03 March 2012

INITIATING COVERAGE- ‘BUY’ : MUTHOOT FINANCE LIMITED:: Hedge Research

Please Share:: Bookmark and Share India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��


Business Summary
Muthoot Finance Limited (MFL) is India’s largest gold loan financing company (in terms of loan portfolio with an AUM of Rs.22694 crores) and a market share of 19.5% of the total gold loan market in India. At the end of 9MFY12, MFL had branch network and employee strength of 3480 and 23219 respectively.
Investment Rationale The gold loan market is generating a lot of goodwill with the fast changing perception of gold loans. Besides only 10% of the total gold loan stock in the country has found its way into the gold loan market thereby offering plenty of scope for its growth potential. MFL is a consummate proxy on the burgeoning gold loan market in India. It has generated ample experience and goodwill for over 7 decades, has a branch network of 3480 branches that is becoming of a large PSU bank and is the market leader with an AUM of Rs. 22694 crores and a market share of 19-20%. MFL has a host of customer engagement practices that generate strong goodwill. In addition to that it has also been diversifying its product offerings and geographical presenc. We have employed a weighted average valuation approach of determining our share target price of Rs.197. We have assigned 40% weights to our DCF and PBV targets with a 20% weight for the PE target. Our buying level of

Risks MFL’s loan book (loan book growth of 110% and 122% in the last two years) and branch expansion (run rate of 800 to 900 branches a year) in the last couple of years has taken place at meteoric rates and this may not be sustainable going forward. MFL runs the risk of growing too soon. It has been reported that the RBI is concerned with the pace of growth of gold loan companies and is looking to implement measures (higher margin ratios, restrictions on branch expansion) that could curb their growth. The success of MFL’s business model is founded on the fascination associated with the gold metal. Were gold prices to crash MFL would be adversely affected by dwindling sales and higher margin requirements. If MFL’s due diligence and recruitment and training of HR in certain branches is not up to the mark, they could suffer at the hands of fraudulent employees who can misuse their positions.

No comments:

Post a Comment