IOTW: India's Largest Gold Finance Company Muthoot Yields 6.6% Returns with Acclaim! (Bond Express)

Muthoot’s rapid increase in loan portfolio size, substantial capital, and its unique gold loan business model, showcased the company’s strong risk tolerance and solid operational stability. Their 2028 USD bond offers an attractive 6.6% net yield and is now on Bond Express!

Table 1: Bond information

Company Background

Founded in 1939, the Muthoot Finance primarily engages in gold loan services, where customers can utilize their gold jewellery, bars, or coins as collateral to obtain short-term loans. Currently, the company operates over 4,500 branches in India and is the largest gold loan company in the country

The company is listed on the Bombay Stock Exchange and the National Stock Exchange of India (Stock symbol: 533398.BSE and MUTHOOTFIN.NSE). The current market capitalisation is approximately INR 708.2 billion (about USD 8.5 billion).

Operating Performance

Driven by weddings and religious reasons, India has long been a major global consumer market for gold jewellery. With a consumption of 562 tonnes, India ranks as the second-largest gold jewellery market worldwide, just behind China. This substantial consumer market has made gold loans very popular in India's financial sector, with many households and small businesses using gold as collateral to secure loans.

Muthoot, being the largest gold loan company in the country, has consistently experienced a steady upward trend in loan portfolio size, sustaining a 20% compound annual growth rate from 2014 to 2024. As of March 2024, the company’s loan portfolio reached INR 758.3 billion with a year-on-year growth of 20%.

Driven by robust growth in its loan business, Muthoot has achieved a remarkable overall performance in FY24, with interest income and net profit attributable to shareholders both growing by over 22% and amounting to INR 145.5 billion and INR 44.7 billion respectively, while its net interest margin maintained at an ideal level of 11.2% (See Table 2).

Table 2: Muthoot’s Revenue and Profit

Credit Position

On the credit side, as of March 2024, the company has issued INR 729 billion gold loans, which is only about half the market value of the 1.4 trillion gold collateral. This indicates a loan-to-value (LTV) ratio of only 52%, implying the leverage ratio is at a healthy level. The lower LTV ratio also suggests the company has cushion to offset potential loan losses by disposing of gold collateral to maintain operational stability.

Moreover, Muthoot has a high capital adequacy ratio of 30.4%, well above the regulatory requirement of 15%, showing ample capital position. The non-performing loan ratio in FY24 decreased by 0.5 percentage point year-on-year to 3.3%, which is rather low in the personal finance sector, reflecting good overall credit quality.

Table 3: Muthoot’s Credit Metrics

Bond Investment

Both Muthoot and the bond ‘MUTHIN 7.125% 14Feb2028 Corp (USD)’ have credit ratings of BB/BB (S&P/Fitch). The bond is now available on Bond Express where investors can trade with a lower minimum investment amount.

The bond has a yield to maturity of 6.6% with around 3 years to maturity. Given the manageable potential investment risk, we believe the bond is an attractive option in the Indian high-yield segment.

In addition, it is worth mentioning that this bond contains an amortization plan whereby Muthoot will redeem 20% of the principal amount of the bond in February, May, August, November 2027 and February 2028 (the maturity date of the bond).

Corporate Risk

There were significant inflationary pressures in India during the pandemic. If local inflationary pressures rebound, India could further raise interest rates. This could hinder local consumption and investment demand, thereby introducing uncertainty to Muthoot's operational condition.

Despite being in a high-interest-rate environment, Muthoot's interest rate increases on the asset side (loan disbursements) have not kept pace with the interest rate increases on the liability side (bond issuance, borrowing from banks for financing), making it a "victim" during the rate-hiking cycle. If the group's financing costs continue to rise, it may impact the company's operational condition, weakening its credit quality.

This bond is a senior secured bond with the right to call on a portion of the receivables pledged as collateral in case of a bond default. However, most of the issuer's other bonds are also secured by the same collateral, meaning that this bond may not necessarily have a significant advantage in the event of default.

Conclusion

Muthoot’s loan portfolio size experienced rapid growth in FY24, leading to an increase of over 20% in both interest income and net profit attributable to shareholders.

Considering factors such as a conservative loan-to-value ratio of 52%, the company’s strong capitalization and unique business model of utilizing gold as collateral for loans, Muthoot demonstrated its exceptional risk resilience.

The current yield of this USD bond maturing in 2028 is approximately 6.6%, presenting an attractive investment value.