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Muthoot Finance Ltd (MFL) : MUST BUY IPO


Muthoot  Finance  Ltd (MFL) is coming  out  with  an  initial public  offering (IPO) of 5.15  crore  equity shares  of face value  of  Rs10 each. Post-issue, the  shareholding of  the promoters in the company will fall to 80.12% from the current holding of 93%. The issue is priced at Rs160-175 per share, translating into 4.9x M8FY2011book value (pre-issue) at the upper end of the  price  band. However  based on post  issue equity, the  company  would  trade at 3.2x  M8FY2011 book value (BV). At the  upper end of the  price  band MFL intends to raise Rs901 crore. The company plans to use the proceeds to  augment its  capital base   to  meet future capital requirements.

Company background
MFL is the  largest gold financing company  in India in terms of loan  portfolio. It has  been classified as  “Systemically Important Non-deposit taking NBFC” by the Reserve Bank of India  (RBI). The company  provides personal and  business loans secured by gold jewellery, or gold loans, primarily  to individuals who possess  gold jewellery but  cannot access formal  credit within  a  reasonable time. MFL  had  1,921 branches (as on August 2010) spread over 20 states and two union territories. Seventy per cent of the company’s branches are  located in  the  southern region  but  MFL  has  started focusing on the  northern region also.  The outstanding gold loan portfolio of MFL at the  end  of M8FY2011 was Rs9,810 crore, which is the  highest among the  other gold financing non-banking finance companies (NBFCs). In addition, MFL’s branch network is the largest among the gold loan NBFCs in India (as per  an IMac report).
Key investment positives
·         Market leader in gold loan  segment
·         MFL is the  largest gold financing company  in India in terms of  loan  portfolio. The  company’s outstanding  gold  loans portfolio was around Rs9,810 crore in the eight months ended FY2011. The company  has approximately 20% market share in  the   gold  loan  segment, which  is  served by  several specialised NBFCs, banks etc.
·         Wide geographical presence
·         Being a dominant player in the southern region, the company is expanding into  the  northern region  and  select areas of the eastern region which would be a key driver of its growth in the  coming  years. It has  about 2,600  branches (as  in November  2011)  of which  approximately 70% are  in the southern region. In addition, the company’s branch network remains the  highest among  the  other NBFCs which  gives edge  to its business.
·         Strong brand name, track record and  promoter support
·         The company  has an operating history  of over a period of70 years  since  M  George  Muthoot  founded a  gold  loan business in 1939.   The business is also well supported by the  high net  worth  promoters, who are  members of the Muthoot family.

Key risks
·         Regulatory risks : The  biggest   risk  for  these  companies would  be  the sustainability of regulatory arbitrage vis–a-vis banks  and other NBFCs. For example, MFL benefits in terms of easy Know Your Client norms, and independence to price products (unlike micro-finance institutions), expand branch network and recovery loans.

·         Macro  risks:  The  key  macro   concerns can  affect the   company’s performance. For example, a sharp increase in the interest rates may squeeze its margin  while  a sharp  correction in gold’s price  may contribute to its NPAs.

Valuations
At the  upper end  of the  price  band  the  issue is priced at 3.2x  M8FY2011 book  value, which  is at a  premium to Manapuram  General Finance  and  the  other NBFCs. The premium pricing  is due  to  a  leadership  position in  its segment, strong  brand  visibility  and  better operational metrics. However, considering the  regulatory risks in the sector and  the  other macro  factors the  company  should trade at a slight discount to the  larger NBFCs.