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IPONoteMuthootFinanceLtd

Recommendation

SUBSCRIBE

PriceBand

Rs.160175

BiddingDate
BookRunningLead
Manager

18thApr21thApr
ICICISec,KotakMahindra

Background

Muthoot Finance Ltd (MFL) is a nondeposit taking NBFC (nonbanking


finance company) incorporated in 1997. It is the largest gold financing
NBFCinIndia;engagedinthebusinessofprovidingpersonalloansand
businessloansagainstusedhouseholdjewellery.In2001,MFLreceived
theNBFClicensefromtheRBI.

Overtheyearsthecompanyhasexpandeditsportfoliobyexpandingthe
branch network all over the India. Currently it has the largest branch
networkamonggoldloanprovidersinIndiawith2,611branchesanda
Sector
NBFC
strongpresenceintheunderservedruralandsemiurbanmarkets.The
RetailApplicationDetailAtCutoffPrice
main customers of MFL are typically small businessmen, vendors,
NumberofShares
1120 traders, farmers and salaried individuals, who for reasons of
ApplicationMoney
Rs.196000 convenience,accessibilityornecessity,availofcompanyscreditfacilities
AmountPayable
Rs.196000 bypledgingtheirgoldjewelleryratherthanbytakingloansfrombanks
Discounttoretail
0% and other financial institutions. MFL hasa market share of 19.5%
Financials(RsinCrs)
FY10
8MFY11 amongst the top 10 organized players (organized players account for
~25%shareofthemarket)asofFY2010.
TotalIncome(NII+OI)
1,089
1,301

PBT
346
441
In 2010, it received a fund infusion of Rs 2.5 bn from 3 private equity
players for a 6% stake in the company. In2011, Welcome Trust picked
PAT
228
291
upanadditional1%stakefromthepromoters,takingthetotalstakeof
Upper
Valuations
LowerBand
private equity investors to 7%. The last PE transaction took place at
Band
EPS*
11.74
11.74 aroundRs.173.5pershare.
BookValue*
52.61
54.68 DuringFY06toFY10,MFLsAUMincreasedataCAGRof74%drivenby
P/Eratio*
13.63
14.91 theriseinpledgedgoldandaspurtingoldprices.ItreportedgrossAUM
P/BV*
3.04
3.20 ofRs7400crsandPATofRs230crsonatotalincomeofRs1100crsin
FY10.TheaverageyieldontheAUMsduringthesameperiodwas19.9%.
*calculatedondilutedequity
InFY10assetqualityremainedstrongwithgrossNPAofonly0.46%,the
PostIssueShareholdingPattern
capitalization level was comfortable with a capital adequacy ratio of
Promoters
80% 14.8%.
6%
Institutions
14% ObjectsoftheIssue
Public

Offerstructurefordifferentcategories
Augment its capital base to meet its future capital
QIB(IncludingMutualFund)
50.0%
requirements to provide for funding of loans to the
HNI
15.0%
customers
Retail
35.0%
Generalcorporatepurpose
371.7
Reap the benefits of listing on the stock exchanges like
PostissueEquity(Rs.incrore)
easyaccesstofundsandlowercostofaccessingfunds
824901
IssueSize(Rs.incrore)

10
FaceValue(Rs.)
Post issue the promoters holding in the bank would fall from 93% to
SilkyJainResearchAnalyst
80%.AnchorInvestorsareofferedtheissueatRs.170pershare.
Ph(022)39268178

EMail:silky.jain@nirmalbang.com

Registrar

LinkIntimeIndiaPvtLtd

IPONoteMuthootFinanceLtd

Business
MFLsprimarybusinesscomprisesofprovidingpersonalloansandbusinessloansagainst
usedhouseholdjewellery.Theseloanssizearetypicallysmallticketloanscollateralized
by gold jewellery. MFL generally lend between 60% 85% of value of the gold. These
loanshaveamaximumtermof12months.However,customersmayredeemtheloanat
anytime,andthesegoldloansaregenerallyredeemedbetween36months.Interestis
paidonlywhentheprincipalisrepaidwhichcouldbefromfewdaystofewmonths.

