Muthoot Finance Ltd IPO Review (Apply)
Review By MLR Securities Private Ltd on April 16, 2011
Issue Date: April 18 - April 21
Price Band: Rs 160 - 175
Market Cap (Rs Cr): 5,947 - 6,505
Issue Size (Rs Cr): 824 - 901
No of Shares (Cr): 5.15
GreyMarket Premium(Rs): 32-35
Muthoot Finance Ltd is a non-deposit taking NBFC in the business of lending against household used gold jewellery to individuals. Muthoot Finance’s operating history has evolved over a period of 70 years since Mr M George Muthoot founded a gold loan business in 1939. MFL received the NBFC licence from the RBI in 2001. The NBFC has the largest branch network among gold loan providers in India with 2,611 branches and a strong presence in under-served rural and semi-urban markets in India with total Assets under Management of Rs 12,897 Cr as of November 2010.
During 2010, the company received fund infusion amounting to Rs 2.5 bn from private equity players like Baring India Private Equity, Matrix Partners India, Kotak India Private Equity Fund and Wellcome Trust for a 6% stake in the company. Further, in 2011 Wellcome Trust picked up additional 1% stake from the promoters, taking the total stake of private equity investors to 7% in the company. The NBFC raised Rs 130 Cr from 11 Anchor investors at Rs 170/share. The anchor investors include Citigroup, Goldman Sachs, Credit Suisee amongst others.
Muthoot Finance’s AUM increased at a CAGR of 74% from Rs 8 bn in FY06 to Rs 74 bn in FY10 driven by a rise in pledged gold and a significant spurt in gold prices.
On the back of growth in AUM, interest income increased at a CAGR of 66% from Rs 1.4 bn in FY06 to Rs 10.8 bn in FY10. Profit after tax (PAT) improved from Rs 271 mn to Rs 2,276 mn in FY10.
The adjusted EPS and adjusted book value of the company increased at a CAGR of 53% and 43% respectively over FY06-10. Gross NPAs have been contained to less than 0.5% in the past three years. Muthoot Finance enjoys a strong capital to risk adjusted ratio (CRAR) of 15% which is in excess of the RBI’s requirement of 12%.
The company frequently sells its portfolio under bilateral direct assignments which also helps it keep its capital ratio strong. In 2010, the company raised Rs 2.5 bn from private equity players, which will help it shore up capital base and fund its growth.
Financials (Rs in Cr) |
FY08 |
FY09 |
FY10 |
8mFY11 |
Gold AUM |
2,179.00 |
3,300.10 |
7,341.70 |
12,897.70 |
Gold Volume Pledged (tons) |
30.00 |
39.00 |
66.00 |
97.60 |
Interest income |
357.90 |
606.20 |
1,077.50 |
1,289.35 |
Interest expense |
179.80 |
309.80 |
473.70 |
582.56 |
NII |
178.10 |
296.50 |
603.80 |
706.79 |
Other Income |
10.70 |
14.20 |
11.90 |
123.17 |
Net Profit |
63.60 |
97.70 |
227.60 |
291.48 |
Adjusted EPS (Rs) |
2.60 |
3.50 |
7.60 |
7.84 |
Adjusted Equity Shares (In Cr) |
24.60 |
28.00 |
30.10 |
37.17 |
Net Worth |
213.10 |
361.40 |
584.20 |
2,032.25 |
Adjusted Book Value |
8.70 |
12.00 |
19.40 |
54.67 |
RoE (%) |
34.00 |
34.00 |
48.00 |
51.00 |
RoA (%) |
3.00 |
3.00 |
5.00 |
2.90 |
Gross NPA (%) |
0.42 |
0.48 |
0.46 |
0.35 |
CRAR (%) |
12.60 |
16.30 |
14.80 |
15.06 |
NIMs (%) |
9.70 |
10.60 |
11.20 |
10.40 |
Valuations
Muthoot Finance’s market cap is coming to Rs 5,847 Cr – Rs 6,505 on a price band of Rs 160 – Rs 175. The company is asking for a price to earnings multiple of 13.6-14.9 times its annualized FY11 EPS of Rs 11.7 which is at a discount to Manappurram General Finance despite the former having a higher market share of 20% while Manappuram just has a market share of 6.8% as on FY10. The price to book value is 2.9-3.04 times its post issue book value which is at marginal premium to Manappurram General Finance.
