IPO Analysis:

Recommendation: Subscribe India is one of the largest markets for gold and as of fiscal 2010, accounts for about 10% of the total world gold stock with an annual demand of about 700 tonnes. Gold Loans have emerged as key gold based financial products, and in the year ended March 31, 2010, the organized Gold Loans market in India was estimated at between Rs 35,000 crore and Rs 40,000 crore with a Compounded Annual Growth Rate (CAGR) of about 40% during fiscal 2002 to fiscal 2010. The Gold Loans market is significantly under-penetrated and is expected to continue growing at the rate of 35-40% in the future. Muthoot, as a leading player in the industry, the branch expansion and large scaled marketing initiatives of the company are anticipated to give a strong boost to the companys value. Regarding the valuation, the stock is valued reasonably in the given price band, compared to the peers like Manappuram General Finance & Leasing (While manappuram, currently, trading at a P/E of 22.72, the industry trade at a combined PE of 19.2 times). Muthoot, at the upper band of the price band (Rs.175), is valued at 14.88 times of its FY11 annualized diluted earnings (Taking the 8MFY11 earnings as a basis, the annualized diluted EPS works out to 11.76). Meanwhile, the valuation of the stock at the lower range of the band i.e. Rs.160 works out to 13.6 times. So, taking the robust prospect of the industry and impressive fundamentals of the company, the issue can be opted with an aggressive risk appetite. As the stock is valued well below the industry, a decent listing gain, too, cannot be ruled out.

Muthoot Finance Limited

PROFILE AND BUSINESS

Muthoot Finance is the largest gold financing company in terms of loan portfolio. The company is a Systemically Important Non-deposit taking NBFC headquartered in the southern Indian state of Kerala. It provides personal and business loans secured by gold jewels, or gold Loans, primarily to individuals who possess gold jewels but could not access formal credit within a reasonable time, or to whom credit may not be available at all, to meet unanticipated or other short-term liquidity requirements. The companys Gold Loan portfolio as of November 30, 2010 comprised about 4.1 million loan accounts in India across 21 states and four union territories in India. According to the IMaCS Industry Report 2010, its branch network was the largest among gold loan NBFCs in India. It has since increased its branch network to 2611 branches as of February 28, 2011, and used its branch network to serve an average of 67953 customers per day in the month of February

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2011. As of November 31, 2010, the company employed 15664 persons in its operations. The companys customers are typically small businessmen, vendors, traders, farmers and salaried individuals, who for reasons of convenience, accessibility or necessity, avail of its credit facilities by pledging their gold jewellery with it, rather than, by taking loans from banks and other financial institutions. It provides retail loan products, primarily comprising Gold Loans. Its Gold Loans have a maximum 12 month term and its average disbursed Gold Loan amount outstanding was Rs 26,183.0 per loan account as of March 31, 2010. The company has a strong presence in underserved rural and semi urban markets. It has held 97.6 tons of gold jewels as security for gold loan as on November 2010. Besides, its outstanding gross gold loan under management was 12897 crore as on November 2010.

Concerns
On the concern-side, the company had negative net cash flows from operating and investing activities in the last three fiscal years. Apart from that, the demographic concentration of the company in the southern part is a major risk as any untoward happening in the region may impact the business of the company. Also the company relies on the quality of gold and lacks credit analysis of the individual customers. Here, any negative price variability of gold stands as a risk causing higher NPA. The Reserve Bank of India (RBI) recently increased the capital adequacy ratio of NBFCs to 15% and removed the priority sector status of gold-loan companies. The company may be selling some gold loan portfolios to offset higher cost of borrowing arising out of non-priority sector status.

FINANCIALS AND VALUATIONS

The financials looked to be quite impressive with the top line growing at 69% and 78% in the FY09 and FY10 respectively on a year on year basis. The same grew at a CAGR of 65% during 2006 to 2010 period. Meanwhile the bottom line saw a surge of 54% and 134% (YoY) for FY09 and FY10 at a compounded rate

of 70%. With the impressive growth, the former touched the 1000 crore mark to reach at Rs.1077 crore. Meanwhile, the eight months ended at November 2011 have crossed the FY10 annual numbers and have moved in an exciting manner with the net sales and PAT standing at 1289 crore and 291crore respectively. This marks a 19% (sales) and 28% (Profit) growth over the previous years. In line with the growth in the business, Muthoot Finance has been improving its margins too. The PAT margins for the FY10 and 8MFY11 have been 21% and 22.4% respectively, which look exceptional compared to the peers like Manappuram General financing and Leasing, India bulls finance etc The companys NIM, which stands at 10.4% as on November 2010, is also good enough to compete with the rivals. The company has also been able to perk up the return ratios like Return on average equity, gross retail AUM with the same reaching at 51% and 4.3%. The yield on advances has also been maintained at 1920%. It is also noteworthy that it has got a remarkable quantum of reserves on the balance sheet when the

Ipo at a glance
Muthoot Finance Limited is coming out with a 100% book building; initial public offering (IPO) of 51.50 lakh equity shares of Rs 10 each in a price band Rs 160-175 per equity share. The issue will constitute 13.85% of the fully diluted post issue paid-up equity share capital of the company. Market lot: 40 Equity Shares Maximum Subscription amount for Retail investors: Rupees two lakh The issue will open for subscription on April 18, 2011 and will close on April 21, 2011. Up to 50% of the issue will be allocated to Qualified Institutional Buyers (QIBs), including 5% to the mutual funds. Further, 15% would be available for the noninstitutional bidders and the remaining 35% for the retail investors. The shares will be listed on BSE and NSE both. The face value of the share is Rs 10 and is priced 16 times of its face value on the lower side and 17.5 times on the higher side. CRISIL has assigned a CRISIL IPO grade of 4/5 to the IPO, indicating above average fundamentals of the company. Book running lead managers to the issue are ICICI Securities and Kotak Mahindra Capital Company and Co-Book running lead manager to the issue is HDFC Bank.

same has shot up, recently, by 5280 crores to 8112 crores. Meanwhile, the leverage position still stands at 8.6, which looks like a concern. But since it is a Non-deposit taking NBFC, it can be justifiable. Moreover, the NPA, too, has come down significantly over the years to a mere 0.35%, which also stands out among the peers. Regarding the valuation, the stock is valued reasonably in the given price band, compared to the peers like Manappuram General Finance & Leasing (While manappuram, currently, trades at a P/E of 22.72, the industry trades at a combined PE of 19.2 times). Muthoot, at the upper band of the price band (Rs.175), is valued at 14.88 times of its FY11 annualized diluted earnings (Taking the 8MFY11 earnings as a basis, the annualized diluted EPS works out to 11.76). Meanwhile, the valuation of the stock at the lower range of the band i.e. Rs.160 works out to 13.6 times.

Prepared By:
Muhammed Aslam E with the assistance of Krishanan Thampi K

RESEARCHED AND PRESENTED BY: Head of Research: Krishnan Thampi K Sr. Fundamental Analyst: Amar Chandramohan Fundamental Analyst: Muhammed Aslam E Sr. Equity Technical Analyst: Anish Chandran C V Sr. Commodity & Equity Technical Analyst: Kesavamoorthy B F&O Analyst: Yunus Ismail

DIRECT ALL RESEARCH QUERIES TO: Research & Strategies Group Hedge Equities Ltd 12 Floor, -Mini Muthoot Tech Towers, Kaloor, Kochi 682017, Kerala, India Phone: (0484) 3040400 Email: research@HedgeEquities.com

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