ThemainUSPofMFListhatitcandisburseloanwithin5minutesfromthetimethegold
istenderedtotheappraiser.Similarly,theloancanberepaidandgoldcanbecollected
within 3 minutes. MFLs current ticket size stands Rs 31,553 per loan account as of
November 2010 and the company had 97.6 tons of gold jewellery held as security for
goldloans.

InvestmentRationale

9 Stronggrowthingoldloanbusiness
India is one of the largest markets for gold and as of fiscal 2010, India
accountedforapproximately10%ofthetotalworldgoldstockwithanannual
demand of approximately 700 tones (Source: IMaCS Industry Report (2010
Update)).

Based on the assessment of the emerging dynamics and competitive


landscape,thegoldloansmarketisexpectedtogrowatbetween35%and40%
overthenextthreeyears.Moreover,asthemarketiscurrently
underpenetrated,itisexpectedthatthegoldloansmarketwillofferenough
opportunities for portfolio expansion and retain attractive margins for all
existing specialized NBFCs, banks and new entrants (Source: IMaCS Industry
Report2009).

Overall,marketshareofNBFCsengagedingoldfinancebusinesshasincreased
from 23.6% in FY09 to 32% in FY10. Even though the gold loan portfolio of
banks has grown over the years, it had been largely driven by bilateral
assignments with NBFCs to meet their direct priority sector lending targets
(benefit no longer available post new RBI regulation). Yet banks have lost
marketsharewithNBFCsgrowingat~2xtheindustrygrowth.Webelievethat
MFL being the largest player in the industry will benefit from these growth
opportunities.

IPONoteMuthootFinanceLtd
Golddemand

Intonnes

800
700
600
500
400
300
200
100
0

Source: IMaCSIndustryReport(2010Update)

Largestplayerwithstrongnetwork

Over the years MFL has grown its business robustly and expanded its market
sharefrom11%inFY2007to20%inFY2010.CurrentlyMFLenjoysthehighest
marketshareamongsttheorganizedplayers.

Marketshareoftop10organizedplayers
Company
Marketshare(%)
FY07
FY09
FY10
MuthootFinance

11%

13%

20%

IndianOverseasBank

13%

13%

14%

IndianBank

13%

13%

10%

Manappuram

4%

5%

7%

SouthIndianBank

5%

6%

6%

MuthootFincorp

4%

5%

6%

StateBankofTravancore

9%

6%

5%

AndhraBank

3%

4%

4%

5%

4%

2%

FederalBank

Source: Companydata

Geographicdiversificationandincreaseinbranchnetwork

MFLhasbeenabletomaintainitsleadershippositioninthegoldloanindustry
due to the aggressive branch expansion strategy of the management. The
numberofbrancheshasincreasedfrom707in2008to2611in8M2011.

IPONoteMuthootFinanceLtd

3,000

2611

Branchexpansion

2,500
2,000

1605

1,500
1,000

985

707

500
0
2008

2009

2010

8M2011

Source: Companydata

Moreover,MFLisimprovingitsbranchpenetrationandexploringnewregions.
AfterexpandingaggressivelyinwesternIndia,thecompanyislookingtoexpand
inotherregionslikeNorthandEast.Thisstrongexpansionstrategywillhelpthe
companytogrowmorerobustlyandmaintainleadershipposition.

BranchPenetration
3%
10%

17%

69%
Northern

Southern

Western

Eastern

Source: Companydata

9 Healthyassetquality
MFLsassetqualityhasremainedhealthywithGrossNPAsat0.46%and0.35%
as on FY10 and Nov'10 respectively. The company does not have NPAs
technicallyasgoldissoldbyendof17thmonth.MostoftheNPAsreportedare
on account of extension given to borrowers (those who have not defaulted
previouslyandenjoyastrongrelationshipwiththecompany).

