Muthoot Finance appears to be back on growth path

After grappling with regulatory issues and drop in gold loan demand due to slowdown, the country’s largest gold loan company Muthoot Finance appears to be back on the growth track. Considering the rise in demand in coming quarters and favourable RBI regulations, the current valuation of 1.5 price-to-book appears attractive, given that the company could deliver a healthy growth in earnings in coming years.

Kochi-based Muthoot Finance’s assets under management (AUMs) declined in the last four consecutive quarters, primarily due to decline in gold prices and lower demand for gold loans from small businesses. However, the rate of decline came down in the June 2014 quarter. The management expects the AUM to remain flat during the September quarter before picking up from the third quarter onwards.

In the quarter ended June 2014, Muthoot's AUM dropped by Rs 300 crore as against Rs 3,800 crore and Rs 600 crore in the two previous quarters. “In the next four quarters, business should grow by 15% to 20%, and proportionately, the profit should also grow by 15% to 20%,” said Oommen K Mammen, chief financial officer of Muthoot Finance, in a recent analyst conference call.

The company disbursed a significant amount of loans in 2012 and 2013 when gold prices were trading at near Rs 3,000 per gram. “As gold prices fell, about 8-10% of these accounts did not service interest on their principals,” said Digant Haria of Antique Broking, in his latest report on the company. The company had to auction some of the assets to check any rise in non-performing assets (NPA). Although the NPA was in a comfortable zone, it was always a worry for investors. But now that fear has disappeared.


Given the company’s aggressive expansion, its wide network and presence across India, Muthoot's loan book has grown seven times during the period between 2009 and 2013. However, the last fiscal was a tough one for the company as RBI introduced stringent regulations in September 2013 to check the sharp rise in gold financing. One of the major restrictions was that it capped the loan-to-value (LTV) ratio at 60%. This resulted in a sharp fall in gold loan lending.

However, in January this year, the central bank raised the LTV limit to 75%, which allowed companies to grow at a decent pace. In addition, the new regulations brought gold loan financing companies at par with banks. Although banks offer a lower interest rate for gold loans, a quick turnaround time and geographical reach of the Muthoot Finance give it a competitive edge.

Despite difficult times in FY14, the company managed a return on assets (RoA) of 3.2%. Given the improvement in business climate in the current fiscal, the company may be able to generate a return on assets around the same level. At current market price of Rs 190, the stock is trading at a price-tobook value of 1.5. Given the concern on the declining AUM, the company's stock has underperformed its peers.