INDIA DAILY August 20, 2020 India 19-Aug 1-day 1-mo 3-mo Sensex 38,615 0.2 3.2 25.3 Nifty 11,408 0.2 3.5 25.8 Contents Global/Regional indices Dow Jones 27,693 (0.3) 3.8 12.7 Daily Alerts Nasdaq Composite 11,146 (0.6) 3.5 18.9 FTSE 6,112 0.6 (2.4) 0.7 Results, Change in Reco Nikkei 23,078 (0.1) 1.6 12.1 Hang Seng 25,179 (0.7) 0.5 3.2 Muthoot Finance: Overheated KOSPI 2,337 (1.0) 6.3 17.5 Muthoot: Gold price rally benefits in multiple ways Value traded – India Funding constrained growth in 1Q, 18% growth over next nine months Cash (NSE+BSE) 599 634 640 10,87 Derivatives (NSE) 15,973 10,808 Muthoot has been a great outperformer, riding gold prices; downgrade to 2 REDUCE Deri. open interest 4,056 3,482 2,487 Company alerts Forex/money market Tata Power: Cleaner, leaner, greener Change, basis points Aggressive plans driven by higher contribution from renewable segment 19-Aug 1-day 1-mo 3-mo Rs/US$ 74.8 6 (10) (82) Extant investment thesis is based on de-leveraging of balance sheet, 10yr govt bond, % 6.3 - 15 (8) resolution of Mundra Net investment (US$ mn) 18-Aug MTD CYTD FIIs 141 5,374 4,086 MFs (76) (766) 3,336 Top movers Change, % Best performers 19-Aug 1-day 1-mo 3-mo BHFC IN Equity 490 (1.9) 28.1 73.8 EDEL IN Equity 73 0.1 7.8 71.3 TPWR IN Equity 57 1.9 15.6 70.5 BAF IN Equity 3,410 (0.3) (0.9) 66.9 MMFS IN Equity 138 1.3 (1.5) 65.5 Worst performers YES IN Equity 16 5.0 (18.8) (41.8) BHARTI IN Equity 536 1.8 (6.9) (9.8) DMART IN Equity 2,267 0.3 12.3 (7.6) BHIN IN Equity 201 0.4 (0.9) 0.2 NEST IN Equity 16,346 (1.3) (5.2) 0.3 [email protected] Contact: +91 22 6218 6427 For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES. REFER TO THE END OF THIS MATERIAL. REDUCE Muthoot Finance (MUTH) Diversified Financials AUGUST 19, 2020 RESULT, CHANGE IN RECO. Sector view: Attractive Overheated. Muthoot Finance reported marginal (1% qoq) loan book decline despite CMP (`): 1,256 sharp rally in gold prices, likely due to funding challenges. Even as we expect growth to Fair Value (`): 1,100 catch up over the next nine months, we find Muthoot’s valuations overheated post the BSE-30: 38,615 sharp stock rerating, following the rally in gold prices. Downgrade the stock to REDUCE from ADD with FV of Rs1,100. Improving funding and stabilizing Covid cases prompt us to look at other inexpensive NBFCs even as further rally in gold poses risk to our call. Muthoot Finance Stock data Forecasts/valuations 2020 2021E 2022E 52-week range (Rs) (high,low) 1,406-477 EPS (Rs) 75.0 76.8 87.1 Mcap (bn) (Rs/US$) 504/6.8 EPS growth (%) 52.3 2.4 13.5 ADTV-3M (mn) (Rs/US$) 4,098/55 P/E (X) 16.7 16.4 14.4 QUICK NUMBERS Shareholding pattern (%) P/B (X) 4.4 3.6 3.0 Promoters 73.4 BVPS (Rs) 288.5 347.4 414.1 PAT up 59% yoy; FIIs 14.6 RoE (%) 28.1 24.1 22.9 core PBT up 34% MFs/BFIs 6.1/0.6 Div. yield (%) 1.2 1.2 1.4 Price performance (%) 1M 3M 12M NII (Rs bn) 58 63 72 yoy Absolute 4 61 99 PPOP (Rs bn) 41 44 50 Rel. to BSE-30 0 26 93 Net profits (Rs bn) 30 31 35 Standalone AUM up 15% yoy/down 1% Muthoot: Gold price rally