Whalesbook
Muthoot Finance achieved strong profit growth, boosted by rising gold prices and higher loan-to-value ratios. However, this financial success hides a worrying trend of customer departures and growing credit risk. The company's strong overall results mask a more complex situation beneath the surface.
Muthoot Finance announced strong Q4 FY26 results, with net profit surging 135.3% year-on-year to ₹3,397 crore. Total income rose 65.1% to ₹9,291.36 crore. Gold loan Assets Under Management (AUM) grew 50% year-on-year to ₹1.54 lakh crore, and the net interest margin widened to 13.38%. These results significantly surpassed analyst expectations, which predicted profit between ₹1,400-1,550 crore.
However, the company's active customer base contracted by 2% quarter-on-quarter, a trend now persisting for two consecutive periods. This indicates a loss of ground, particularly among lower-ticket borrowers. Concurrently, gold tonnage, a critical metric for loan collateral, fell 4% sequentially to 196 tonnes. Investors reacted negatively, sending shares down as much as 5% on the results announcement day.
Muthoot Finance's performance stands in contrast to its peer, Manappuram Finance. Manappuram reported a turnaround in Q4 FY26 with a profit of ₹405 crore after a loss the previous year. Its AUM increased by 48.3% year-on-year to ₹63,798 crore. Although Manappuram's profit was affected by its microfinance segment, its main gold loan business showed strength. Still, for the full FY26, Manappuram's consolidated profit fell 17.5% year-on-year.
The overall gold loan market in India is expected to reach ₹15 lakh crore by March 2027, growing at a CAGR of about 25% from FY20 to FY24. Non-banking financial companies (NBFCs) are a major part of this retail lending growth, fueled by rising gold prices that increase collateral values and borrowing power.
New regulations effective April 1, 2026, introduce a tiered Loan-to-Value (LTV) structure. This caps LTV at 85% for loans up to ₹2.5 lakh, 80% for loans between ₹2.5-₹5 lakh, and 75% for loans over ₹5 lakh.
Macroeconomic factors, including how interest rate changes from the RBI affect NBFCs, paint a mixed picture. While lower repo rates could reduce funding costs, this benefit is passed on slowly and unevenly to NBFC borrowing and lending rates. Larger, well-rated companies often benefit more. This suggests potential margin pressure for companies like Muthoot Finance, especially since management has indicated borrowing costs are rising.
Investors have shown sensitivity to regulatory shifts before. In May 2025, Muthoot Finance's stock fell sharply despite strong results, driven by concerns over draft LTV guidelines. This indicates a historical reaction to potential growth constraints.
Several risks lie beneath the strong profit numbers. The ongoing drop in active customers, particularly those taking out smaller loans, may indicate a loss of market share or a change in customer behavior that could reduce future loan volumes. This is worsened by a significant 136.7% rise in impairments, totaling ₹240 crore, and a rise in Stage 3 loan assets to 2.35% from 1.58% last quarter. These figures point to increasing credit problems in the loan portfolio.
Additionally, operating expenses remain high compared to loan assets. Management has also warned of rising borrowing costs, which could reduce profit margins. Muthoot Finance's large scale might make it more vulnerable to shifts in borrower types or competitive challenges compared to peers who could benefit from higher LTVs on smaller loans.
Despite these challenges, analysts remain cautiously optimistic about Muthoot Finance's long-term earnings. Jefferies kept its 'Buy' rating but reduced its price target to ₹4,350 from ₹4,750, noting customer churn as a key area to watch. Bernstein maintained an 'Outperform' rating with a target of ₹4,500. For the full fiscal year 2026, Muthoot Finance achieved a record consolidated profit after tax of ₹10,607 crore, up 98% year-on-year. Loan AUM also grew 49% year-on-year to ₹1,81,916 crore. The company's success in managing customer departures while maintaining asset quality and borrowing costs will be key to sustaining its growth.