FY10 (Rs Cr) |
Total Income |
Net Income |
Est Gold Loans Portfolio |
Market Share (%) |
Mcap |
Annualised EPS (Rs) |
P/E (x) |
P/BV (x) |
Manappuram General Finance |
478 |
120 |
2560 |
6.8 |
5292 |
5.8 |
22.4 |
2.8 |
Muthoot Finance |
616 |
229 |
7342 |
19.5 |
5947-6505 |
11.7 |
13.6-14.9* |
2.9-3.04* |
Key Positives
Muthoot – Established Brand
MFL has an established track record in the niche Gold loan segment, and has a gold loan portfolio of Rs. 12,897 Cr as on November 30 2010. The Muthoot Group enjoys strong market knowledge and a good franchise in southern India on the back of significant experience of the promoters of the Group since 1939. An early entry in this business, not only in South India but also in other regions, has helped the company develop a strong brand image, wide distribution network and AUM. The growth of the company is also aided by the fact that gold loans are commonly accepted form of financing amongst households in southern India.
Niche Business Model
MFL is the largest player in the niche business of gold financing, both in terms of AUM and distribution network. The gold loan asset class is characterised by small ticket size loans secured against gold ornaments. The average ticket size is of around Rs 30,000 for MFL. While the contractual tenure of the loan contract is 12 months, the loan tenure is typically around 3-4 months. MFL’s AUM has grown at a four-year CAGR of 74% to Rs 74 bn in FY10. The company has grown its market share by 9% during FY07- FY10 backed by its strong presence in the South India Market.
Gold Loans Provider |
Estimated Gold Loans Portfolio (Rs Bn) |
Gold Loans Market Share (%) |
FY08 |
FY08 |
FY09 |
FY10 |
FY08 |
FY09 |
FY10 |
Muthoot Finance |
14.2 |
33 |
73.4 |
11 |
13.4 |
19.5 |
Muthoot Fincoro |
4.7 |
11.8 |
22.2 |
3.6 |
4.8 |
5.9 |
Manapurram |
4.8 |
12 |
25.6 |
3.7 |
4.9 |
6.8 |
Indian Bank |
17 |
32.5 |
39.2 |
13.2 |
13.2 |
10.4 |
Indian Overseas Bank |
16.9 |
31 |
52.2 |
13.1 |
12.6 |
13.9 |
Federal Bank |
6 |
10.7 |
8.6 |
4.7 |
4.3 |
2.3 |
South Indian Bank |
6 |
15 |
23.5 |
4.7 |
6.1 |
6.3 |
State Bank of Travancore |
11.4 |
16 |
19.3 |
8.9 |
6.4 |
5.1 |
Andhra Bank |
4 |
9 |
14 |
3.1 |
3.6 |
3.7 |
Robust Industry Outlook
According to the IMACs industry report, based on the assessment of the emerging dynamics and competitive landscape, the Gold Loans market is expected to grow at between 35% and 40% over the next three years. Moreover, as the market is currently under-penetrated, it is expected that the Gold Loans market will offer enough opportunities for portfolio expansion and retain attractive margins for all existing specialized NBFCs, banks and new entrants. The branch expansion and marketing initiatives of various specialized NBFCs are anticipated to give a strong boost to the acceptability of Gold Loans and lead to further growth in the Gold Loans market.
Healthy Asset Quality
Muthoot Finance has maintained strong asset quality supported by its comfortable loan-to-value (LTV) ratio at origination, robust systems and processes, and the highly secured nature of the LAG business. Strong underwriting standards have resulted in very low gross non-performing assets (NPA) of 0.46% for the company. Sentiment attached to the household ornament also support low NPA.
The company's track record of collections in the gold loan segment has been good, and has been supported by good portfolio monitoring systems; borrower's sentimental attachment towards the pledged gold ornaments and rising gold prices. The company monitors the market value of the outstanding security against each of its contracts; and has the option to auction gold ornaments in case borrowers fail to repay their loans.
Also, the ultimate losses have been lower; it has incurred credit losses lower than Rs 30 mn over the past seven years, out of cumulative disbursement of more than Rs 590 bn. Gold loan is provided on the basis of weight of the gold ornaments excluding cost of studded stones and making charges for the ornament which further lowers the LTV of the loan. Such factors along with sentiment attached to ornaments discourage customers from defaulting.
Asset Quality |
FY08 |
FY09 |
FY10 |
8mFY11 |
Gross NPAs |
9.30 |
16.10 |
34.40 |
46.10 |
Provisions |
0.90 |
1.60 |
3.70 |
5.00 |
Net NPAs |
8.30 |
14.50 |
30.60 |
41.10 |
Net Retail Loans |
1792.20 |
2556.00 |
5429.80 |
9757.20 |
Net NPAs/ Net Retail Loans (%) |
0.50 |
0.60 |
0.60 |
0.40 |
Gross Retail Loans |
2226.30 |
3369.00 |
7438.20 |
13003.70 |
Gross NPAs/ Gross Retail Loans (%) |
0.40 |
0.50 |
0.50 |
0.40 |