LKP Securities has initiated coverage on Muthoot Finance Limited (MFL) with a BUY recommendation, assigning a 12-month target price of Rs 2,849, representing a 22% upside from the current market price of Rs 2,338. As the undisputed market leader in India’s organized gold loan segment, Muthoot’s well-capitalized, customer-centric and digitally evolving model positions it strongly for sustained growth. With superior return ratios, consistent profitability, and a unique risk-averse lending portfolio backed by gold, the company continues to outperform the broader NBFC sector. LKP’s conviction is anchored in MFL’s strong fundamentals, expanding footprint, and conservative yet scalable business approach.

Dominating a High-Margin, Underserved Lending Segment

Muthoot Finance has transformed India's fragmented gold loan industry into an organized, profitable vertical, effectively leveraging its first-mover advantage. With over 4,900 branches and deep penetration across semi-urban and rural India, the company caters to a borrower segment often excluded by traditional banks.

Unlike many NBFCs that navigate credit risk via unsecured retail or SME lending, MFL thrives in a collateral-backed model with low credit costs and minimal default risk. Gold loans are short-tenured, small-ticket, and secured with high-quality household gold, making this a naturally de-risked portfolio.

Strong Financial Trajectory and Healthy Return Metrics

LKP’s forecast outlines a robust growth path for Muthoot Finance across key performance parameters:

The bottom line: A 26% CAGR in profits between FY24–FY27 is anticipated, driven by margin expansion, operational efficiency, and AUM growth.

Key Growth Drivers: From Gold Demand to Branch Expansion

MFL’s AUM is projected to expand at a 24% CAGR over FY24–FY27, bolstered by several structural and macroeconomic enablers:

Rising gold prices enhance the collateral value, allowing for higher disbursals per customer.

Shift away from unsecured loans is increasing reliance on secured lending like gold loans.

RBI’s recent approval for 115 new branches will extend Muthoot’s reach, aiding further disbursal expansion.

Muthoot’s customer retention rate stands at a remarkable 80%, reflecting brand trust and ease of credit access.

Subsidiaries Contribute to SOTP Valuation

The LKP report uses a Sum-of-the-Parts (SOTP) valuation model, assigning value to both the core gold loan business and MFL’s subsidiaries.

Asset Quality Concerns Are Manageable and Temporary

In Q3FY25, gross stage 3 assets increased to 4.22% from 3.62% YoY. However, Muthoot’s gold-backed model means that technical NPAs rarely lead to credit losses.

Customers often request extensions on repayment terms; Muthoot accommodates this, reinforcing loyalty.

The collateralized nature of the business ensures recovery through auction if loans aren’t repaid.

The company maintains a conservative Loan-to-Value (LTV) ratio of 63%, well below the RBI cap of 75%.

Cost Control and Digitalization Enhance Margins

Operating metrics have steadily improved:

Cost-to-Income ratio has declined from 30.9% in FY23 to 26.9% in FY27E, indicating efficient scaling.

Investments in digital platforms and online gold loans are reducing processing time and overheads.

Management expects employee and branch costs to increase moderately but remain within budgeted ratios.

Competition and Risks: Navigating the Gold Lending Landscape

While Muthoot enjoys a dominant 76.7% market share among NBFCs in FY24, key risks include:

Volatility in gold prices could affect LTV and asset valuations.

Increased competition from banks offering gold loans at lower interest rates may pressure yields.

Alternate loan products (personal loans, MSME credit) could see resurgence as credit conditions improve.

That said, Muthoot’s customer-centric model, rapid disbursal and safety assurances continue to differentiate it from rivals.

Valuation and Investment Outlook

Muthoot Finance is trading at a 2.3x FY27E P/BV, which is slightly above its 3-year average but still at a discount to broader NBFC peers. When adjusted for risk (thanks to gold-backed loans), it offers one of the best risk-adjusted return profiles in the Indian financial sector.

With gold prices expected to remain elevated and funding conditions improving, Muthoot is well-positioned to ride the next leg of NBFC expansion.

Recommendation: BUY
Target Price: Rs 2,849
Current Market Price: Rs 2,338
Upside Potential: 22%

Bottom Line for Long Term Investors

Muthoot Finance is a classic case of scalable conservatism—combining operational discipline with an underpenetrated market opportunity. As investors seek resilient plays in a shifting macroeconomic environment, MFL presents a rare blend of stability, yield, and growth.

Its commanding market share, deep customer loyalty, conservative risk management, and focused expansion make it a compelling long-term wealth creator.