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Muthoot finance ltd. (mfl) – IPO note
Issue Details
Issue Date April 18, 2011 – April 21, 2011
Issue Size Rs. 8.24-9.01bn
Price Band Rs. 160-175
FV Rs.10
Fresh issue 51.5 mn equity shares
QIB 50%
Non Institutional/HNIs 15%
Retail 35%
Equity shares prior to issue 320.2mn equity shares
Equity shares post issue 371.7mn equity shares
Post issue market capitalization Rs. 59.5-65.0bn
IPO Rating Grade 4 by ICRA and CRISIL
Lot size 40 equity shares and multiples thereof
Issue Manager ICICI Securities, Kotak
Co-Book Running Lead Manager HDFC Bank Ltd.
Registrar to the issue Link Intime
About the company
MFL is Systemically Important Non-deposit taking NBFC based in the Kerala. It has an operating
history of over 70 years. Gold Loan Business of MFL was founded by Late. M George Muthoot
(father of the current promoter) under the heritage of trading business established by his father,
Ninan Mathai Muthoot. As on December 31, 2010, the promoters of MFL held a 93% stake in the
company. The promoters diluted their stake from 100%, following issue of fresh shares to the extent of
6% of their shareholding during H1, 2011 to private equity investors– Matrix Partners, Baring India
Private Equity, Kotak India Private Equity, Kotak Investment Advisors Limited and the Wellcome Trust
Limited. Subsequently the promoters sold 1% of their shareholding to the Wellcome Trust Limited.
Robust Business Model…
The company provides personal and business loans secured by gold jewellery, or Gold Loans,
primarily to individuals who possess gold jewellery but could not access formal credit within a
reasonable time, or to whom credit may not be available at all, to meet unanticipated or other
short term liquidity requirements. It offers products with varying loan amounts, advance rates
(per gram of gold) and interest rates. It typically charges interest rates of 12%-30% p.a on its gold
loans. As on 30th November 2010, its gold loan portfolio comprised 4.1mn loan accounts in India
that it services through its 2,611 branches (as on February 28, 2011) across 20 states, the national
capital territory of Delhi and four union territories in India.
On an average, the company services 67,953 customers per day through its various branches. Its
customers are typically small businessmen, vendors, traders, farmers and salaried individuals,
who avail credit facilities by pledging their gold jewellery with the company. The gold loans
have a maximum term of 12 months with a small ticket size. Its average disbursed gold loan
amount outstanding was Rs. 31,553 per loan account as on November, 2010. In FY10, its retail
loan portfolio earned, on average, 1.67% per month, or 19.94% per annum, and in the eight
months ended November 30, 2010, its retail loan portfolio earned, on average, 1.57% per month,
or 18.92% per annum. As on November 30, 2010, its gross NPAs stood at 0.35%.
The company depends on the following sources of funds for its financing business:
a) Bonds: The company has issued secured non-convertible debentures called “Muthoot
Gold Bonds” on a private placement basis. The issuance of Muthoot Gold Bonds forms a
significant source of funds for its Gold loan business.
b) Bank loans and surbordinated instruments.
c) The company also raised capital by selling a portion of its loan receivables under
bilateral assignment agreements with various banks.
As on November, 2010, MFL had Rs.33.6 bn in outstanding Muthoot Gold Bonds and Rs. 57.2 bn in
other borrowings. The company has witnessed a good financial performance over the period
2006-10. It witnessed a CAGR of 65% in total income, 68% in operating income and 71% in net
profit. Today, MFL enjoys the status of the largest gold financing company in terms of loan
portfolio.
In addition to gold financing business, the company also provides money transfer services,
collection services and is also engaged in wind mills business.
Objects of the issue
Augment capital base to meet the capital adequacy norms for future capital requirements and
growth in assets.
Key positives
Underpenetrated gold loans market, rural India to drive growth
India is one of the largest markets for gold and as of fiscal 2010, accounts for ~10% of the total
world gold stock with an annual demand for ~700 tonnes. (Source: IMaCS Industry Report -2010).
