Muthoot Finance's stock dropped more than 7% in early trading on Friday after the company's September quarter results fell short of analysts' expectations. On the BSE, Muthoot Finance shares tumbled as high as 7.31% to 1,217.05. During the second quarter of FY24, the company's net interest income (NII) climbed 18.2% year on year to 1,858.4 crore from 1,572 crore.

Finance costs increased by more than 28% at the Kerala-based company, bringing overall spending up by nearly 30% to Rs. 1,743 crore. The NBFC said that its loan assets increased by 21% year on year to 69,002 crore in H1FY24 from 57,230 crore in H1FY23. Muthoot Finance's Q2FY24 results fell 6% short of expectations due to an NII shortfall.

Nuvama Institutional Equities reported that AUM increased 3% QoQ and 21% YoY, including Muthoot's first-ever ARC sale of $7 billion, compared to 7% QoQ and its projection of 5%.  "The spread fell from 9.67% to 9.19% year on year." NPLs increased by 20% year on year. "As a customer-friendly policy, Muthoot sold NPLs worth $7 billion to an ARC on a par to avoid auctioning," Nuvama noted.

The brokerage restated its 'Reduce' rating on the stock and maintained its target price of 1,200 per share, believing Muthoot Finance is under pressure to decrease yields and acknowledge more non-performing loans (NPLs) in order to be client friendly in the face of increased competition.

It expects competition to heat up as banks reduce their growth in unsecured loans in favour of higher-yielding secured loans. Kotak Institutional Equities reduced its forecast by 1-6% to account for lower net interest margin (NIM) and somewhat higher credit cost.

"We are modeling higher funding costs to reflect a rise in Q2 and further increase in Q3; we also tweak yields down, while acknowledging volatility in the same." The company's AUM CAGR will remain in the mid-teens (15%), with an earnings CAGR of 18%. We continue to feel that gold loans are a specialized industry, and that peers have yet to be challenged during the gold price fall. "In the short term, the gold price rally bodes well, with lingering concerns about an increase in NPLs," Kotak Institutional Equities stated.

The brokerage company maintained its 'Add' rating on the stock and boosted the target price to $1,500 per share from $1,475 previously. Muthoot Finance shares were trading 5.07% lower on the BSE at 1,246.55 per share at 9:55 a.m.