Muthoot Finance shares rise 2.5% after Q2 results; management explains rise in loan delinquencies

Shares of Muthoot Finance rose over 2% on Monday, November 2, following its strong September-quarter performance, with consolidated net profit rising 27% year-on-year to ₹2,978 crore and net interest income increasing 34.4% to ₹5,365 crore.

The stock was trading at ₹2,471.70, up ₹62.20 or 2.58%, at the time of the update.

Commenting on the quarterly performance in an interaction with CNBC-TV18, Managing Director Alexander George Muthoot said the rise in Stage 2 and Stage 3 loans following the implementation of the revised Reserve Bank of India (RBI) gold lending guidelines was a transitional phase and did not indicate any unwillingness among customers to repay their loans.

He said 98% of the company's customers continue to pay their loans regularly. The management also said the LTV ratio stood at 72% for Stage 2 loans and 53% for Stage 3 loans.

Muthoot Finance guided for 25% AUM growth in FY27, while management said it does not see any system-level stress arising from overleveraging.

What management said on loan delinquencies

Explaining the increase in Stage 2 and Stage 3 loans, the management said the revised RBI gold lending guidelines have changed the repayment structure, with customers now required to make monthly interest payments instead of following the earlier bullet repayment structure.

The company said its focus is on educating customers about the new products and repayment requirements as they adjust to the revised lending framework.

Management also disclosed that the loan-to-value (LTV) ratio stood at 72% for Stage 2 loans and 53% for Stage 3 loans. It said it does not see any system-level stress arising from overleveraging.

What brokerages say on Muthoot Finance

Brokerages have maintained a broadly positive view on Muthoot Finance following its September-quarter performance, although their target prices and assessment of asset quality concerns differ.

Bernstein has maintained an Outperform rating on the stock with a target price of ₹4,500. It noted that the company delivered a strong second-quarter performance, with AUM increasing 10% quarter-on-quarter, ahead of the 5% rise in gold prices.

The brokerage pointed out that non-performing loans (NPLs) increased sharply, resulting in a 900% quarter-on-quarter rise in provisions. However, a 148-basis-point improvement in yields helped earnings per share (EPS) grow 17% sequentially and 27% year-on-year.

Bernstein also noted that net interest margin (NIM) expanded 152 basis points sequentially to 11.93%, supported by an improvement in asset yields to 19.41%. Management expects yields to normalise towards 18.5% over the coming quarters.

CLSA has maintained an Outperform rating but cut its target price to ₹3,500. The brokerage said Muthoot Finance's second-quarter profit after tax (PAT) beat its estimates by 14%, largely supported by higher net interest income (NII).

NII grew 23% quarter-on-quarter, aided by 9% growth in AUM and a 150-basis-point increase in yields. CLSA also highlighted an acceleration in tonnage growth and customer additions.

On asset quality, CLSA noted that Stage 2 and Stage 3 loans increased sharply as customers missed payments on newly launched shorter-tenure products. However, it said management did not see underlying stress and drew a parallel with a similar increase during the Covid-19 pandemic, which subsequently normalised without higher write-offs or credit costs.

Kotak Institutional Equities has upgraded Muthoot Finance to Buy from its earlier rating, with a target price of ₹3,400.

The brokerage highlighted the company's strong operating performance, including 9% sequential loan growth, a 150-basis-point increase in yields and 3.5% quarter-on-quarter growth in tonnage.

While acknowledging the sharp increase in delinquencies, Kotak said the relatively low LTV ratios provide a margin of safety. It also cited Muthoot Finance's track record of navigating gold price volatility as a source of comfort.

Muthoot Finance Q2 results

Muthoot Finance reported a 27% year-on-year increase in consolidated net profit to ₹2,978 crore for the September quarter of FY27, compared with ₹2,345 crore in the corresponding period last year.

Net interest income increased 34.4% to ₹5,365 crore from ₹3,992 crore a year earlier, beating the CNBC-TV18 poll estimate of ₹4,525 crore.

Consolidated loan AUM grew 42% year-on-year to ₹2,09,317 crore during the first half of FY27. The company also raised its standalone gold loan growth guidance for FY27 by an additional 10%, as announced following its quarterly results.

The company's board has also approved the merger of wholly owned subsidiary Muthoot Money with Muthoot Finance, with April 1, 2027, as the appointed date, subject to regulatory and other approvals.