Lending against gold has been one of the most popular instruments based on gold, and it works
well with the Indian rural population, which typically views gold as an important savings
instrument that is liquid and can be converted into cash instantly to meet their urgent cash
requirements. Rural India is estimated to hold ~65% of the total gold stock. The organized gold
loans portfolio accounted for merely 1.2% of the value of total gold stock in India.
Gold loans market in India was estimated at ~Rs.350-400bn which has witnessed a CAGR of 40%
over the period 2002-2010. The gold loans market is significantly under penetrated and is
expected to grow at rate of 35-40% in the future. (Source: IMaCS Industry Report – 2010 update).
Moreover, traditionally gold owners in southern India are more open than elsewhere in the
country to accept and exercuise the option of pledging gold to borrow money (Source: IMaCS
Industry Report – 2009).
The company has a dominant presence in Southern India which augurs well for the company as
it is the largest market accounting for ~40% of the gold demand.
Market leading position in Gold Loan business, early mover advantage and strong brand
MFL has been the leader in gold financing business with 20% share as on FY10. The other players
in this segment with major market share are Indian Overseas Bank (20%) and Indian Bank (10%).
The company due to its early entry has built a recognizable brand in the rural and semi –urban
markets of India, particularly in the southern Indian states of Tamil Nadu, Kerala, Andhra Pradesh
and Karnataka. This has led to strong distribution network. As on March 31, 2010 and November
30, 2010, the southern Indian states of Tamil Nadu, Kerala, Andhra Pradesh, Karnataka and Union
Territory of Pondicherry constituted 75.4% and 75.3%, respectively of its gold loan portfolio.
Diversifying presence
The company has predominantly been a south based player. The company is now diversifying its
presence in Northern and Western India. Its efforts of diversifying presence have been evident
through its reducing branch concentration in South to 70% in FY10 from 85%.
Strong capital raising ability
MFL raises funds at relatively competitive rates from banks and institutional investors. It enjoys
high credit ratings of LAA- and A1+ from ICRA, which support its ability to raise funds at
competitive rates. In addition, the strong franchise and the group’s long track record in Kerala
enable MFL to tap retail funding sources (accounting for about 33% of total funding in
September 2010). As on December 2010, the capital adequacy of MFL was at 15.19% (Tier 1 of
10.69%). The company raises subordinate debt (which classifies as Tier 2 capital, subject to a
maximum of 50% of Tier I capital) placed primarily to its retail investors. MFL currently has limited
headroom to raise additional Tier 2 capital in the form of subordinate debt but has headroom
(of Rs. 5.9bn) to raise Tier 2 capital in the form of preference shares to meet its regulatory capital
adequacy requirements of 15% (with effect from March 2011). Proposed IPO would create
additional headroom for MFL to raise Tier 2 capital, thereby expanding its capacity to lend.
High margin of safety enjoyed by MFL in gold financing business
It provides loan which is ~70-80% of the asset value, average maturity of loan is~4-5 months and
smaller ticket size loans (average ticket size Rs.31,553/-) leading to higher response time. On
account of this, there are no calls for margin payments to clients, in the event of decline in gold
prices. Over the last three years, the company has not more than 3% of gold against loans
outstanding has been auctioned. This is primarily on account of gold ornaments being pledged
by families where huge sentiments are involved leading to higher recovery of loans.
Key risks
MFL loan portfolio not classified as priority sector advances by the RBI
A recent notification issued by the RBI in February 2011, has stipulated that loans sanctioned to
NBFCs for on lending to individuals or other entities against gold jewellery would not be eligible
for classification as priority sector advances in the context of priority sector lending guidelines
issued by RBI. Accordingly, its ability to raise capital by selling down its gold loan portfolio under
bilateral assignments will be hampered in the future and impact its ability to raise funds through
loans from banks, which may adversely affect its financial condition.
