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Muthoot Finance IPO Review by India Infoline (Apply)

Review By India Infoline Ltd on April 20, 2011

Muthoot finance is a flagship company of the Muthoot Group based in Southern India. The group has a presence in diverse businesses including financing, healthcare, real estate, education, hospitality, forex, wealth management services, money transfer services, power generation and entertainment.

Y/e 31 Mar (Rs m) FY08 FY09 FY10 8mFY11
Total oper. Income 1,888 3,106 6,157 7,191
yoy growth (%) 40.9 64.5 98.2 16.8*
Op. profit (pre-prov) 970 1,482 3,456 4,411
Net profit 631 979 2,285 2,915
yoy growth (%) 43.8 55.2 133.5 27.6*

EPS (Rs) 2.6 3.5 7.6 9.1
BVPS (Rs) 8.7 12.1 19.4 35.3
P/BV (x) (Lower band) 18.4 13.2 8.2 3.0
P/BV (x) (Upper band) 20.1 14.5 9.0 3.2
ROE (%) 33.9 34.1 48.3 34.0
ROA (%) 3.2 3.2 4.5 3.4
CAR (%) 12.6 16.3 14.8 15.1
Tier I (%) 10.6 12.5 9.9 10.8

Source: Company RHP, India Infoline Research
Note: *8mFY11 figures are compared with FY10 numbers for growth purpose.

Immense growth potential in organized gold loan market


According to IMaCS Industry Report, 2010, India accounted for 10% of the total world gold stock in FY10 with annual demand for gold pegged at 700 tonnes. Gold-based financial products viz gold coins and bars, ETFs and lending against gold have gained traction particularly amongst retail consumers.  With organized gold loan market estimated at Rs350-400bn, lending against gold has emerged as a most popular instrument in recent past. Further, with <5% of gold being pledged; 75% of which is pledged to unorganized market, we believe the gold loan industry is poised for healthy growth.


NBFCs better placed vis-à-vis Banks

MFL and other similar NBFCs are better placed as compared to banks owing to their flexibility, quick disbursal and an informal lending environment. Also with presence in rural and semi-urban markets, particularly in un-banked areas and relatively higher LTV ratio (60%-90% offered vis-à-vis 55%-65% offered by banks) NBFCs are in position to command premium rates and thereby enjoy healthy margins. Share of NBFC in gold loan market has improved from 18% in FY07 to over 32% in FY10.


Key risks remains: a) Mono-line stream of revenue with exposure predominantly in Southern India b) increasing competition in the gold loan space by banks and other NBFCs c) steep decline in gold prices.

Strong business model with limited risk

With over 70-years of operating history in gold loan business, MFL is engaged in the business of providing personal and business loans secured by gold jewellery, or Gold Loans, to individuals who possess gold jewellery 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. MFL operates through 2,611 branches spread pan-India and has catered to needs of over 4.1mn customers predominantly based in under served rural and semi-urban areas. It has witnessed a stupendous 81% CAGR in its gold loan portfolio over FY08-Feb,2011 and involves lending to small businessmen, vendors, traders, farmers and salaried individuals, who for reasons of convenience, accessibility or necessity, avail of credit facilities by pledging their gold jewellery from the company. 


67% of MFL branches are located in gold-rich region of South India which cumulatively accounted for ~75% of total loan portfolio as at Feb-11. In addition to wide-spread reach and strong expertise in lending business, lower LTV with smaller ticket size (typically 60%-90% of the gold pledged), adequate collateral, internally set KYC norms and in-house staff for the purpose of appraising the quality of the gold has ensured a clean, attractive and a secure business environment.

67% of branches are located in gold-rich region of South India
Muthoot Finance IPO
... and account for 75% of total loan portfolio
Muthoot Finance IPO Review
Source: Company RHP, India Infoline Research

With loan portfolio being primarily short term in nature (less than 1-year); MFL has maintained an adequate ALM. Its borrowings are typically short to medium term in nature and comprises of redeemable non-convertible debentures (41%) and cash credit from banks including working capital demand loans (58% of total borrowings).  Further, with superior credit rating, MFL has been in position to borrow at competitive rates, thereby enjoying healthy 8%+ margin.


In addition to gold loan business, MFL also acts as sub-agent of various registered money transfer agencies and provides money transfer services through its branches. It has also commenced the business of providing collection agency services and operates three windmills of 1.25MW each in the state of Tamil Nadu.  Going forward, MFL plans to expand its reach in North and West India and also tap upper-middle income and upper income group by introduction of gold loan product - 'Lifestyle product'.

Conclusion / Investment Strategy

Muthoot Finance (MFL), with gold loan portfolio of ~Rs130bn, is the largest gold financing company in India. With ~20% market share in gold loan business, the company caters to the needs of ~4.1mn customers. A NBFC-ND-SI, MFL has 67% of its branches located in gold-rich region of South India and accounts for 75% of total loan portfolio from this region.


With immense potential for growth in the organized gold loan market, we believe a) early entry and leadership position in this niche segment b) wide spread geographical reach with presence primarily in rural and semi-urban markets c) lower LTV ratio (60%-90% of the gold content of the jewellery) with adequate collateral d) smaller ticket size with loan portfolio at less than 1-year, e) adequate capital with healthy return ratios and f) minimal concerns on asset quality with NPA recognition policy, should drive valuations for the company. SUBSCRIBE.  

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Review By India Infoline Ltd on April 20, 2011