Geojit Financial Services has reiterated its "Accumulate" rating on Muthoot Finance, India’s largest gold loan-focused NBFC. The recommendation comes as the company continues to outperform in the gold loan sector, driven by robust loan growth, rising gold prices, and a shift away from unsecured lending. The consolidated loan book expanded by 34% YoY, with the gold loan portfolio alone touching Rs. 92,964 crore. Despite a cautious approach to auctions, net interest income (NII) surged by 43% YoY in Q3FY25. Given the strong fundamentals, Geojit has set a 12-month target price of Rs. 2,512, indicating an 11% upside from the current market price (CMP) of Rs. 2,269.

Gold Loan Business Propels Strong Growth

Muthoot Finance’s consolidated loan book expanded by 34% YoY, reaching Rs. 1,11,308 crore in Q2FY25.
The gold loan portfolio surged to Rs. 92,964 crore, driven by higher demand during the festive season and a slowdown in unsecured lending.
The company's interest income from gold loans stood at Rs. 4,369 crore, translating to a current yield of 18.62%.

Asset Quality Remains Stable Amid Controlled Auctions

Gross Loan Asset Stage 3 ratio improved slightly to 4.2% in Q3FY25, compared to 4.3% in Q2FY25.
Gold auctions during the quarter stood at Rs. 600 million, significantly lower than Rs. 2,500 million in the previous quarter.
With rising gold prices, asset quality risks remain under control, ensuring stable provisioning and credit costs.

Expansion and Digital Transformation Strengthen Customer Base

Muthoot Finance continues to expand its branch network and enhance digital services, improving customer engagement.
The company has partnered with PhonePe and Google Pay for lead generation, supporting loan origination in various categories.
Muthoot Money, a subsidiary previously focused on vehicle finance, is now pivoting towards gold loans, following the unprofitable performance of the vehicle finance business.

Financial Performance: Strong Growth in Profitability

Net Interest Income (NII) surged by 43% YoY, reaching Rs. 2,721 crore in Q3FY25.
Pre-provision profit grew by 47.7% YoY to Rs. 2,059 crore.
Adjusted PAT rose by 32.7% YoY to Rs. 1,363 crore, supported by higher loan growth and interest income expansion.
EPS for Q3FY25 stood at Rs. 34.0, reflecting a 32.7% increase YoY.

Stock Performance: Outpacing Broader Market

Muthoot Finance has delivered an impressive 68.4% return over the past year, significantly outperforming the Sensex’s 4.4% gain.
Over the last six months, the stock has gained 18.6%, while the Sensex has declined by 5.9%.
The stock’s Beta of 0.89 indicates lower volatility compared to the broader market.

Valuation & Target Price

Geojit has valued Muthoot Finance at 2.4x FY26E BVPS and arrived at a target price of Rs. 2,512.
The valuation is based on a Sum-of-the-Parts (SOTP) approach, factoring in:
Gold loan business valued at 2.5x FY27E book value.
Subsidiaries contributing an additional Rs. 57 per share.
A 20% holding discount on subsidiary valuation.
At the current CMP of Rs. 2,269, the target implies an 11% upside.

Key Risks and Considerations

Regulatory Changes: While Muthoot Finance remains compliant with RBI’s gold loan lending regulations, any new regulatory actions could impact operations.
Gold Price Volatility: A decline in gold prices could impact loan-to-value ratios and asset quality.
Competition from Banks and Fintechs: The entry of banks and digital lenders into the gold loan segment could increase competition.

Investment Outlook

Geojit remains bullish on Muthoot Finance’s growth trajectory, driven by gold loan demand, stable asset quality, and improving digital adoption. With the company maintaining strong profitability, expanding its branch network and digital partnerships, and capitalizing on rising gold prices, the outlook remains positive. Investors with a 12-month horizon can "Accumulate" the stock, targeting Rs. 2,512.