Major concentration in southern India
As on February 28, 2011, 1753 out of its 2,611 branches are located in the southern states of Tamil
Nadu (593 branches), Kerala (607 branches), Andhra Pradesh (316 branches), Karnataka (230
branches) and Union Territory of Pondicherry (7 branches). Moreover, southern states as on
November, 2010 accounted for 75.28% of its total gold loan portfolio. Any slowdown in the
southern Indian economy could affect business and profitability.
Exposed to an event risk – Kerala Money Lender’s Act
MFL is exposed to an event risk- ‘Kerala Money Lender’s Act’ (KML), which empowers the state
government to regulate lending rates of money lenders operating in the state and requires
money lenders to register branches with the state authorities apart from other things. The matter
is subjudice at the Supreme Court. Any adverse ruling in this case could impact the growth
prospects of the company in the state of Kerala, which accounted for around 16% of its portfolio
as on September 30, 2010. However, the impact on asset quality may not be significant as the
company can auctions the pledged gold ornaments.
Outlook and recommendation
We believe the stock valuation of P/BV – 3.2x at the upper end of the price band of Rs. 175 is
justified, because of the following reasons:
a) MFL being the market leader in gold financing business,
b) Early mover advantage in gold financing business and strong brand in southern India,
c) Strong fund raising capabilities at competitive rates,
d) Diversifying presence in northern and western parts of the country,
e) CRISIL and ICRA rating of 4, indicating above average fundamentals,
f) Larger presence (2,611 branches) with a higher scale in terms of gold loan portfolio of
Rs.128.9bn as compared to its peer Manappuram General Finance Ltd. (MGFL) with
1,800 branches and gold loan portfolio of Rs.65bn,
g) No offer for sale by PE players and Preferential allotment to private equity players(Matrix
Partners India Investments, LLC and The Wellcome Trust) on September 23, 2010 at
Rs.173.5 instills confidence and provides a comfort on the valuation front
We recommend ‘SUBSCRIBE’ to the issue for short term listing gains.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Muthoot finance ltd. (mfl) – IPO note
Issue Details
Issue Date April 18, 2011 – April 21, 2011
Issue Size Rs. 8.24-9.01bn
Price Band Rs. 160-175
FV Rs.10
Fresh issue 51.5 mn equity shares
QIB 50%
Non Institutional/HNIs 15%
Retail 35%
Equity shares prior to issue 320.2mn equity shares
Equity shares post issue 371.7mn equity shares
Post issue market capitalization Rs. 59.5-65.0bn
IPO Rating Grade 4 by ICRA and CRISIL
Lot size 40 equity shares and multiples thereof
Issue Manager ICICI Securities, Kotak
Co-Book Running Lead Manager HDFC Bank Ltd.
Registrar to the issue Link Intime
About the company
MFL is Systemically Important Non-deposit taking NBFC based in the Kerala. It has an operating
history of over 70 years. Gold Loan Business of MFL was founded by Late. M George Muthoot
(father of the current promoter) under the heritage of trading business established by his father,
Ninan Mathai Muthoot. As on December 31, 2010, the promoters of MFL held a 93% stake in the
company. The promoters diluted their stake from 100%, following issue of fresh shares to the extent of
6% of their shareholding during H1, 2011 to private equity investors– Matrix Partners, Baring India
Private Equity, Kotak India Private Equity, Kotak Investment Advisors Limited and the Wellcome Trust
Limited. Subsequently the promoters sold 1% of their shareholding to the Wellcome Trust Limited.
Robust Business Model…
The company provides personal and business loans secured by gold jewellery, or Gold Loans,
primarily to individuals who possess gold jewellery but could not access formal credit within a
reasonable time, or to whom credit may not be available at all, to meet unanticipated or other
short term liquidity requirements. It offers products with varying loan amounts, advance rates
(per gram of gold) and interest rates. It typically charges interest rates of 12%-30% p.a on its gold
loans. As on 30th November 2010, its gold loan portfolio comprised 4.1mn loan accounts in India
that it services through its 2,611 branches (as on February 28, 2011) across 20 states, the national
capital territory of Delhi and four union territories in India.
