Higher Funding Costs and Intensifying Competition Threaten Muthoot Finance’s Profitability

In the wake of recent trading activity, shares of Muthoot Finance have experienced a significant decline, dropping nearly 8% over two consecutive trading sessions since August 1. This downturn follows the company’s reporting of a reduction in net interest margin (NIM) and loan yields for the June quarter. Analysts predict that yields will remain under pressure throughout the year due to elevated borrowing costs and heightened competition from both banks and peer finance companies. As a result, the potential for earnings growth in FY27 is anticipated to rely more heavily on loan book expansion rather than margin enhancement, a shift from the one-off benefits observed in FY26.

The stock has depreciated approximately 19% since May 14, coinciding with the release of the March quarter results. Given the current profitability pressures, it’s likely that Muthoot Finance’s stock may remain range-bound in the near term, trading at a Price-to-Book (P/B) ratio of 2.9—slightly below its three- and five-year average multiples of 3.2 and 3, respectively. Investors should be vigilant as the financial landscape increasingly influences lending prices. Specifically, management forecasts a stabilization of gold loan yields at approximately 18-18.5%, which still represents a decline from the elevated levels of 19.6%-20.7% observed in FY26. This reduction continues to impact margins, with NIM declining to 10.4% in the June quarter, down from 13.4% in the prior quarter and 12.2% year-over-year.

Furthermore, the favorable performance recorded in the previous fiscal year was largely attributed to atypical recoveries and advantages derived from restructuring assets. Current fiscal conditions suggest that falling loan yields might not receive adequate support from funding costs. With borrowing expenses anticipated to remain high and potentially increase based on Reserve Bank of India (RBI) policy, Muthoot Finance faces a challenging environment. Compounded by escalating competition among gold loan providers, there is a likelihood that the company will have to lower interest rates to attract customers, inevitably straining profitability.

Despite the pressures, management remains optimistic, citing their established customer base and brand reputation as key factors in maintaining market share and fostering loan growth. However, analysts predict a moderation in earnings growth for Muthoot Finance over the forthcoming years, indicating that essential financial metrics are expected to expand at a slower rate compared to historical performance. Investors are advised to monitor these developments closely as they assess the viability of their investments in the current marketplace.

Source: The Economic Times

(Expert Note: This report was prepared by the Wealthova team.)