After a lackluster first quarter, Muthoot Finance won’t be regaining its shine anytime soon

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Investors are quite disappointed with gold lending provider Muthoot Finance Ltd’s June quarter (Q1FY23) results, sending the stock down more than 12% on Tuesday. Weakness in its core gold lending business, which contributes more than 90% to its assets under management (AUM), has troubled investors. Gold loan assets under management fell 2.4% sequentially in the June quarter. This, combined with lower yields due to teaser loans, weighed on overall earnings, resulting in lower consolidated net earnings year-over-year and sequentially.

“For a gold lending company, a sequential decline in AUM is negative. In addition, its competitor Manappuram Finance Ltd saw its gold loan assets under management increase quarter over quarter. The strong Muthoot’s stock price reaction is therefore not surprising,” said Prabhudas Lilladher analyst Akshay Ashok.

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Not glittering

Despite a miserable quarter, management reiterated its expectation of 10-15% growth in assets under management for FY23. It expects AUM on gold loans to improve in the over the next few quarters.

However, the road is unlikely to be smooth. An immediate concern is the impact of the withdrawal of the eye-catching loan programs on the company’s customer base and, therefore, the growth of gold loans. A teaser loan offers lower interest rates for a fixed term. The company launched teaser loans in the December quarter to attract high-value customers. “During the quarter, we focused on migrating these teaser loans to higher rate programs and completed this fiscal year on June 30, 2022,” the company said. may come at the cost of losing customers.

Also, the additional demand for gold loans is causing concern, especially in the absence of eye-catching loans. Motilal Oswal Financial Services Ltd noted that demand for gold loans is not buoyant.

“There is a trade-off between spreads/margins and gold loan growth. The gold lending NBFC position has now reverted to restoring spreads and margin. We believe this will result in weak gold loan growth. Finding an appropriate balance between loan growth and margin will be important,” the brokerage said in a statement.

That said, the company’s near-term outlook is bleak, and investors seem to recognize that. So far this year, the stock is down 30.5% compared to the Nifty Financial Services Index’s nearly 5% gain.

“Yields and NIMs should start to improve over the next few quarters and a lot of pain is factored in,” Ashok pointed out.

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