benefits in multiple ways qoq Muthoot has been a clear beneficiary of the sharp rally in gold prices that (1) potentially drives Gold tonnage higher loan growth, (2) provides comfort on underlying asset quality, in an environment of pledged with heightened risk for rest of the NBFC sector, and (3) boosts yields as a comfortable LTV enables it Muthoot Finance to recover penal and other charges as well. down 6% yoy/qoq Funding constrained growth in 1Q, 18% growth over next nine months We believe that the recent sharp rally in gold prices (34% since April) will provide further legs to growth over the next couple of months. Challenges on the funding side likely constrained the company in the first two months of 1QFY21, driving 1% qoq decline in the loan book. We continue to model 18% loan growth for the year with a catch-up over the next nine months. Funding access remains a crucial growth enabler (despite high gold prices); as the NBFC funding environment eases, we expect Muthoot to benefit as well. Muthoot has been a great outperformer, riding gold prices; downgrade to REDUCE We are downgrading Muthoot Finance to REDUCE, after 61%/99% rally in past 6/12 months. The sharp rally in gold prices, likely reflecting safe haven nature of the commodity, broadly corresponded with the rise in pandemic and has driven Muthoot’s stock. Early signs of rise in Nischint Chawathe Covid cases stabilizing coupled with rerating of Muthoot Finance prompt the downgrade. Muthoot’s business tends to be highly cyclical with linkages to the gold cycle and it would be M B Mahesh, CFA inaccurate to juxtapose current strong return ratios to arrive at long-term valuation multiples. Notably, Muthoot reported average RoA of 2.6-6.8% during the recent cycle, i.e. 2014-20 (peak Dipanjan Ghosh of 6.8% in FY2020) and RoE of 14-28% (peak of 28% in FY2020); the stock currently trades at 3X book FY2022E. At our RGM-based FV of Rs1,100 (from Rs1,025), the stock will trade at Abhijeet Sakhare 2.5X book June 2022E. In the current environment, we prefer inexpensively valued vehicle finance NBFCs (Cholamandalam, Shriram Transport Finance and SCUF) over Muthoot Finance. Ashlesh Sonje We are raising our estimates by 2-11%. We expect Muthoot Finance to deliver 16% loan book CAGR during FY2021-23E, driving 15% EPS CAGR during the period. Near-term RoE will likely remain high at 22-24%. It remains challenging to take a call on gold prices; continuous rise in gold prices will likely drive further rerating of Muthoot and poses risk to our stock call. [email protected] Contact: +91 22 6218 6427 For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL. Muthoot Finance Diversified Financials Exhibit 1: Muthoot Finance-quarterly summary March fiscal year-ends, 1QFY20-1QFY21 (Rs mn) Ind-AS Ind-AS Ind-AS Ind-AT (% chg.) Ind-AS Ind-AS Ind-AS 1QFY21 1QFY21E 1QFY20 4QFY20 1QFY21E 1QFY20 4QFY20 2021E 2020 (% chg.) 2022E Income statement Operational income 23,851 24,149 18,568 24,004 (1.2) 28.5 (0.6) 98,661 87,041 13.4 111,745 Interest income 