The Muthoot Finance share price has been in the limelight after the RBI‘s final gold loan norms relaxed some of the tighter norms proposed in the draft. The stock ended the session with nearly 4% gains. The stock is Jefferies preferred pick in this space. The international brokerage house has a price target of Rs 2,660 per share. This implies an upside of 4% despite the 44% run-up in the last 1 year.
Jefferies on Muthoot Finance: Valuation perspective
Jefferies price target is based on “2.6x P/BV (June FY27) for the standalone business and 0.8x P/B June 2027 for the MFI subsidiary.” They added that the target also assumes 1.1x P/B by June 2027 for the housing subsidiary and 10x PE by June 2027 for the insurance broking subsidiary.”
Jefferies on Muthoot Finance: Relaxation in loan to value norms
The final regulation for gold loans relaxes some of the tighter norms proposed in the earlier draft regulation and removes “key overhang related to possible impact on loan growth for gold financiers due to tighter LTV norms proposed in earlier draft.” The final regulation implies an effective loan-to-value of 73% at origination (assuming a 17% yield) for gold loans less than Rs 2.5 lakh ticket size. This is close to 75% LTV at origination, followed by most NBFCs at present.
Jefferies on Muthoot Finance: Skip credit assessment for smaller loans
As per the regulations, only for loans above Rs 2.5 lakh,a detailed credit assessment will be needed. Draft norms required detailed credit appraisal and due diligence for all gold loans. Jefferies explained that the requirement for mandatory end-use monitoring for gold loans proposed in the draft would have increased operational intensity and has also been dropped in the final regulations.”
All in all, Jefferies believes that these relaxations in regulations will impact growth and operational expenditure in a positive way. These are likely to ease key concerns and aid margins. That said, Jefferies does not rule out the risks involved. According to them, a fall in gold prices, lower growth, and higher NIM pressure, along with an increase in credit losses, are some of the key concerns to watch out for. The stock has surged over 14% in the last 5 trading sessions. It has delivered over 44% gains in the last 1 year.
