Muthoot Finance AUM growth remains strong as gold loan yields compress

Investment View and Valuation

Motilal Oswal Financial Services retained its Neutral rating on Muthoot Finance in its August 2, 2026 results update and set a target price of Rs 2,850, based on approximately 2x March 2028 estimated price-to-book value. The target is below the current market price of Rs 3,120.

The broker is cautious because competitive intensity in gold loans has increased materially. Muthoot Finance has taken calibrated pricing actions to defend AUM growth, but Motilal Oswal sees downside risk to yields, spreads and margins as large, well-capitalised NBFCs scale their gold-loan franchises. The company may face a trade-off between retaining market share and protecting profitability.

1QFY27 Financial Performance

Muthoot Finance reported a weak start to FY27 despite strong balance-sheet expansion. Profit after tax increased 25 per cent year-on-year but declined 17 per cent quarter-on-quarter to approximately Rs 2,550 crore, around 20 per cent below Motilal Oswal's estimate. Net total income rose 24 per cent year-on-year to approximately Rs 4,460 crore, a 19 per cent miss, while pre-provision operating profit grew 25 per cent to approximately Rs 3,470 crore, around 24 per cent below estimates.

Margin and Funding-Cost Pressure

The principal concern was a roughly 3 percentage point sequential decline in calculated NIM to approximately 10.6 per cent from 13.7 per cent. Spreads fell to 9.4 per cent, while gold-loan yield declined to 18.1 per cent. The cost of borrowings increased approximately 15 basis points sequentially to 8.75 per cent.

Yield pressure reflected product-mix changes, a higher share of lower-yield loans, lower pricing on selected products and lower rates on loans rolled over before the April 2026 RBI gold-lending regulations because of the rebate structure. Management also said unusually strong recoveries, renewals and interest collections in 3QFY26 and 4QFY26 made the current quarter's yield appear lower sequentially.

Management expects yields to stabilise at approximately 18.0-18.5 per cent, but does not expect a meaningful near-term reduction in funding costs.

Strong Gold-Loan Operating Momentum

Operating momentum remained healthy. Standalone gold-loan AUM grew approximately 44 per cent year-on-year and 6 per cent quarter-on-quarter to about Rs 1,63,000 crore, while consolidated AUM rose approximately 43 per cent year-on-year and 5 per cent quarter-on-quarter to about Rs 1,92,000 crore.

The group added 86 branches during the quarter, taking its network to 7,654 branches. Management plans to add another 500-600 branches in FY27 and reiterated AUM-growth guidance of approximately 15 per cent for FY27, subject to review after 2QFY27.

Asset Quality and Belstar Performance

Asset quality was broadly stable. Gross stage 3 declined approximately 5 basis points sequentially to about 2.3 per cent, although gross stage 2 increased approximately 45 basis points to 1.09 per cent and 30-plus-days-past-due rose approximately 35 basis points to about 3.4 per cent. Motilal Oswal estimates credit costs of approximately 25-30 basis points for FY27E and FY28E.

At microfinance subsidiary Belstar, AUM grew 2 per cent year-on-year but declined approximately 5 per cent sequentially to about Rs 7,800 crore. Gross stage 3 improved to approximately 2.85 per cent from 5.55 per cent in the prior quarter. Belstar remains focused on calibrated, lower-risk growth and portfolio diversification through gold-loan branches.

Earnings Outlook and Key Monitorables

Motilal Oswal cut its FY27E and FY28E earnings estimates by approximately 17 per cent and 7 per cent, respectively, to reflect a lower steady-state NIM. The broker estimates NIM of approximately 10.3 per cent in both FY27E and FY28E, standalone gold-loan growth of 22 per cent in FY27 and PAT growth of 4-5 per cent in FY27.

The broker expects FY27 return on assets and return on equity to remain below recent highs and views FY26 as likely the cyclical profitability peak.

Key monitorables include the competitive response to Muthoot Finance's pricing, stabilisation of yields and margins, borrowing-cost trends, and the ability of branch expansion and customer acquisition to sustain profitable growth.