Muthoot Microfinance stock jumps 4% post 'buy' call from Investec, nearly 40% upside expectation

So far this year, the stock of this micro-finance institution rallied over 17 percent, beating 8 percent rise in the benchmark Nifty 50 index

Shares of Muthoot Finance jumped over 4 percent to Rs 252 apiece on June 20 after UK-based brokerage firm Investec shared a 'buy' rating on the counter amid strong growth outlook and set target price at Rs 350 apiece.

So far this year, the stock of this micro-finance institution rallied over 17 percent, beating 8 percent rise in the benchmark Nifty 50 index. Earlier, Muthoot Microfinance shares had hit 52-week high of Rs 280 apiece on December 26, 2023.

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Investec analysts believe that Muthoot Microfinance's valuations were ignoring positives as it trades at 1x FY26E price-to-book (P/B) ratio, which is not justified given its growth profile and profitability projected over the course of 3 years.

"We see re-rating catalysts for Muthoot Microfinance amid its credit rating upgrade after it crossed AUM size of Rs 10,000 crore, sustained financial performance, and government initiatives undertaken to improve rural economic growth. We forecast Muthoot Microfinance to deliver 24 percent AUM growth and 4 percent/18 percent RoAUM/RoE over the next 3 years," the brokerage firm added.

Furthermore, the company is backed by a permanent promoter, which helps with regular equity infusions during any shock events, said analysts. Promoter owns 55.47 percent stake in the company, whereas private equity investors own 22.67 percent stake, lowest among listed peers.

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However, analysts also highlighted some of the key risks to this re-rating like an event or political risk in microfinance, regulatory risk on microfinance pricing, or supply headwinds from existing private equity shareholders.

Muthoot Microfinance has diversified its AUM mix over time and share of largest state Tamil Nadu and second largest state Kerala reduced to 26 percent and 16 percent, respectively as of March 2024. It has scaled further in UP and Bihar, which now contribute to 9 percent and 11 percent AUM as of March 2024.

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