Expect Muthoot Fin to drive 15% loan growth

We expect MUTH to generate loan growth of around 15% over the medium term. With an AA + rating, the cost of funds is expected to decline over the next few quarters.

In an exchange dossier, Muthoot Finance (MUTH) disclosed the details of a definitive agreement concluded by its subsidiary Belstar Microfinance (MUTH holds around 70% of the capital before the capital injection) with Augusta Investments, Arum Holdings, MAJ Invest and MUTH. This final agreement is linked to a proposal for the injection of primary capital of Rs 3,500 crore into Belstar Microfinance and secondary OFS by the promoters for a total consideration of Rs 20 crore.

After this equity injection, MUTH’s stake in Belstar Microfinance will be reduced to 57.9%, and MAJ Invest, Augusta Investments and Arum Holdings will respectively hold 10%, 4.6% and 13.8% of the capital. On a rolling basis, the transaction was carried out at a valuation of 2.4x. We did not take this equity injection into Belstar Microfinance into account in our estimates.

The transaction is subject to obtaining the regulatory approvals required by Belstar Microfinance. The indicative timeframe for completing the above transaction is approximately three months. The nature of the transaction would be 100% cash, with no exchange of shares.

MUTH once again demonstrated its resilience with its performance in the first quarter of FY22. Its gold loan portfolio and holdings were sequentially stable in the first quarter of FY22, despite weak demand for loans from gold during lockdowns led by Covid. Led by an around 6% quarter-over-quarter (QoQ) increase in average gold prices, the LTV on gold loans fell from around 390 basis points to around 71%, offering comfort to MUTH and not requiring the need for aggressive auctions. Even as normalcy is restored and business resumes, we expect demand for gold loans to rebound as clients fall back into it when their cash flow is stressed.

We expect MUTH to generate loan growth of around 15% over the medium term. With an AA + rating, the cost of funds is expected to decline over the next few quarters.

This should alleviate the pressures on yield, if any. RoA / RoE should remain robust (6.6% / 24%) over the medium term. The MFI contributes around 5% of MUTH’s consolidated assets under management. We do not see any significant impact of this transaction on MUTH. It is important to note that MUTH’s stake in its subsidiary IMF will increase from ~ 70% to ~ 58% after this transaction, but with two new investors (Augusta Investments and Arum Holdings) there could be operational improvements.

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