Muthoot Finance step back from IDBI AMC acquisition

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Leading gold financier, Muthoot Finance Ltd., dropped its decision to acquire IDBI Asset Management Co. Ltd. after Reserve Bank of India refused to approve the transaction. RBI said that the mutual fund business does not go in agreement with the primary business of NBFCs.

On Tuesday evening, the lender announced that the company would no longer seek the acquisition of IDBI Asset Management Company. After that Kerala based Non-bank finance company (NBFC) shares fell 1.8%. Analysts believe that the acquisition would have strengthened the lender’s prospects of earnings in the future. As far as valuations are concerned this is a minor setback. Alpesh Mehta, an analyst at Motilal Oswal Financial Services Ltd, said that it was not a big set back for Muthoot Finance because the transaction would have been small. As of March 2020, assets under management (AUM) of IDBI AMC was Rs. 3,396 crores, while Muthoot Finance had Rs. 41,600 crores. Acquisition of the AMC would have increased the valuation of the lender.

Investors are content with the fact that even with all the impact of the pandemic, the lender had come up with high quarterly earnings. Even during the first quarter, the majority of which was under lockdown, Muthoot Finance’s AUM growth did not shrink. With the recovery of gold loan disbursements, the lender’s AUM increased by 32%.

Analysts at Moody Investors Service pointed that the lender’s disbursements and collections in the September quarter exceeded their averages earnings for the past five years. Moody’s reported that the company does not expect this growth during these times while the gold loans are susceptible to a quick decrease in the gold price. Further, Muthoot’s high profitability will help to maintain its capitalization and funding at this time. The lender’s capital adequacy ratios are also strong with tier-1 capital at 24.7% as of the last month of September.

Investors are speculating that the NBFC can sustain robust growth in the disbursements of upcoming quarters. Given that entry to finance is still prevented for the progress for small businesses, the demand for gold loans may not subside. The gold financier’s shares are much better than others and also left the Nifty Financial Services Index far behind in gains in this current year. With the stellar 49% gains so far, the estimated book value of Muthoot Finance trades with a multiple of 2.6 times for FY22.

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