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Objective of the Issue
• To create more risk weighted assets while simultaneously meeting
new CAR requirements of the RBI
• General Corporate Purposes
Company Background
Incorporated in 1997 and headquartered in Cochin, Muthoot Finance
Ltd. (MFL) is the largest gold financing company in India with a 20% market
share. Operating in 26 states and union territories in India with 2611
branches and 16000 employees, it services, on an average, over 61,000
customers daily. Its core business is primarily providing individual and
business loans with gold jewellery as a collateral.
Investment Rationale
Low Cost of Capital
The interest charged on loans varies between 12% and 30% per annum.
MFL enjoys the lowest cost of capital in the industry of approximately
9.5%. This helps it achieve net interest margin of 9-10% on its loans
Market leading position in the Gold Loan business
MFL is the largest gold financing company in India in terms of loan portfolio.
Company’s loan portfolio as of March 31, 2010 and November 30,
2010 comprised approx. 2.8mn and approx. 4.1mn loan accounts, respectively,
in India with Gold Loans outstanding of `73,417mn and
`128,978mn, respectively
Strong presence in underserved rural and semi-urban markets
MFL has the largest branch network among gold loan NBFCs. It has positioned
itself to provide loans targeted at the under-served rural and
semi-urban markets
Sound Risk Management Systems
To mitigate risks of employee theft, MFL has installed CCTV’s at 85% of
its branches and plans to reach 100% within a year. It provides extensive
training for its employees to accurately appraise the quality of gold and
measure its weight. In addition, branches are subject to weekly internal
audit where auditors randomly assess the appraisal of gold on file
Strong capital raising ability
MFL has a track record of successfully raising capital from various
sources such as secured redeemable non-convertible debentures to retail
investors on a private placement basis, equity shares to institutional
investors, borrowings from banks and other financial institutions and
selling receivables under bilateral assignments to banks
Key Risks
• MFL’s financial performance is vulnerable to interest rate risks.
• There are a lot of civil suits, consumer complaints, labour, criminal and tax
disputes against company, group companies and promoters which could impose
financial burden on the company.
• MFL had negative net cash flows from operating and investing activities in
the last three fiscal years which, if continues, could impact company’s ability
to pay dividends to shareholders going ahead.
Valuation & Recommendation
MFL is a market leader in its segment. It has had an average RONW of 39% which
is far better than its competitor (19.61% for Manappuram). The company has
major global PE firms invested in it; namely Matrix Partners India Investments
LLC, Baring India Private Equity Fund III Limited and The Wellcome Trust Limited.
At the upper and lower ends of IPO price band of Rs160-Rs.175, MFL is available
at a P/E of 11.72x and 12.82x respectively as compared to 22.73x for
Manappuram.
Considering robust GDP growth of India, increasing purchasing power and evergrowing
appetite for gold, the company looks well poised for a sound growth
trajectory in the years to come.
Hence, we recommend SUBSCRIBE with a medium to long term perspective.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Objective of the Issue
• To create more risk weighted assets while simultaneously meeting
new CAR requirements of the RBI
• General Corporate Purposes
Company Background
Incorporated in 1997 and headquartered in Cochin, Muthoot Finance
Ltd. (MFL) is the largest gold financing company in India with a 20% market
share. Operating in 26 states and union territories in India with 2611
branches and 16000 employees, it services, on an average, over 61,000
customers daily. Its core business is primarily providing individual and
business loans with gold jewellery as a collateral.
Investment Rationale
Low Cost of Capital
The interest charged on loans varies between 12% and 30% per annum.
MFL enjoys the lowest cost of capital in the industry of approximately
9.5%. This helps it achieve net interest margin of 9-10% on its loans
Market leading position in the Gold Loan business
MFL is the largest gold financing company in India in terms of loan portfolio.
Company’s loan portfolio as of March 31, 2010 and November 30,
2010 comprised approx. 2.8mn and approx. 4.1mn loan accounts, respectively,
in India with Gold Loans outstanding of `73,417mn and
`128,978mn, respectively
Strong presence in underserved rural and semi-urban markets
MFL has the largest branch network among gold loan NBFCs. It has positioned
itself to provide loans targeted at the under-served rural and
semi-urban markets
Sound Risk Management Systems
To mitigate risks of employee theft, MFL has installed CCTV’s at 85% of
its branches and plans to reach 100% within a year. It provides extensive
training for its employees to accurately appraise the quality of gold and
measure its weight. In addition, branches are subject to weekly internal
audit where auditors randomly assess the appraisal of gold on file
Strong capital raising ability
MFL has a track record of successfully raising capital from various
sources such as secured redeemable non-convertible debentures to retail
investors on a private placement basis, equity shares to institutional
investors, borrowings from banks and other financial institutions and
selling receivables under bilateral assignments to banks
Key Risks
• MFL’s financial performance is vulnerable to interest rate risks.
• There are a lot of civil suits, consumer complaints, labour, criminal and tax
disputes against company, group companies and promoters which could impose
financial burden on the company.
• MFL had negative net cash flows from operating and investing activities in
the last three fiscal years which, if continues, could impact company’s ability
to pay dividends to shareholders going ahead.
Valuation & Recommendation
MFL is a market leader in its segment. It has had an average RONW of 39% which
is far better than its competitor (19.61% for Manappuram). The company has
major global PE firms invested in it; namely Matrix Partners India Investments
LLC, Baring India Private Equity Fund III Limited and The Wellcome Trust Limited.
At the upper and lower ends of IPO price band of Rs160-Rs.175, MFL is available
at a P/E of 11.72x and 12.82x respectively as compared to 22.73x for
Manappuram.
Considering robust GDP growth of India, increasing purchasing power and evergrowing
appetite for gold, the company looks well poised for a sound growth
trajectory in the years to come.
Hence, we recommend SUBSCRIBE with a medium to long term perspective.
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