23,161 23,874 18,274 23,506 (3.0) 26.7 (1.5) 97,369 85,644 13.7 110,131 Net gain on fair value change 581 100 96 312 480.9 502.0 86.0 300 590 (49.1) 300 Sale of services 18 50 54 41 (63.6) (66.3) (55.2) 632 785 (19.5) 754 Service charges 92 125 143 135 (26.7) (36.1) (32.2) 350 593 (41.0) 550 Other operational income — — — 9 10 (571) NM 10 Interest expense 8,715 7,571 6,416 7,700 15.1 35.8 13.2 34,419 27,753 24.0 38,354 NII 14,446 16,303 11,858 15,806 (11.4) 21.8 (8.6) 62,950 57,891 8.7 71,777 Net operational income 15,136 16,578 12,152 16,303 (8.7) 24.6 (7.2) 64,242 59,288 8.4 73,391 Other income 3 20 19 23 (86.1) (85.1) (87.6) 35 109 (68.0) 50 Total income 15,139 16,598 12,171 16,326 (8.8) 24.4 (7.3) 64,277 59,397 8.2 73,441 Operating expenses 3,738 5,300 3,972 5,304 (29.5) (5.9) (29.5) 20,193 17,996 12.2 23,643 Employee expense 2,362 3,153 2,295 3,088 (25.1) 2.9 (23.5) 11,535 10,290 12.1 13,968 Depreciation expense 99 100 96 122 (0.7) 3.5 (18.9) 456 431 5.8 461 Other operating expenses 1,277 2,047 1,581 2,094 (37.6) (19.2) (39.0) 8,203 7,276 12.7 9,214 PPOP 11,401 11,298 8,199 11,021 0.9 39.1 3.4 44,084 41,401 6.5 49,798 Provisions 146 106 33 48 37.5 342.4 205.2 2,698 985 173.9 2,833 PBT 11,255 11,191 8,166 10,974 0.6 37.8 2.6 41,385 40,416 2.4 46,966 Tax 2,847 2,865 2,866 2,822 (0.6) (0.7) 0.9 10,595 10,351 2.4 12,023 PAT 8,408 8,326 5,300 8,151 1.0 58.6 3.1 30,791 30,065 2.4 34,942 Core PBT 10,802 11,148 8,049 10,659 (3.1) 34.2 1.3 43,147 40,005 7.9 48,740 Tax rate (%) 25 26 35 26 -30 bps -980 bps -42 bps 26 26 -1 bps 26 Key highlights (Rs mn) AUM 412,957 432,750 358,159 416,106 (4.6) 15.3 (0.8) 490,706 416,106 17.9 563,272 Borrowings 388,693 281,289 372,264 38.2 4.4 422,630 372,264 13.5 454,022 Net worth 123,161 97,432 115,718 26.4 6.4 139,304 115,718 20.4 166,071 Key calculated ratios (%) Yield on loans on balance sheet 22.3 20.9 23.5 148 bps -113 bps 21.5 22.6 -111 bps 20.9 Cost of borrowings 9.2 9.3 8.8 -16 bps 34 bps 8.7 8.7 1 bps 8.8 NIM 13.9 15.4 13.5 15.8 -143 bps 40 bps -185 bps 13.9 15.3 -138 bps 13.6 Cost-to-income 24.7 31.9 32.6 32.5 -724 bps -794 bps -780 bps 31.4 30.3 112 bps 32.2 Cost-to-average AUM 3.6 5.0 4.5 5.3 -139 bps -93 bps -169 bps 4.5 4.7 -29 bps 4.5 Credt cost (% of AUM) 0.1 0.1 0.0 0.0 4 bps 10 bps 9 bps 0.6 0.3 34 bps 0.5 Asset quality Gross stage-3 (Rs mn) 10,553 11,474 8,992 (8.0) 17.4 14,230 8,992 58.3 15,208 Gross stage-3 (%) 2.6 3.2 2.2 -65 bps 39 bps 2.9 2.2 74 bps 2.7 Capital adequacy details (%) CAR 26.3 24.7 25.5 158 bps 83 bps Tier-I 25.2 24.3 24.3 87 bps 90 bps Operational highlights Branches (#) 4,573 4,502 4,567 1.6 0.1 4,557 4,567 (0.2) 4,607 Gold (weight in tons) 165 176 176 (6.3) (6.3) Employees (#) 25,430 24,644 25,554 3.2 (0.5) 26,773 25,554 4.8 28,691 Loan per gram (Rs) 2,503 2,035 2,364 23.0 5.9 Source: Company, Bloomberg, Kotak Institutional Equities estimates Strong growth in earnings in 1QFY21 Muthoot reported strong growth in PAT (standalone) at 59% yoy in 1QFY21 led by robust growth in NII, strong cost control and lower tax rate.