On an average, the company services 67,953 customers per day through its various branches. Its
customers are typically small businessmen, vendors, traders, farmers and salaried individuals,
who avail credit facilities by pledging their gold jewellery with the company. The gold loans
have a maximum term of 12 months with a small ticket size. Its average disbursed gold loan
amount outstanding was Rs. 31,553 per loan account as on November, 2010. In FY10, its retail
loan portfolio earned, on average, 1.67% per month, or 19.94% per annum, and in the eight
months ended November 30, 2010, its retail loan portfolio earned, on average, 1.57% per month,
or 18.92% per annum. As on November 30, 2010, its gross NPAs stood at 0.35%.
The company depends on the following sources of funds for its financing business:
a) Bonds: The company has issued secured non-convertible debentures called “Muthoot
Gold Bonds” on a private placement basis. The issuance of Muthoot Gold Bonds forms a
significant source of funds for its Gold loan business.
b) Bank loans and surbordinated instruments.
c) The company also raised capital by selling a portion of its loan receivables under
bilateral assignment agreements with various banks.
As on November, 2010, MFL had Rs.33.6 bn in outstanding Muthoot Gold Bonds and Rs. 57.2 bn in
other borrowings. The company has witnessed a good financial performance over the period
2006-10. It witnessed a CAGR of 65% in total income, 68% in operating income and 71% in net
profit. Today, MFL enjoys the status of the largest gold financing company in terms of loan
portfolio.
In addition to gold financing business, the company also provides money transfer services,
collection services and is also engaged in wind mills business.
Objects of the issue
Augment capital base to meet the capital adequacy norms for future capital requirements and
growth in assets.
Key positives
Underpenetrated gold loans market, rural India to drive growth
India is one of the largest markets for gold and as of fiscal 2010, accounts for ~10% of the total
world gold stock with an annual demand for ~700 tonnes. (Source: IMaCS Industry Report -2010).
Lending against gold has been one of the most popular instruments based on gold, and it works
well with the Indian rural population, which typically views gold as an important savings
instrument that is liquid and can be converted into cash instantly to meet their urgent cash
requirements. Rural India is estimated to hold ~65% of the total gold stock. The organized gold
loans portfolio accounted for merely 1.2% of the value of total gold stock in India.
Gold loans market in India was estimated at ~Rs.350-400bn which has witnessed a CAGR of 40%
over the period 2002-2010. The gold loans market is significantly under penetrated and is
expected to grow at rate of 35-40% in the future. (Source: IMaCS Industry Report – 2010 update).
Moreover, traditionally gold owners in southern India are more open than elsewhere in the
country to accept and exercuise the option of pledging gold to borrow money (Source: IMaCS
Industry Report – 2009).
The company has a dominant presence in Southern India which augurs well for the company as
it is the largest market accounting for ~40% of the gold demand.
Market leading position in Gold Loan business, early mover advantage and strong brand
MFL has been the leader in gold financing business with 20% share as on FY10. The other players
in this segment with major market share are Indian Overseas Bank (20%) and Indian Bank (10%).
The company due to its early entry has built a recognizable brand in the rural and semi –urban
markets of India, particularly in the southern Indian states of Tamil Nadu, Kerala, Andhra Pradesh
and Karnataka. This has led to strong distribution network. As on March 31, 2010 and November
30, 2010, the southern Indian states of Tamil Nadu, Kerala, Andhra Pradesh, Karnataka and Union
Territory of Pondicherry constituted 75.4% and 75.3%, respectively of its gold loan portfolio.
Diversifying presence
The company has predominantly been a south based player. The company is now diversifying its
presence in Northern and Western India. Its efforts of diversifying presence have been evident
through its reducing branch concentration in South to 70% in FY10 from 85%.
