Why Muthoot Fin is a good long-term stock bet

Despite disruption in its branch operations during the first quarter of 2021-22, Muthoot’s gold loan business showed good resilience and its gold loan portfolio grew by 29% y-o-y. Muthoot is expected to report better numbers for the second quarter due to reopening of branches and improvement in gold loan demand. More and more cash stressed borrowers are now shifting to gold loans because of its lower turnaround time.Muthoot was also able to show decent asset quality during this period. Though the first-quarter gross NPA deteriorated to 1.22% from 0.9% q-o-q, it was mostly technical in nature and is expected to reverse in the second quarter. Strong performance during difficult times like this shows its inherent strength.Muthoot Finance is one of the leading gold loan companies with more than 4,600 branches and a gold loan portfolio of more than Rs 52,000 crore. The gold loan segment is still underpenetrated in India and the aggressive push by banks in this regard is providing impetus to the industry and in turn is helping well-entrenched players like Muthoot. In addition to its brand image, increasing its branch networks is also helping Muthoot. Due to steady business growth, analysts believe its gold loan portfolio will reach Rs 1 lakh crore by 2024-25.High margins enjoyed by Muthoot is another reason that is attracting analysts to this counter. Despite banks offering gold loans at around 12%, Muthoot is still able to price its gold loan at around 20% due to its short duration gold loans, faster turnaround time and better loan to value (LTV). In addition to attracting new customers, Muthoot is also able to retain its customers and this sticky customer base is the main reason for its operating performance improvement in recent years.Due to high capital adequacy ratio, AA+ credit rating and positive asset-liability situation, Muthoot has been able to keep its costs of funds close to 8%, thereby enjoying a spread of around 12%. Muthoot can also boast a healthier RoA and RoE of around 5% and 25% respectively because Muthoot’s gross NPA is close to 1% and the resultant low provisioning cost.Despite faster growth, Muthoot is still trading at reasonable valuations. While lacklustre performances by other segments like housing finance, microfinance, vehicle finance, etc are keeping its valuation low, analysts say it is not a serious concern because the current contribution of these subsidiaries to consolidated net profit is small. 86888553 Selection MethodologyWe pick up the stock that has shown maximum increase in “consensus analyst rating” during the last 1 month. Consensus rating is arrived at by averaging all analyst recommendations after attributing weights to each of them (ie 5 for strong buy, 4 for buy, 3 for hold, 2 for sell and 1 for strong sell) and any improvement in consensus analyst rating indicates that the analysts are getting more bullish on the stock. To make sure that we pick only companies with decent analyst coverage, this search will be restricted to stocks with at least 10 analysts covering it.

from Economic Times https://ift.tt/3mGcAVv