0.60%
0.50%
0.40%
0.30%
0.20%
0.10%
0.00%

MovementofNPAs

2008

Source: Companydata

2009

2010

8M2011

IPONoteMuthootFinanceLtd

StableNIMsandMargins
The company has maintained a stable NIM of between 1012% over last few
years.Evenduringthetimeofrisinginterestratesthecompanyhasmanagedto
maintainahealthyNIMataround10.5%.ThisisbecauseMFLhasbeenableto
passonthehigherborrowingcoststothecustomers.
RBI has asked banks not to classify loans to nonbanking finance companies
(NBFCs) onlending against gold jewellery as priority sector. This move will
increase the cost of borrowing of NBFC from Banks from 7% to around 9.5%.
However Management is confident of maintaining its NIM above 10% by
passingonsomecosttothecustomersandimprovingefficiency.

CAREandCRISILRating

CAREaswellasCRISILhasassignedaIPOGrade4outof5,totheproposed
IPO of Muthoot Finance Ltd. CARE and CRISILs IPO Grade 4 indicates above
averagefundamentals.InadditionICRAhasassignedA1+foritscommercial
paperandforshorttermnonconvertibledebenturesofRs200crs.CRISILhas
assigned P1+ rating for short term debt instruments of Rs 1,000 cr. These
ratings are of the highest grade and suggest strong fundamentals of the
company.

KeyConcerns

9 IncreasingcompetitionfrompublicsectorbanksandotherNBFCsinthesame
lineofbusiness

OneofthemajorriskfactorforMFListherenewedinterestratesputforward
bypublicandprivatesectorbanksfortheirgoldloanswhicharemuchcheaper
than the rates provided by the private gold loan companies like MFL and
ManappuramFinance.Bankshavealreadystartedencouragingtheseportfolios
astheyareunabletolendtoprivategoldloancompaniesformeetingtheirown
priority sector requirements. Therefore, the increasing competition is likely to
affectyieldsandspreads.

9 Volatilityingoldprices

MFL provides loans with gold jewellery as collateral by the customer. A sharp
downward movement in the price of gold could result in a fall in collateral
values. In such a case customers pay default in repaying the loans which may
adverselyimpactthefinancialperformanceofthecompany.

9 Concentrationinspecificregions

MFLhasapproximately2600branchesallthroughoutthecountryoutofwhich
69% of the branches are located in Southern India. Also out of its branches,
1119branchesarelocatedinsouthernstatesofTamilNadu,Kerala,andAndhra

IPONoteMuthootFinanceLtd
Pradesh&Karnataka Withsuchahighconcentrationinaparticularregionany
uncertain or adverse economic condition developing in that particular region
canhampertheoperationsandgrowthprospectsofthecompany.

9 RegulatoryChange
Thecompanyisalsoexposedtoregulatoryandgeopoliticalrisk.Anyregulatory
changebyRBImayimpactthecompanysgrowthprospects.Alsothechangein
politicalpowerinSouthmaybringaboutachangeinpolicylikewesawinthe
MFI industry. These factors can impact the companys topline and margins
goingforward.

ValuationandPeerComparison

MuthootFinanceLtd ManappuramFinance
(8MFY11)
(9MFY11)
Totalincome(Rscrs)
Netprofit(Rscrs)
EPS(Rs)
Networth(diluted)
CurrentBVPS(diluted)
Price(UpperBand)
P/E
P/BV
ROE
Numberofbranches
Loanticketsize(Rs.Crs)
AUM(Rs.Crs)
Employeeperbranch
Noofemployees

1,301
291
11.74
2032.7
54.68
175
14.91
3.20
21.47%
2,611
31,553
13,004
6
15,664

761
181
5.79
1,920
46.09
130
22.46
2.82
12.56%
1,795
63,704
6,520
8
14,670

Source:Companydata,NirmalBangResearch

We have compared Muthoot Finance with Manappuram Finance. Muthoot Finance is


almost double the size of Manappuram based on its AUM size. At the price band of
Rs.160175, MFL is priced at 13.6x/14.9x P/E of its FY11E annualized EPS of Rs 11.74
whereas 3.04x/3.20x P/BV of its post issue book value of Rs 52.61/54.68 respectively.
Whereas its closest competitor Manappuram General Finance & Leasing is trading at
22.46xP/EofitsFY11EannualizedEPSofRs.5.79and2.82xP/BVofitsBVofRs.46.09.

