs.368mn (~250 accounts) is based in Kerala. The management stated that they didn t receive any feedback from their borrowers regarding loss of property. On their microfinance business, the management stated that they just began their operations in Kerala, which now has an AUM of Rs.400mn and there hasn t been any impact as such from the floods. Cost of funds rose from 8.25% to 8.66% on a QoQ basis. The management stated that they have increased their lending rates by 0.5%-1% in certain schemes and, as such, will pass on any increased cost of funds to their borrowers. The management is targeting an AUM of Rs.3.5bn by FY19 end and Rs.10bn by FY20 end on their vehicle finance business. The management is expecting their gross gold loan book to grow 20% in the full year of FY19 over FY18. They believe their subsidiaries will register a higher growth rate than this. The management stated that an interest spread of ~12% can be maintained in the short term. The management guided for ROA to be about 4% in the long term. The management stated that in terms of writing back excess provisions, they will wait for further clarification from RBI. The management stated that they have branches which are operating at an AUM of ~Rs.200mn, hence, AUM per branch is not a constraint even though it is higher than competitors. The management stated that a negative impact of Rs.382mn on net worth due to ECL as on 1 st April 2017 was due to the then norm of 120 dpd for NPA recognition. The management stated that the current excess capital benefit to NIM will decrease going forward. The management stated that gold price increases have not been factored in guidance for gold loan book growth. Management stated that wholesale lending has now been reduced and exposure to top 20 borrowers as a proportion of loan book would, therefore, reduce. Provisions amounting to Rs.8096mn stood at 1.9% of total assets. Stage 1 and stage 2 asset provisions stood at 1.57% of total assets. 2 Muthoot Finance
The management stated that the rise in lending rates has been recent and its effect will be seen in the coming quarters. In their housing finance business, disbursements fell by around Rs.2bn on a QoQ basis. The management stated that most of the disbursements seasonally take place in the final quarter and their prospective disbursements will most likely occur in 3 rd and 4 th quarter of FY19. Auctions amounted to ~Rs.2950mn in this quarter. The management stated that they received interest of 16-17% on the auctioned holdings instead of ~24% but no principal loss was incurred. The management stated that they have been able to contain their borrowing costs and have not let it rise as much as market rates. Muthoot Insurance Brokers, their wholly owned subsidiary, has designed many insurance products which align to their existing loan customers, but they are also selling to non loan customers. The management stated that in their vehicle finance business, they broadly have 3 products viz. financing of cars, CVs and construction equipments for both new and used assets. The management is targeting their housing finance book to reach Rs.25bn by FY19 end. The management is targeting their microfinance book to reach Rs.18bn by FY19 end. Exhibit 1: Reconciliation of IND-AS Migration on PAT Particulars (Rsmn) 1QFY2018 Net Profit after Tax reported under Previous GAAP 3,511 Adjustments increasing/(decreasing) net profit after tax as reported in the previous GAAP: Impact on application of Expected Credit Loss method for loan loss provisions and related adjustments as per IND AS 109 (311) Amortisation of net income under Effective Interest Rate method for Financial Assets (20) Amortisation of expenses under Effective Interest Rate method for Financial Liabilities 205 Reversal of derivative liability recognised on transition 59 Reclassification of Actuarial Gain/Loss to Other Comprehensive Income (15) Fair Valuation of Employee Stock Options (13) Tax adjustments on above items 33 Net Profit after tax as under IND AS 3,449 Other Comprehensive Income/Loss (Net of tax) 10 Total Comprehensive Income (after tax) as reported under IND AS 3,459 Exhibit 2: Reconciliation of IND-AS Migration on Reserves and Surplus Particulars Rsmn Opening Reserve & Surplus as per Indian GAAP as at 1st April 2017 65,164 Adjustments: Impact on application of Expected Credit Loss method for loan loss provisions and related adjustments as per IND AS 109 (382) Amortisation of net income under Effective Interest Rate Method for Financial Assets (101) Amortisation of expenses under Effective Interest Rate method for Financial Liabilities 234 Reversal of derivative liability recognised on transition (59) Fair value of Investments 86 Tax adjustments on above items 77 Opening Reserve & Surplus as of 1st April 2017 65,019 3 Muthoot Finance
