Company Report | IPO Note
LONG TERM INVESTMENT CALL
Issue Details
Issue Opens
Issue Closes
Price Band (INR/Share)
Face Value (INR/Share)
No of Equity Shares (mn)
Size of the Issue (INR mn)
IPO Grading Agency CRISIL / ICRA
IPO Grade
Source: RHP, Unicon Research
Shareholding Pattern (%)
Group
Promoters & Promoter Group
Non Promoter Holding
Public
Total 100.0
Source: RHP, Unicon Research
Objects of the Issue
• To augment its capital base to meet future
capital requirements to provide for funding
of loans to our customers
• General corporate purposes.
Financial Summary FY10
Income 10,774
EBIDTA 3,455
PAT 2,275
Post-Issue P/BV-Upper Band
Post-Issue P/BV-Lower Band
* Source: RHP, Unicon Research
Wealth Research, Unicon Financial Intermediaries. Pvt Ltd.
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19 April 2011 SUBSCRIBE
Muthoot Finance Ltd (MFL) is a Kerala based non-banking finance
April 18, 2011 company which provides loans against gold, fixed investment options,
April 21, 2011
money transfer services, insurance, securities, foreign exchange, vehicle,
160 – 175
and asset finance services. It is primarily in the business of lending
10
against used household gold jewellery to individuals.
51.5
8,240 / 9,013
Investment Rationale
Leader in the Gold Financing Segment: MFL is the largest gold
4/5
financing company in India in terms of gold-loan portfolio. As of March
2010, gold loans comprised of nearly 2.8 mn loan accounts in India. It
has outstanding advances of INR 130 bn as of November 2010, against
gold ornaments, which weighs nearly 97 tonnes. MFL is also expecting
to grow its gold loan book by another INR 100 bn by March 2012.
Pre Post
Muthoot Finance currently has a 20% market share (Source: IMaCS) in
IPO IPO
93.0 80.1 the INR 650 bn organised gold loan market.
7.0 6.0
- 13.9 Wide & Increasing Network: MFL has a nationwide presence with
100.0 nearly 2,611 branches spanning across 20 states. As of November 2010,
over 75% of the company's gold loan portfolio was from Kerala,
Karnataka, TN, AP and Pondicherry. Muthoot Finance has 97 branches
in the eastern states of the country. With the IPO proceeds, MFL will
increase its presence in the northern and north-eastern states, thus
consolidating its leadership status in this segment.
Strong Management Capabilities to Lead the Business: Muthoot has
operating experience evolved over a period of 70 years since M George
(INR mn)
FY11 E Muthoot (the father of the current promoters) founded a gold loan
19,340 business in 1939 under the heritage of a trading business established by
6,617 his father, Ninan Mathai Muthoot, in 1887.
4,371
2.9 Concerns
2.7 • Vulnerable to Interest Rate Risk.
• Sustainability of Regulatory Arbitrage viz. Banks & NBFCs.
• Margin compression due to increased competition.
• Volatility in Gold prices.
Valuation
At the upper & lower price band, the issue is priced at 2.9x & 2.7x its
annualized FY11 book value, which is at a premium to its peers. The
company’s leadership position in this market, visible brand and better
operational parameters justify its premium pricing. However,
regulatory risks in the sector and the other macro factors are concerns.
Considering very few listed players in the gold financing space and the
fundamentals, we recommend subscribing to this issue.
 Company Background

Muthoot Finance Ltd. is a ‘Systematically Important Non-Deposit Taking NBFC’ (as

described by the Reserve Bank of India). The company provides personal and
business loans secured by gold jewellery (or gold loans) primarily to people who
possess jewellery but do not have formal access (or are ineligible) to short-term credit.
With 97.6 tonnes of gold jewellery and a loan portfolio of INR 130 bn under
management, Muthoot Finance Ltd. is the largest gold financing company in India.
The firm has 2,611 branches (as of February 2011) spread over 20 states, the national
capital region and four union territories, making it the largest network amongst gold
loan NBFCs in India. 70% of the company’s branches are located in the southern
region but more recently, the firm has started focusing on the northern parts of the
country.