Strong capital raising ability
MFL raises funds at relatively competitive rates from banks and institutional investors. It enjoys
high credit ratings of LAA- and A1+ from ICRA, which support its ability to raise funds at
competitive rates. In addition, the strong franchise and the group’s long track record in Kerala
enable MFL to tap retail funding sources (accounting for about 33% of total funding in
September 2010). As on December 2010, the capital adequacy of MFL was at 15.19% (Tier 1 of
10.69%). The company raises subordinate debt (which classifies as Tier 2 capital, subject to a
maximum of 50% of Tier I capital) placed primarily to its retail investors. MFL currently has limited
headroom to raise additional Tier 2 capital in the form of subordinate debt but has headroom
(of Rs. 5.9bn) to raise Tier 2 capital in the form of preference shares to meet its regulatory capital
adequacy requirements of 15% (with effect from March 2011). Proposed IPO would create
additional headroom for MFL to raise Tier 2 capital, thereby expanding its capacity to lend.
High margin of safety enjoyed by MFL in gold financing business
It provides loan which is ~70-80% of the asset value, average maturity of loan is~4-5 months and
smaller ticket size loans (average ticket size Rs.31,553/-) leading to higher response time. On
account of this, there are no calls for margin payments to clients, in the event of decline in gold
prices. Over the last three years, the company has not more than 3% of gold against loans
outstanding has been auctioned. This is primarily on account of gold ornaments being pledged
by families where huge sentiments are involved leading to higher recovery of loans.
Key risks
MFL loan portfolio not classified as priority sector advances by the RBI
A recent notification issued by the RBI in February 2011, has stipulated that loans sanctioned to
NBFCs for on lending to individuals or other entities against gold jewellery would not be eligible
for classification as priority sector advances in the context of priority sector lending guidelines
issued by RBI. Accordingly, its ability to raise capital by selling down its gold loan portfolio under
bilateral assignments will be hampered in the future and impact its ability to raise funds through
loans from banks, which may adversely affect its financial condition.
Major concentration in southern India
As on February 28, 2011, 1753 out of its 2,611 branches are located in the southern states of Tamil
Nadu (593 branches), Kerala (607 branches), Andhra Pradesh (316 branches), Karnataka (230
branches) and Union Territory of Pondicherry (7 branches). Moreover, southern states as on
November, 2010 accounted for 75.28% of its total gold loan portfolio. Any slowdown in the
southern Indian economy could affect business and profitability.
Exposed to an event risk – Kerala Money Lender’s Act
MFL is exposed to an event risk- ‘Kerala Money Lender’s Act’ (KML), which empowers the state
government to regulate lending rates of money lenders operating in the state and requires
money lenders to register branches with the state authorities apart from other things. The matter
is subjudice at the Supreme Court. Any adverse ruling in this case could impact the growth
prospects of the company in the state of Kerala, which accounted for around 16% of its portfolio
as on September 30, 2010. However, the impact on asset quality may not be significant as the
company can auctions the pledged gold ornaments.
Outlook and recommendation
We believe the stock valuation of P/BV – 3.2x at the upper end of the price band of Rs. 175 is
justified, because of the following reasons:
a) MFL being the market leader in gold financing business,
b) Early mover advantage in gold financing business and strong brand in southern India,
c) Strong fund raising capabilities at competitive rates,
d) Diversifying presence in northern and western parts of the country,
e) CRISIL and ICRA rating of 4, indicating above average fundamentals,
f) Larger presence (2,611 branches) with a higher scale in terms of gold loan portfolio of
Rs.128.9bn as compared to its peer Manappuram General Finance Ltd. (MGFL) with
1,800 branches and gold loan portfolio of Rs.65bn,
g) No offer for sale by PE players and Preferential allotment to private equity players(Matrix
Partners India Investments, LLC and The Wellcome Trust) on September 23, 2010 at
Rs.173.5 instills confidence and provides a comfort on the valuation front
We recommend ‘SUBSCRIBE’ to the issue for short term listing gains.
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