Considering the larger size, strong brand image of MFL, the bright prospects of gold
financing in India, good track record of management and lower NPA levels, Muthoot
Finance seems to be offered at comparatively attractive valuations as compared to its
peers. Consequently, we recommend investors to SUBSCRIBE to the issue with a
mediumtolongtermperspective.

IPONoteMuthootFinanceLtd

IncomeStatement

Rs.Incrs.
Interestincome
Interestexpense
Netinterestincome
Otherincome
Totalincome
Operatingexpenses
Operatingprofit
ProvisionforNPAs
Profitbeforetax
Taxes
Netprofit
Adjustments
Netprofitasrestated

FY2006A
143
65
78
5
83
42
41
0
41
14
27
0
27

FY2007A
224
100
124
10
134
67
67
0
67
23
44
0
44

FY2008A
358
180
178
11
189
91
98
1
97
33
64
1
63

FY2009A FY2010A 8MFY11


606
1,078
1,289
310
474
583
296
604
706
14
12
12
311
616
719
162
268
277
149
348
442
1
2
1
148
346
441
51
118
150
98
228
291
0
1
0
98
227
291

(Source:Company&NirmalBangResearch)

BalanceSheet

Rs.Incrs.
Totalcashandbankbalances
Investments
Advances
Fixedassets
Otherassets
Totalassets
SecuredLoans
UnsecuredLoans
Otherliabilitiesandprovisions
Totalliabilities
Equitycapital
Reserve
Totalliabilitiesandequity
(Source:Company&NirmalBang Research)

FY2006A
24
12
795
51
59
941
737
69
44
850
4
86
941

FY2007A
24
24
1,389
63
108
1,609
1,312
71
67
1,450
5
154
1,609

FY2008A
58
18
1,805
109
296
2,286
1,840
75
157
2,073
5
208
2,286

FY2009A FY2010A 8M2011


194
463
461
9
8
8
2,574
5,462
9,810
129
153
199
854
355
298
3,760
6,440
10,776
3,009
4,547
8,033
157
733
1,050
233
575
562
3,399
5,856
9,645
49
301
320
312
283
811
3,760
6,440
10,776

IPONoteMuthootFinanceLtd
RatioAnalysis

EPS
Yieldonaverageloans
Costofdeposits
RONW*
NIM
GrossNPA
NetNPA

FY2008A
2.6
19%
9%
30%
8.2%
0.42%
0.47%

FY2009A
3.5
21%
10%
27%
8.2%
0.48%
0.57%

FY2010A
7.6
19%
8%
39%
9.3%
0.46%
0.56%

8MFY11
9.3
19%
9%
26%
9.2%
0.35%
0.42%

*Notannualized
(Source:Company&NirmalBangResearch)

IPONoteMuthootFinanceLtd

NOTE

Disclaimer
ThisDocumenthasbeenpreparedbyNirmalBangResearch(ADivisionofNirmalBangSecuritiesPVTLTD).Theinformation,
analysisandestimatescontainedhereinarebasedonNirmalBangResearchassessmentandhavebeenobtainedfromsources
believedtobereliable.Thisdocumentismeantfortheuseoftheintendedrecipientonly.Thisdocument,atbest,represents
Nirmal Bang Research opinion and is meant for general information only. Nirmal Bang Research, its directors, officers or
employeesshallnotinanywayberesponsibleforthecontentsstatedherein.NirmalBangResearchexpresslydisclaimsanyand
allliabilitiesthatmayarisefrominformation,errorsoromissionsinthisconnection.Thisdocumentisnottobeconsideredasan
offertosellorasolicitationtobuyanysecurities.NirmalBangResearch,itsaffiliatesandtheiremployeesmayfromtimetotime
hold positions in securities referred to herein. Nirmal Bang Research or its affiliates may from time to time solicit from or
performinvestmentbankingorotherservicesforanycompanymentionedinthisdocument