Muthoot IPO

8/6/2019 Muthoot IPO

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IPO Analysis:

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 individualswho possess gold jewels but could not access formalcredit within a reasonable time, or to whom credit maynot be available at all, to meet unanticipated or othershort-term liquidity requirements.

• The company’s Gold Loan portfolio as of November30, 2010 comprised about 4.1 million loan accounts inIndia across 21 states and four union territories inIndia.

According to the IMaCS Industry Report 2010, itsbranch network was the largest among gold loanNBFCs in India. It has since increased its branchnetwork 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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India is one of the largest markets for gold and as of fiscal2010, accounts for about 10% of the total world gold stock

with an annual demand of about 700 tonnes. Gold Loanshave emerged as key gold based financial products, and inthe year ended March 31, 2010, the organized Gold Loansmarket in India was estimated at between Rs 35,000 croreand Rs 40,000 crore with a Compounded Annual GrowthRate (CAGR) of about 40% during fiscal 2002 to fiscal 2010.The Gold Loans market is significantly under-penetrated andis expected to continue growing at the rate of 35-40% in thefuture. 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 thecompany’s value. Regarding the valuation, the stock is valuedreasonably in the given price band, compared to the peerslike Manappuram General Finance & Leasing (Whilemanappuram, currently, trading at a P/E of 22.72, theindustry trade at a combined PE of 19.2 times). Muthoot, atthe upper band of the price band (Rs.175), is valued at 14.88times of its FY11 annualized diluted earnings (Taking the

8MFY11 earnings as a basis, the annualized diluted EPSworks out to 11.76). Meanwhile, the valuation of the stock atthe lower range of the band i.e. Rs.160 works out to 13.6times. So, taking the robust prospect of the industry andimpressive fundamentals of the company, the issue can beopted with an aggressive risk appetite. As the stock is

valued well below the industry, a decent listing gain, too,cannot be ruled out.

Research & Strategies GroupHedge Equities Ltd.



2011. As of November 31, 2010, the company employed 15664persons in its operations.

The company’s customers are typically small businessmen,vendors, traders, farmers and salaried individuals, who forreasons of convenience, accessibility or necessity, avail of itscredit facilities by pledging their gold jewellery with it, ratherthan, by taking loans from banks and other financialinstitutions. It provides retail loan products, primarilycomprising Gold Loans. Its Gold Loans have a maximum 12month term and its average disbursed Gold Loan amountoutstanding was Rs 26,183.0 per loan account as of March 31,

2010.

The company has a strong presence in underserved rural andsemi urban markets. It has held 97.6 tons of gold jewels assecurity for gold loan as on November 2010.

Besides, its outstanding gross gold loan under management was12897 crore as on November 2010.

FINANCIALS AND VALUATIONS

The financials looked to be quite impressive with the top linegrowing at 69% and 78% in the FY09 and FY10 respectively on ayear on year basis. The same grew at a CAGR of 65% during2006 to 2010 period. Meanwhile the bottom line saw a surge of 54% and 134% (YoY) for FY09 and FY10 at a compounded rate

Concerns

On the concern-side, thecompany had negative net cashflows from operating andinvesting activities in the lastthree fiscal years.

Apart from that, the demographicconcentration of the company inthe southern part is a major riskas any untoward happening in

the region may impact thebusiness of the company.

Also the company relies on thequality of gold and lacks creditanalysis of the individualcustomers. Here, any negativeprice variability of gold standsas a risk causing higher NPA.

The Reserve Bank of India (RBI)recently increased the capitaladequacy ratio of NBFCs to 15%and removed the priority sectorstatus of gold-loan companies.

The company may be sellingsome gold loan portfolios tooffset higher cost of borrowingarising out of non-priority sectorstatus.



of 70%. With the impressive growth, the formertouched the 1000 crore mark to reach at Rs.1077crore.

Meanwhile, the eight months ended at November2011 have crossed the FY10 annual numbers andhave moved in an exciting manner with the net salesand PAT standing at 1289 crore and 291crorerespectively. 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 PATmargins for the FY10 and 8MFY11 have been 21%and 22.4% respectively, which look exceptionalcompared to the peers like Manappuram Generalfinancing and Lea sing, India bulls finance etc… Thecompany’s NIM, which stands at 10.4% as onNovember 2010, is also good enough to compete withthe rivals.

The company has also been able to perk up the returnratios like Return on average equity, gross retailAUM with the same reaching at 51% and 4.3%. Theyield on advances has also been maintained at 19-20%.

It is also noteworthy that it has got a remarkablequantum 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 equityshares of Rs 10 each in a price band Rs 160-175 per equityshare.

The issue will constitute 13.85% of the fully diluted post issuepaid-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 mutualfunds. Further, 15% would be available for the non-institutional bidders and the remaining 35% for the retailinvestors.

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 higherside.

CRISIL has assigned a CRISIL IPO grade of 4/5 to theIPO , indicating above average fundamentals of the company.

Book running lead managers to the issue are ICICI Securitiesand Kotak Mahindra Capital Company and Co-Book runninglead 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, whichlooks 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 likeManappuram General Finance & Leasing (While manappuram, currently, trades at a P/E of 22.72, the industry trades ata combined PE of 19.2 times). Muthoot, at the upper band of the price band (Rs.175), is valued at 14.88 times of itsFY11 annualized diluted earnings (Taking the 8MFY11 earnings as a basis, the annualized diluted EPS works out to11.76). 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



Disclaimer:

The information contained in our report does not constitute an offer to sell securities or the solicitation of an offer to buy any security. This report is prepared for private circulation only. The information in our report is not intended as financial advice. Hedge Equities Ltd do not undertake the responsibility for any investment decision taken by the readers based on this report. Moreover, none of the research report is intended as a prospectus within the meaning of the applicable laws of any jurisdiction. The information and opinions contained in the research reports have been compiled or arrived at from sources believed to be reliable in good faith,but no representation or warranty, express or implied, is made by Hedge Equities Ltd to their accuracy. Moreover, you should be aware of the fact that investments in securities or other financial instruments involve risks. Past results do not guarantee future performance.

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: [email protected]

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Muthoot IPO