Muthoot Finance gold loan growth and NIM beat offset by Stage 2 stress

Investment View and Target Price

Motilal Oswal Financial Services' November 1, 2026 results update on Muthoot Finance retains a Neutral rating and revises the target price to Rs 2,550, based on 1.5x September 2028E price-to-book value. The broker characterises 2QFY27 as a mixed quarter: gold-loan growth and margin-led earnings were strong, but asset quality deteriorated sharply as customers adjusted to revised interest-servicing requirements.

2QFY27 Financial Performance

Annualised credit costs rose to about 114 basis points, compared with 36 basis points a year earlier and 12 basis points in 1QFY27.

Robust Gold-Loan and Branch Growth

Business momentum remained strong. Standalone gold-loan AUM rose about 43% YoY and 10% QoQ to approximately Rs 1.79 lakh crore, while consolidated AUM increased 42% YoY and 9% QoQ to about Rs 2.09 lakh crore. Consolidated gold-loan AUM grew 46% YoY to approximately Rs 1.93 lakh crore.

Margin Improvement and Funding Costs

Calculated NIM expanded about 150 basis points QoQ to 12.2%. Loan yields also rose about 150 basis points QoQ to 19.6%, while the cost of borrowing declined about 15 basis points QoQ to 8.6%.

Management attributed the improvement in yields to loans originated under lower-rate schemes in 1QFY27 migrating into higher-yielding schemes in 2QFY27. It expects yields to normalise near 18.5% and retained its NIM guidance of 10.5-11%. Borrowing costs are expected to rise gradually, although management may raise lending rates, aided by short loan tenure and rapid repricing.

Asset-Quality Deterioration

Asset quality was the key concern during the quarter. Gross Stage 3 increased about 160 basis points QoQ to 3.9%, Stage 2 rose about 11 percentage points QoQ to 12.5%, and 30-plus days past due increased about 13 percentage points QoQ to 16.4%.

Management attributed the stress mainly to customers transitioning from bullet repayment to monthly or periodic interest servicing under RBI regulations effective April 1, 2026, rather than to underlying borrower stress. Stage 2 and Stage 3 gold-loan loan-to-value ratios were about 53% and 72%, respectively, compared with about 65% for the overall portfolio.

Management cited an approximately 8.8% loss given default, collateral protection and customer engagement as mitigants. However, Motilal Oswal views near-term asset-quality trends as uncertain and expects higher collection efforts.

Growth Outlook and Estimates

Management upgraded FY27 gold-loan AUM growth guidance to 25% from 15% and plans to add about 500-600 exclusive branches during FY27.

Motilal Oswal raised its FY27E and FY28E EPS estimates by about 15% and 8%, respectively, reflecting stronger gold-loan growth and NIM expansion. The broker forecasts standalone AUM and PAT CAGRs of about 23% and 17%, respectively, over FY26-28E.

Valuation, Risks and Corporate Restructuring

At the report CMP, Muthoot Finance traded at 1.6x FY28E price-to-book value and 7x FY28E P/E. The risks to the thesis include:

• Structural yield and NIM compression as gold financiers shift towards EMI or monthly-interest products.
• The regulatory trade-off between growth and yields.
• Lower gold prices.
• Elevated asset-quality stress.
• Intensifying competition from highly rated NBFCs, which could affect market share.

The proposed merger of wholly owned Muthoot Money into Muthoot Finance from April 1, 2027, subject to approvals, is expected by management to simplify the group structure and improve operational and funding efficiency.