MOSL: MUTHOOT FINANCE (Neutral)-Growth remains elusive-strong margins lead to PAT beat

Muthoot Finance: Growth remains elusive; strong margins lead to PAT beat

(MUTH IN, Mkt Cap USD2.6b, CMP INR424, TP INR475, 12% Upside, Neutral)

• Muthoot Finance’s (MUTH) 3QFY18 PAT grew 59% YoY to INR4.6b (6% beat), driven by strong margins and controlled opex. AUM grew 2.4% QoQ / 5% YoY to INR283b – the best sequential growth since demonetization.
• NII was up a staggering 47% YoY, driven by 470bp improvement in margins off a low base. Yields came in at 22% in the quarter v/s average of ~20% – this is despite an increase in NPLs due to stronger collections from overdue buckets. MUTH has grown its collection team as a strategy to focus more on repayments/renewals by customers rather than auctions.
• Cost of funds declined 20bp QoQ to 8.6% – we believe cost of funds has bottomed out now and should stay put or even rise, going forward. However, interestingly, MUTH reduced its borrowings by 6% QoQ – this is a reflection that, in the absence of growth, profits generated by the company are used to pay down debt. Another interesting thing to note is that the share of term loans jumped from 46% to 57% sequentially while that of CPs reduced from 15% to 7%.
• MUTH has managed to keep its quarterly opex in a tight band of INR3b-3.3b per quarter for the past seven quarters. With 7% YoY opex growth, the C/I ratio came in at 29%.