Muthoot Finance: Future tense

Shares of Muthoot Finance, one of India’s leading gold financing companies, declined over 5% on the NSE on Thursday, a day after the company declared its financial results for the quarter ended June 2020 (Q1FY21).
The company posted a 53.46% rise in its consolidated net profit at Rs 853.51 crore against Rs 556.19 crore in the year-ago period.

Sales rose 25.96% to Rs 2,604.48 crore in the quarter ended June 2020 as against Rs 2,067.67 crore in the corresponding quarter of the previous year.
The company’s consolidated asset under management or AUM grew 16% YoY and declined 1% QoQ, which is lower than expected. This is a one-off given the muted disbursements in Apr-May’20. PAT increased, largely supported by controlled opex. Demand for gold loans picked up in Jul-Aug’20, and is likely to sustain given the tough economic environment.

Over the past year, the company has increased liquidity on the balance sheet from 3% of loans to 20% of loans, which is comforting. However, this is likely to be a drag on margins going ahead. While Muthoot’s subsidiaries have witnessed improving collection efficiency.
The near-term risk for Muthoot is a sudden decline in the gold price and increased competition from banks.
The RBI has recently increased LTV on gold loan to 90% for banks.
Given the recent rally, Muthoot Finance now trades a higher range of valuation.

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