In addition to its gold based financing, the company also provides money transfer
services, insurance, foreign exchange, securities, vehicle and asset finance services.

Industry Overview

Gold Finance Industry in India

India is one of the largest markets for gold and as of fiscal 2010, accounts for
approximately 10% of the total world gold stock with an annual demand of
approximately 700 tonnes (Source: IMaCS Industry Report (2010 Update)). While various
different gold backed financial products have been created for retail consumers in the
Indian market, lending against gold has been one of the most popular instruments
amongst these. Gold loan products in India are largely concentrated in southern
India, which holds the largest proportion of India's gold portfolio, and is typically
more open to borrowing against gold as compared to consumers in the northern and
western regions of India (Source: ImaCS Industry Report 2009). In the year ended March
31, 2010, the organized gold loan market in India was estimated around INR 350 – 400
bn with a compound annual growth rate of approximately 40% between FY02 and
FY10. However, the organized gold loan portfolio accounted for a mere 1.2% of the
total value of gold stock in India. The gold loan market is significantly under-
penetrated and thus provides tremendous scope of growth. The gold financing
industry in India is expected to grow at the rate of 35 – 40% in the future. (Source:
IMaCS Industry Report (2010 Update)).

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 Investment Rationale

Leader in the Gold Financing Segment:

Muthoot Finance Ltd. is the largest gold financing company in India in terms of loan
portfolio. The company’s outstanding gold loans portfolio was around INR 130 bn by
November 2011. 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 over 2,600 branches (as of February 2011) of
which approximately 70% are in the southern region. In addition, the company’s
branch network remains the largest amongst the other NBFCs which gives it an edge
in this business. A strong brand name, track record and promoter support and an
operating history of over a period of 70 years since M George Muthoot founded his
gold loan business in 1939, the company has a lot of support to power its forward
growth. The business is also well supported by its high net worth promoters, who are
members of the Muthoot family.

Source: RHP, Company, Unicon Research

Wealth Research, Unicon Financial Intermediaries. Pvt Ltd.

Email: wealthresearch@unicon.in
 Strong Funding Profile

Muthoot Finance Ltd. has a diversified funding mix and sources funds through
multiple channels like bank borrowings, securitisation, nonconvertible debentures
(gold bonds) etc. The company funds a large part (about 50%) of its requirement
through Muthoot Gold Bonds, which is popular among investors. It has been
assigned an “A1+” rating by ICRA for commercial paper and for short-term non-
convertible debentures of INR 2 bn and a “P1+” rating by CRISIL for short-term debt
instruments of INR 10 bn. The company intends to tie up for long-term institutional
funding by improving its ratings for long-term debt instruments which will further
improve its cost ratios.

Robust Operational Metrics

With an average net interest margin of 11% and return on equity in excess of 30%, the
company’s operational metrics stand among the best in the industry. Its non-
performing assets (NPAs) were at 0.35% of the loans on its books as of November
2010, indicating strong asset quality.

Concerns

Financial Performance is Vulnerable to Interest Rate Risk.

Over the last several years, the Government of India has substantially deregulated the
financial sector. As a result, interest rates are now primarily determined by the
market, which has increased the interest rate risk exposure of all banks and financial
intermediaries in India, including MFL. The company’s results of operations are
substantially dependent upon the level of its net interest margins. Interest rates are
sensitive to many factors beyond its control, including the RBI’s monetary policies,
domestic and international economic and political conditions and other factors. A
sharp increase in the interest rates may squeeze its margin while a sharp correction in
gold’s price may contribute to its NPAs.

Regulatory Risks

The biggest risk for these companies would be the sustainability of regulatory
arbitrage viz. 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.

Wealth Research, Unicon Financial Intermediaries. Pvt Ltd.

