Muthoot Finance Ltd
Price band: Rs 160-175 per share
Issue opens: April 18, 2011
Issue closes: April 21, 2011
Bid Lot: 40 shares
Company and Promoters
Incorporated in 1997; Muthoot Finance Ltd. (MFL) is the flagship company of The Muthoot Group based in Southern India. MFL is registered as a Non-Banking Financial Company - Non Deposit taking - Systemically Important (NBFC-ND-SI); and is engaged in the loan against gold ornament segment with a managed advance base of Rs 11,550 cr as on Sept 2010. Although the company is a non-deposit accepting NBFC, it does accept retail debentures (not considered as public deposits), which accounted for close to 33% of the company’s total funding as on Sept 2010.
M.G. George Muthoot; current Chairman of MFL; is a graduate in engineering from Manipal University. He is the National Executive Committee Member of the FICCI and the current Chairman of FICCI-Kerala State Council. He was conferred the Mahatma Gandhi National Award for social service for the year 2001 by the Mahatma Gandhi National Foundation.
Issue Highlights
ü Muthoot Finance Ltd. (MFL) is the LARGEST gold financing company in India in terms of loan portfolio. Gold Loan portfolio as of Feb 2011 comprised approx. 4.1 mn loan accounts in India that were serviced through 2,611 branches across 25 states in India. Approx. 67,953 customers per day were catered to by MFL in Feb 2011.
ü Equipped with collateral for the loans provided to clientele; MFL currently has minimal NPA (0.5%) which speaks volume of the quality of its investments. Moreover, as on 8M FY 2011; RONW stands at 29.6%; NIM stood at 9.2% and capital adequacy ratio stands healthy at 15.1%.
ü Till date; MFL has been primarily South region focused player with approx. 70% of its branch network positioned there. MFL is rapidly scaling up branches in Northern and Eastern regions and company is expected to achieve formidable presence in this region thereby reducing its high dependence on single region in the medium term. The next trigger will be to replicate the success achieved down South when it reaches newer geographies.
ü MFL has achieved stellar financial performance in previous fiscals. The NBFC has registered a CAGR of 65% in total income, 68% in operating income and 71% in net profit over the period 2006-2010.
ü CRISIL and ICRA have graded 4/5 for the MFL IPO indicating that the fundamentals are above average relative to other listed equity securities in India.
Positives
· Geographic diversification will aid in business scalability: MFL is rapidly scaling up branches in Northern and Eastern regions. Over the next 2 years company can achieve formidable presence in this region thereby reducing its high dependence on single region, opening up newer growth avenues for MFL. The next trigger for MFL will be to replicate the success achieved down South when it reaches newer geographies.
· Lowering cost of funds will propel profits: Company’s measures in reducing its cost of debt will augment its profitability going forward.
· Being customer friendly; MFL enjoys several advantage over peers like banks and private lenders: MFL offers accessibility, quick response time and minimal documentation. These are prime reasons for its business scalability as it can cater to a wider audience which might be burdened by private lenders loans or who do not get easy access to bank loans. Thus, loan book growth is expected to remain robust going forward.
· Low average loan tenure and stringent risk measurement techniques will shield against gold price volatility: Over the last 3 years, not more than 3% of gold against loans outstanding has been auctioned; which speaks volume of the strength of the business model. Thus, MFL’s business model is pretty healthy in light of stringent risk practices, low loan tenures and ticket size.
Risk factors
· MFL extends loans secured by gold jewellery provided as collateral by the customer. An economic downturn or sharp downward movement in the price of gold could result in a fall in collateral values. In the event of any decrease in the price of gold, customers may not repay their loans and the collateral gold jewellery securing the loans may have decreased significantly in value, resulting in losses which company may not be able to support. A failure to recover the expected value of collateral security could expose MFL to potential losses. Any such losses could adversely affect their financial condition and results of operations.
· As of March 31, 2010, the Southern Indian states of Tamil Nadu, Kerala, Andhra Pradesh and Karnataka constituted 75.38% of MFL’s total Gold Loan portfolio. Company’s concentration in the Southern states exposes them to adverse economic or political circumstances that may arise in that region as compared to other NBFCs and commercial banks that have diversified national presence. If there is a sustained downturn in the economy of South India, MFL’s financial position may be adversely affected.
For additional information & risk factors please refer to the Red Herring Prospectus