Aug-11 Jan-12 Jun-12 Nov-12 Apr-13 Sep-13 Feb-14 Jul-14 Dec-14 May-15 Institutional Equities Oct-15 Mar-16 Aug-16 Jan-17 Jun-17 Nov-17 Apr-18 Sep-18 Exhibit 3: Financial summary Y/E March (Rsmn) FY16 FY17 FY18 FY19E FY20E Net interest income 25,552 33,609 41,201 43,779 48,951 Pre-provision profit 14,791 22,026 29,914 31,616 35,577 PAT 8,095 11,798 17,141 18,091 21,054 EPS (Rs) 20.3 29.5 42.8 45.2 52.6 BV (Rs) 140.8 163.1 194.0 232.2 277.6 P/E (x) 21.5 14.8 10.2 9.7 8.3 P/BV (x) 3.1 2.7 2.3 1.9 1.6 Gross NPAs (%) 2.9 2.1 7.0 3.0 2.5 Net NPAs (%) 2.5 1.7 6.2 1.9 1.5 RoA (%) 3.0 4.1 5.5 5.3 5.2 RoE (%) 15.1 19.4 24.0 21.2 20.6 Exhibit 4: Actual performance versus our estimates (Rsmn) 1QFY19 1QFY18 4QFY18 YoY (%) QoQ (%) 1QFY19E Devi. (%) Net interest income 11,037 8,439 10,728 31 3 10,369 6 Pre-provision profit 7,576 5,530 7,922 37 (4) 7,443 2 PAT 4,916 3,449 4,514 43 9 4,289 15 Exhibit 5: Change in our estimates Revised estimates Earlier estimates % revision FY19E FY20E FY19E FY20E FY19E FY20E Net interest income (Rsmn) 43,779 48,951 43,659 48,128 0.3 1.7 Net interest margin (%) 14.2 13.7 14.2 13.9 - (17bps) Operating profit (Rsmn) 31,616 35,577 31,339 34,992 0.9 1.7 Profit after tax (Rsmn) 18,091 21,054 18,058 20,858 0.2 0.9 Exhibit 6: 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 7: Income statement Y/E March (Rsmn) FY16 FY17 FY18 FY19E FY20E Interest income 48,129 56,547 60,395 65,563 75,504 Interest expenses 22,577 22,938 19,194 21,783 26,553 Net interest income 25,552 33,609 41,201 43,779 48,951 Non-interest income 621 920 1,824 2,302 2,693 Net revenues 26,173 34,529 43,025 46,081 51,644 Operating expenses 11,382 12,503 13,111 14,466 16,067 -Employee expenses 6,419 7,280 7,315 8,090 9,053 -Other expenses 4,963 5,223 5,796 6,376 7,014 Operating profit 14,791 22,026 29,914 31,616 35,577 Provisions 1,625 2,816 2,437 3,349 2,680 PBT 13,167 19,210 27,477 28,267 32,897 Tax 5,072 7,412 10,336 10,176 11,843 PAT 8,095 11,798 17,141 18,091 21,054 Exhibit 9: Balance sheet Y/E March (Rsmn) FY16 FY17 FY18 FY19E FY20E Share capital 3,990 3,995 4,000 4,000 4,000 Reserves & surplus 52,202 61,170 73,604 88,887 1,07,053 Net worth 56,192 65,165 77,604 92,888 1,11,053 Borrowings 1,85,669 2,09,855 2,12,680 2,60,872 3,10,169 Other liability & provisions 28,626 32,111 23,532 19,361 14,445 Total liabilities 2,70,487 3,07,131 3,13,817 3,73,120 4,35,667 Fixed assets 2,273 2,182 2,062 2,268 2,495 Investments 983 2,091 3,838 3,838 3,838 Loans 2,43,355 2,72,199 2,88,484 3,28,872 3,84,780 Cash 6,791 15,343 4,868 19,732 23,087 Other assets 17,085 15,316 14,564 18,410 21,467 Total assets 2,70,487 3,07,131 3,13,817 3,73,120 4,35,667 Exhibit 8: Key ratios Y/E March (Rsmn) FY16 FY17 FY18 FY19E FY20E Growth (%) Net interest income 18.1 31.5 22.6 6.3 11.8 Operating profit 38.9 48.9 35.8 5.7 12.5 Profit after tax 20.7 45.8 45.3 5.5 16.4 Business (%) Advances growth 4.2 11.9 6.0 14.0 17.0 Spread (%) Yield on loans 20.2 21.9 21.5 21.2 21.2 Cost of borrowing 11.9 11.6 9.1 9.2 9.3 Spread 8.3 10.3 12.5 12.0 11.9 NIM 10.7 13.0 14.7 14.2 13.7 Operational efficiency (%) Cost-to-income 43.5 36.2 30.5 31.4 31.1 Cost-to-assets 4.8 4.9 4.7 4.7 4.5 Productivity (Rsmn) AUM per branch 57.0 63.2 66.7 76.7 88.2 AUM per employee 10.7 11.2 12.3 13.9 16.0 Employee per branch 5.3 5.6 5.4 5.5 5.5 CRAR (%) Tier I 20.9 21.8 24.8 23.5 22.2 Tier II 3.6 3.1 1.8 1.7 1.6 Total 24.5 24.9 26.6 25.3 23.8 Asset quality (%) Gross NPAs 2.9 2.1 7.0 3.0 2.5 Net NPAs 2.5 1.7 6.2 1.9 1.5 Specific provision coverage 14.5 18.1 18.0 36.0 40.0 Credit costs (excluding std. assets) 0.2 0.1 1.1 0.6 0.2 Credit costs (including std. assets) 0.7 1.1 2.3 1.1 0.8 Return ratios (%) RoE 15.1 19.4 24.0 21.2 20.6 RoA 3.0 4.1 5.5 5.3 5.2 Per share (%) EPS 20.3 29.5 42.8 45.2 52.6 BV 140.8 163.1 194.0 232.2 277.6 ABV 125.8 151.6 149.1 216.4 263.2 Valuation (x) P/E 21.5 14.8 10.2 9.7 8.3 P/BV 3.1 2.7 2.3 1.9 1.6 P/ABV 3.5 2.9 2.9 2.0 1.7 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 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 Rating track graph 540 510 480 450 420 390 360 330 300 Not Covered Covered 6 Muthoot Finance
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