Email: wealthresearch@unicon.in
 Possible Margin Compression due to increased competition

Due to its dominance in the gold financing field, the company enjoys margins of upto
20% currently. As time goes, more players will be compelled to enter this space to
capture this lucrative market. This increased competition, especially from powerful
banks, could drive earnings margins for Muthoot Finance Ltd. downwards.

Peer Valuations

As on March 2010 Muthoot Manappuram

Branches 1,605 1,005
AUM (INR mn) 74,381 25,987
NIM (%) 11.2 19.3
RoAA (%) 4.2 5.2
RoAE (%) 48.3 44
GNPA (%) 0.46 0.39
AUM per branch (INR mn) 46.34 25.86
*P/E (x) (Annualized - Upper band) 14.5
19.1
*P/E (x) (Annualized - Lower band) 13.6
*P/BV (x) (Annualized - Upper band) 2.9
2.7
*P/BV (x) (Annualized - Lower band) 2.7
Source: RHP, Unicon Research
*P/E & P/BV valuations based on FY11 estimates.

Valuation

At the upper & lower price band, the issue is priced at 2.9x & 2.7x its annualized FY11
book value, which is at a premium to its peers. The company’s leadership position in
this market, visible brand and better operational parameters justify its premium
pricing. However, regulatory risks in the sector and the other macro factors are
concerns. Considering very few listed players in the gold financing space and the
fundamentals, we recommend subscribing to this issue.

Wealth Research, Unicon Financial Intermediaries. Pvt Ltd.

Email: wealthresearch@unicon.in
Financials

Balance Sheet (INR in Mn) Profit & Loss (INR in Mn)

Particulars 8MFY11 FY10 FY09 Particulars 8MFY11 FY10 FY09

Fixed Assets Income

Interest Income 12,893.5 10,774.5 6,062.4
Gross Block 2,034.6 1,691.1 1,482.7
Less: Accumulated Depreciation Other Income 123.2 119.3 141.6
/ Amortisation 554.0 449.0 320.8 Total Income 13,016.6 10,893.8 6,204.0
Net Block 1,480.5 1,242.1 1,161.9
Capital Work-In-Progress 510.4 290.7 131.2 Expenditures
Interest Expense 5,825.6 4,737.3 3,097.7
Investments 75.1 75.1 85.3 Administrative Expenses 2,546.9 2,359.9 1,405.0
Deferred Tax Assets (Net) (24.4) (24.8) (37.9) Directors Remuneration 128.0 192.2 120.9
Current Assets, Loans and Depreciation 105.0 148.9 98.8
Advances Total Expenditures 8,605.5 7,438.3 4,722.3
Sundry Debtors 69.2 33.5 40.9
Cash and Bank Balances 4,606.6 5,759.9 8,825.3 Profit / (Loss) Before Tax 4,411.2 3,455.5 1,481.7
Loans and Advances 98,104.9 54,617.0 25,735.5 Provision for Tax
Other Current Assets 2,939.5 2,408.1 1,658.1 - Current Tax 1,496.7 1,192.8 507.9
Total Current Assets, Loans and
- Deferred Tax Charge / (Credit) (0.4) (13.0) (3.9)
Advances 105,720.2 62,818.5 36,259.9
- Fringe Benefit Tax 0.0 0.0 0.4
Total Assets 107,761.8 64,401.4 37,600.4
Total Tax Expense / (Credit) 1,496.3 1,179.8 504.5

Liabilities and Provisions

Net Profit / (Loss) 2,914.8 2,275.7 977.2
Secured Loans 80,330.0 45,471.2 30,087.5
Unsecured Loans 10,499.3 7,334.0 1,568.5
Current Liabilities 4,071.1 4,524.4 1,805.6
Provisions 1,546.8 1,229.9 524.5
Total Liabilities 96,447.2 58,559.5 33,986.0

Wealth Research, Unicon Financial Intermediaries. Pvt Ltd.

Email: wealthresearch@unicon.in
 Unicon Investment Ranking Methodology

Rating Buy Accumulate Hold Reduce Sell

Return Range >= 20% 10% to 20% -10% to 10% -10% to -20% <= -20%

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