Muthoot Finance strong gold-loan growth supports FY27 expansion despite regulatory asset-quality challenges

Investment View and Recommendation

In its November 3, 2026 results update, ICICI Securities said Muthoot Finance’s strong execution, large legacy customer base, established branch network and historically strong return profile reinforce its competitive moat in gold loans. The broker believes Muthoot Finance is relatively better placed than peers to manage operational challenges created by revised repayment norms, although competition in gold loans has increased.

ICICI Securities upgraded the stock to BUY, while reducing the target price to Rs 3,070 from Rs 3,500.

Q2FY27 Operating Performance

Muthoot Finance reported strong Q2FY27 operating performance. Consolidated AUM rose 9.3 per cent QoQ and 41.7 per cent YoY to Rs 2.09 trillion, while gold-loan AUM increased 9.6 per cent QoQ and 43.3 per cent YoY to Rs 1.79 trillion. Gold holdings increased 3.6 per cent QoQ to 204 tonnes as lower gold prices supported tonnage growth.

The average gold-loan ticket size was Rs 1,55,600, compared with Rs 1,49,600 in Q1FY27. LTV increased to 64.8 per cent from 64.0 per cent QoQ, but remained below the regulatory limit of 75 per cent, which ICICI Securities considers comfortable.

Consolidated pre-provision operating profit grew 27.4 per cent QoQ and 41.0 per cent YoY, while PAT rose 16.0 per cent QoQ and 35.9 per cent YoY to Rs 3,280 crore. Q2FY27 RoA and RoE were 6.0 per cent and 30.5 per cent respectively. Credit cost increased to Rs 593 crore, or 1.2 per cent of average AUM, from Rs 120 crore, or 0.3 per cent, in Q1FY27.

Management Guidance and Asset Quality

Management raised FY27 AUM-growth guidance to about 25 per cent, implying roughly 8 per cent growth in H2FY27. It reiterated sustainable gold-loan yield guidance of 18.0 to 18.5 per cent and NIM guidance of 10.5 to 11.0 per cent, although borrowing costs are expected to rise in coming quarters.

Management attributed the sharp increase in Stage 2 and Stage 3 loans to customers adjusting to monthly servicing requirements introduced from April 2026, rather than underlying financial stress. Stage 2 loans rose to Rs 23,500 crore and Stage 3 loans to Rs 7,270 crore in Q2FY27. Management expects delinquencies to normalise as borrower behaviour adjusts.

Branch Expansion and Subsidiary Developments

The group added 336 branches in H1FY27, including 262 standalone Muthoot Finance branches, taking the consolidated network to 7,904 branches. Management indicated plans to add 500 to 600 group branches and about 200 to 250 standalone branches in FY27.

Active customers rose 4.4 per cent YoY and 4.3 per cent QoQ to 68.6 lakh. Muthoot Money, which is transitioning from vehicle finance towards gold loans, reported AUM growth of 21 per cent QoQ to Rs 12,700 crore. Its merger into Muthoot Finance is proposed from April 1, 2027, subject to approvals, and management expects funding and operating synergies.

Forecasts and Valuation

ICICI Securities estimates gold-loan AUM CAGR of about 18 per cent over FY26 to FY28E and consolidated AUM CAGR of 17.3 per cent. It forecasts consolidated PAT growth of 3 per cent in FY27E and 15 per cent in FY28E, with consolidated RoAE of 25.1 per cent and 23.6 per cent respectively.

The target price uses 2.1 times FY28E price-to-book for the standalone business, 1 time FY28E price-to-book for home finance and 1 time FY28E price-to-book for other businesses, producing a consolidated multiple of 1.6 times FY28E price-to-book. The lower valuation multiple reflects higher competition.

Key Risks and Potential Upside

• Downside risks: Greater gold-loan competition, lower gold prices and weaker asset quality in non-gold businesses.
• Upside risks: Continued gold-loan growth and stronger non-gold business traction.