Muthoot Microfin IPO review (Apply)

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Review By Dilip Davda on December 14, 2023

•    MML is a Muthoot Pappachan group Micro Finance arm.
•    It marked steady growth in its business for the reported periods. 
•    Based on FY24 annualized earnings, the IPO is reasonably priced.
•    It enjoys place in first three conglomerate in this segment.
•    Investors may park funds for the medium to long term rewards.

ABOUT COMPANY:
Muthoot Microfin Ltd. (MML) is a part of the Muthoot Pappachan Group, a business conglomerate with presence across financial services, automotive, hospitality, real estate, information technology infrastructure, precious metals and alternate energy sectors. The Muthoot Pappachan Group has a history of over 50 years in the financial services business. MML is the second largest company under the Muthoot Pappachan Group, in terms of AUM for the Financial Year 2023. MFL, the flagship company of the Muthoot Pappachan Group, holds 59.29% of the pre-Offer Equity Share capital in the Company, on a fully diluted basis, as of the date of this Red Herring Prospectus. Its relationship with the Muthoot Pappachan Group provides it with brand recall and significant marketing and operational benefits. Further, there are significant synergies between the financial services business of the group and MML's micro-finance business MML is a microfinance institution providing micro-loans to women customers (primarily for income generation purposes) with a focus on rural regions of India. It is the fifth largest NBFC-MFI in India in terms of gross loan portfolio as of March 31, 2023 (Source: CRISIL Report). The company is also the third largest amongst NBFC-MFIs in South India in terms of gross loan portfolio, the largest in Kerala in terms of MFI market share, and a key player in Tamil Nadu with an almost 16% market share, as of March 31, 2023 (Source: CRISIL Report).

As of September 30, 2023, its gross loan portfolio amounted to Rs. 10867.07 cr. As of September 30, 2023, it had 3.19 million active customers, who are serviced by 12,297 employees across 1,340 branches in 339 districts in 18 states and union territories in India. It has built its branch network with an emphasis on under-served rural markets with growth potential, in order to ensure ease of access to customers. MML's branches are connected to its IT networks and are primarily located in commercial spaces which are easily accessible by customers.

Its wide range of lending products are aimed at catering to the life-cycle needs of rural households. MML primarily provides loans for income generating purposes to women customers living in rural areas. Its loan products comprise (i) group loans for livelihood solutions such as income generating loans, Pragathi loans (which are interim loans made to existing customers for working capital and income generating activities), individual loans and Suvidha loans (which are digital loans accessible through the Mahila Mitra application and made to existing customers to enable quick access to funds); (ii) life betterment solutions including mobile phones loans, solar lighting product loans and household appliances product loans; (iii) health and hygiene loans such as sanitation improvement loans; and (iv) secured loans in the form of gold loans and its Muthoot Small & Growing Business ("MSGB") loans.

Over the past few years, it has significantly implemented the use of technology across its microfinance operations. The company has an in-house information technology team that has built its technology platform into a business tool, which helps the company in achieving and maintaining high levels of customer service, enhancing operational efficiency and creating competitive advantages for the organization. To improve its underwriting capabilities using technology, the company has developed
a unique credit score card along with Equifax to evaluate the creditworthiness of customers by assigning individual credit scores to customers.

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with its maiden combo book building route IPO of fresh equity shares issue worth Rs. 760 cr. (approx. 26116845 shares at the upper cap), and an Offer for Sale (OFS) of Rs. 200 cr. (approx.  6872862 shares at the upper cap), thus making an overall IPO size of Rs. 960 cr. (approx. 32989707 shares at the upper cap). It has announced a price band of Rs. 277 - Rs. 291 per share of Rs. 10 each. The issue opens for subscription on December 18, 2023, and will close on December 20, 2023. The minimum application to be made is for 51 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE and NSE. The issue constitutes 19.35% of the post-IPO paid-up capital of the company. From the net proceeds of the fresh equity issue, the company will utilize it for augmenting its capital base. 

The company has reserved equity shares worth Rs. 10 cr. for the eligible employees and offers them a discount of Rs. 14 per share, from the rest, it has allocated not more than 50% for QIBs, not less than 15% for HNIs and not less than 35% for Retail investors. 

The four Book Running Lead Managers (BRLMs) to this issue are ICICI Securities Ltd., Axis Capital Ltd., JM Financial Ltd., and SBI Capital Markets Ltd. while KFin Technologies Ltd. is the registrar of the issue. 

Having issued initial equity shares at par value, the company issued further equity shares in the price range of Rs. 12 - Rs. 194.86 between September 2016 and September 2023. The average cost of acquisition of shares by the promoters/selling stakeholders is Rs. 44.39, Rs. 90.74, Rs. 90.91, Rs. 90.93, Rs. 150.00, and Rs. 165.40 per share.

Post-IPO, MML's current paid-up equity capital of Rs. 144.36 cr. will stand enhanced to Rs. 170.47 cr. Based on the upper cap of the price band, the company is looking for a market cap of Rs. 4960.82 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, the company posted a total income/net profit of Rs. 696.28 cr. / Rs. 7.05 cr. (FY21), Rs. 842.94 cr. / Rs. 47.40 cr. (FY22), and Rs. 1446.34 cr. / Rs. 163.89 cr. (FY23). For H1 of FY24 it earned a net profit of Rs. 205.26 cr. on a total income of Rs. 1047.24 cr. Thus it marked spectacular performance from FY22 onwards. 

For the last three fiscals, the company has reported fully diluted average EPS of Rs. 7.25 and an average RoNW of 6.35%. The issue is priced at a P/BV of 2.28 based on its NAV of Rs. 127.61 as of September 30, 2023 and at a P/BV of 1.91 based on its post-IPO NAV of Rs. 152.64 per share (at the upper cap). 

If we annualized FY24 earnings and attribute it to post-IPO fully diluted paid-up equity capital of the company, then the asking price is at a P/E of 12.08. Thus the issue appears reasonably priced. 

Its net NPAs stood at 0.33% as of September 30, 2023 against 0.60% as of March 31, 2023, 1.55% as of March 31, 2022, and 1.42% as of March 31, 2021. 

DIVIDEND POLICY:
The company has not declared any dividends for the reported periods of the offer document. The company will adopt a prudent dividend policy based on RBI guidelines for the NBFCs, and based on its financial performance and future prospects. 

COMPARISON WITH LISTED PEERS:
As per the offer document, the company has shown Equitas SFB, Ujjivan SFB, CreditAccess Grameen, Spandana Sphoorty, Bandhan Bank, Suryoday SFB, and Fusion Micro as their listed peers. They are trading at a P/E of 15.59, 9.33, 23.60, 17.51, 15.21, 11.20, and 12.19 (as of December 13, 2023). However, they are not comparable on an apple-to-apple basis. 

MERCHANT BANKER'S TRACK RECORD:
The four BRLMs associated with the issue have handled 90 issues in the past three fiscals, out of which 25 issues closed below the offer price on the listing date.

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