In this article, we will be discussing Muthoot Finance Why it is trading at 52-week low levels, what are its financials, and what is its overall business trend. So let’s get started.
Muthoot Finance- Problems:
- The Assets Under Management (AUM)/Loan Book of the Muthoot Finance is around Rs. 58,100 Cr. Being a Gold Non-Banking Financial Corporation (NBFC), the AUM size of the loan book size is quite impressive.
- More than 95% of the loan book is focused on Gold loans.
- The growth in the loan book is around 10% YoY which was in the double-digit mark in past times.
- Net Interest Income (NII) is the core income of the bank or the NBFC, then here for Muthoot Finance, the growth of NII is 7% which is at the lowest point in the last 5 years while the average growth of NII in the last 5 years is 17%.
- The loan book growth average of the last 5 years hovers at around 17%, but last year’s growth was just around 10%.
- The Yield or the interest earned on the loans given is a very strong level of 19.3% which is again at the lowest level against its past performance of over 20%.
- Cost of Funds is also at 8%, the lowest in the last 7 years which is a positive thing for the company.
- Spread which refers to the difference between Yield and Cost of Funds is at around 11.3%. The highest spread for the company was 13.8% which was 3 years back and has now fallen to the levels of 11.3% currently.
- Net Interest Margin (NIM) is again at 5-year low levels of 12.9%. In FY20, the NIM was at 15.2%, which has now fallen by around 3% in the last 2 years.
Positive Pointers for Muthoot Finance:
- Cost to Income Ratio of Muthoot Finance is at 25.1% where the company has recorded its lowest-ever figure showcasing its operational efficiency.
- Here if other factors like Spread, NII, NIM, etc. improve from the current situation, then this will help the company to drive profitability better.
- Profit After Tax (PAT) or the Net Profit of the company is at around Rs. 3,954 Cr. for the year ended 31st March 2022 registering 6% YoY which is again the lowest in the last 8 years.
- Return on Assets (ROA) is at 5.9% and Return on Equity (ROE) is at 24.9% which is a strong figure but is lower than the company’s past performance.
- Talking about customer mix, then the company is having customer profile of 42% who have availed loans of less than Rs. 1 Lakh, and 36% of the company’s customers fall in the bracket of loans availed between Rs. 1 Lakh to Rs. 3 Lakh, and the customer loan profile above Rs. 3 Lakh stands at 22%.
- In the context of geographical presence, the company derives 60% of its business from South Region, 17% from North India, 16% from West India, and 7% from East India. The company is having high dependencies on the South Region from where the company derives the majority of its revenue.
Why Muthoot Finance Stock is Falling?
- Rising competition from Banks and Fintech Companies affects new customer acquisitions: Rupeek Gold Loans, a Gold Loan Fintech company and Banks are giving tough competition to traditional Gold NBFCs like Muthoot Finance and Manappuram Finance.
- Muthoot Finance is having active 55 Lakh Customers, but they are not growing ideally.
- For the last 2 years, the company has not received any approval for the opening of branches: Recently on 1st July 2022, the Reserve Bank of India (RBI) granted permission of opening 150 new branches to Muthoot Finance.
- High Dependency on South Region.
- Lower dependency on Digital business.
What Should Investors Do?
The fall in the stock of Muthoot Finance is not on any fundamental backdrop but is on the grounds of several other hindrances like tougher competition from banks and fintech companies, lower customer growth, and others. Also from a valuation viewpoint, the stock looks to be reasonably valued. Hence, the investors looking for an investment opportunity, this stock should be on their investor radar, but one should follow due diligence before making any investment decision.
Disclaimer: The information here is provided for reference purposes only and should not be misconstrued as investment advice. Under no circumstances does this information represent are commendation to buy or sell stocks or MF.