Muthoot Finance reported a decline in loan book and earnings on the back of a run-down legacy portfolio, though lower pace of q-o-q loan book contraction likely indicates the management?s concerted efforts to push new businesses. We believe persistent efforts on new businesses, recent uptick in gold prices and strong expense management will support its earnings. We tweak estimates, retain the ?buy? rating with a target price of R250.
Muthoot Finance reported PAT of R180 crore, down 7% y-o-y and in line with our estimate of R179 crore. NII was stable y-o-y despite 17% y-o-y (2% q-o-q) decline in loan book to R21,400 crore ? expansion in NIM by 160 bps due to lower borrowing cost supported NII.
On the back of cost-rationalisation efforts of the management, operating expenses were up 8% y-o-y and down 7% q-o-q to R275 crore. Asset quality performance was stable with gross NPLs at 1.9%.
We expect Muthoot?s loan growth to pick up in the next 1-2 quarters and forecast moderate (7% y-o-y) loan growth in FY2015E followed by 17-18% y-o-y growth over the next two years.
While slowdown in loan book, coupled with recent capital issuance will reduce EPS in FY2015E (down 4% y-o-y), higher loan growth and strong NIM will drive 20% earnings growth in FY2016-17E. We expect the company to deliver 17-18% RoE in the medium term. Our growth forecasts factor stable gold prices, but are sensitive to gold price movements.
Kotak Institutional Equities
