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Money Matters Financial Services |
Diversification to help quintuple profits |
NOT RATED
CMP: Rs685 Target Price: NA
n Established in 1997, Money Matters (MMFS) is amongst India’s leading provider of loan/debt syndication services
n MMFS is planning to deploy the strong cash flows of loan/debt syndication business in financing business
n The leads generated through loan/debt syndication business alongwith recently raised Rs4.5bn of equity should help MMFS to sustain future RoEs at 30%
n The stock is currently trading at 17.1x/10.0x FY11E/FY12E earnings. P/BV at 2.8x/2.2x with RoEs of 25% over FY11E/FY12E. We find valuations attractive
Debt syndication - Cash spinning business …
MMFS’ loan/debt syndication business is a cash spinning business which has ability to
generate huge cash flows. The debt syndication business has generated cash of over
Rs1bn each over FY09 and FY10. The loan/debt syndication business has ability to
generate cash flows at 10x its capital employed.
… With immense potential to grow
MMSF has expanded its network over last two years to take advantage of the same.
The core team has been expanded 68 to 80+ employees. The client relationships have
grown from 40 to 78 over FY08-10.
Financial services, power and infrastructure are key contributors to MMFS’ portfolio. We
believe that with strong focus on infrastructure by the union government, the spending
on infrastructure will be growing at CAGR of 14% over next seven years. There is also
industrial capex lined by the manufacturing sector to the tune of USD600bn. All these
augurs well for MMFS’ loan/debt syndication business.
Putting cash flows to good use
To use the huge cashflows generated by the debt syndication business and diversify the
revenue streams, MMFS has entered into financing business. The financing is also a logical
extension as MMFS has been in this business for a very long time understanding the lender
as well as borrowers well.
The diversification will also help MMFS to retain high RoEs which would have diluted if the
cash generated from main business were to remain on book. We believe that through
internal cashflows and recently raised QIP money, the loan book can grow 10x over next
five years with financing business contributing 35-40% of the revenues and profits.
Lack of competition and assignments to ensure robust spreads
MMFS is planning to take advantage of the gaps in financing sector created by regulatory
hurdles. For example, currently banks do not lend to infrastructure projects until the land
acquisition and all project related approvals are in place. MMFS will do funding of (1) the
promoters’ equity and (2) initial debt required for land acquisition and other purposes till the
approvals are received.
Since, the banks would not be competing for this business; the yields would be higher at
15-16%. Once, the approvals are received and the banks and other NBFCs are ready to
lend to the project, MMFS will sell these loans to banks at yield of 11-12%, thereby ensuring
spread of 4-5%. Since, the loans will be for period of 5-7 years, it will ensure strong spreads
for similar tenure. MMFS plans to sell a third of its loan book under bilateral assignments.
Recently concluded QIP to help capital adequacy
Valuations and view
We believe that as MMFS expands its loan book to ~Rs29-30bn by FY12E compared to
almost negligible right now, its revenues are likely to grow to Rs5.2bn assuming spreads of
5%. This would help the net profit to improve to Rs2.4bn by FY12E.
At the current market price, the stock is quoting at 17.1x/10.0x FY11E/FY12E EPS and
2.8x/2.2x FY11/FY12E ABV. We find valuations attractive. We believe that the comparable
businesses for MMFS are CRISIL and ICRA who are into the business of rating the private
debt. We believe that the business models of these companies are identical as their growth
would track the growth in borrowing activities; they all generate strong cash flows every
year with high EBIT margins and robust RoEs however with a caveat that the credit rating
business is an oligopoly where as syndication business has immense competition. These
stocks are currently quoting at 20-22x FY12E PER and 5-7x FY12E BV. MMFS’ valuations
are extremely cheap compared to them.
MMFS has recently concluded a QIP of Rs4.5bn, at Rs625/share resulting in dilution of
20% of post issue capital. We believe that the QIP money alongwith the cash flows from
loan/syndication business can easily help MMFS to fund an asset book of upto Rs50bn.
The QIP would take MMFS’ net worth to Rs8.5bn, implying that MMFS can take decent
participation of upto Rs0.8-1bn in the financing deals to one particular borrower.
H1FY11 financials vindicate strong revenue traction
For H1FY11, MMFS has done revenues of Rs1.4bn registering a growth of 22.7% yoy. The
growth in the revenues was driven by the loan syndication business where the revenues
have grown by 32% yoy for H1FY11 driven by volumes of loan/debt syndicated of Rs160bn
for H1FY11.
As the company has recruited 53 new employees (almost up 50%) over H1FY11, the costs
for H1FY11 have gone up by 57% yoy. Hence, the operating margins for H1FY11 stood at
86.5% compared with 89.5% in the same period last year.
We believe that MMFS’ valuations can see significant rerating concurrent with improvement
in its growth profile over FY10-12E. The valuations can rerate to 14-15x one-year forward
EPS and its fair value at Rs1,000-1,100.
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