Muthoot Finance IPO:: High growth opportunity:: Prabhudas Lilladher,

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Muthoot Finance Ltd. (MFL) is the largest gold financing company in India in terms of
loan portfolio (AUM of Rs130bn as on Nov’10), with a market share of 19.5% as on
FY10. As on February 2011, it has a network of 2,611 branches spread across 25
states in India with nearly 67% of branches concentrated in the southern states.
 Expertise in niche business segment: Muthoot Finance (MFL) is the largest gold
loan financier in the country, with a market share of 19.5% (as on FY10). MFL
has achieved its leadership position in this niche business segment, given its
strong domain knowledge, healthy brand reputation, widespread distribution
network and operational efficiency to achieve scale along with profitability,
while maintaining quality.
 Immense growth potential: The gold loan industry offers immense growth
potential, given its low penetration (despite strong growth seen recently – the
gold loan market has grown at a CAGR of 43% during FY07‐10) and changing
mindsets of Indian households towards raising money against gold, which was
earlier perceived as demeaning. We believe that this industry can continue to
grow at a rapid pace in the medium term, providing ample opportunities for
existing as well as new players in the market.
 Healthy asset quality: MFL’s asset quality remains healthy, with gross NPAs as a
% of gross retail AUM at 0.35% as on November 2010 v/s 0.46% as on March
2010. Although lending against gold is perceived to be a nearly zero‐risk
business, we believe that improving asset quality on a rapidly growing asset
base is commendable.
 Margins remain healthy; sustainability debatable: MFL’s net interest margin
stood at 10.4% as on November 2010 v/s 11.2% in FY10. Growing competition
from banks and other NBFCs and regulatory changes (RBI disallowing banks
lending to NBFCs for direct on‐lending against gold jewellery or by way of
investment in securitized assets from classifying as agri‐lending) are likely to
impact margins adversely. However, we believe, given the strong growth
opportunities and price inelastic demand in this segment; margins are unlikely
to contract substantially in the near‐to‐medium term.
 Key Risks: Steep decline in gold prices in a short span of time could hurt asset
quality and regulatory risks.
 Valuations and outlook: MFL is well poised to tap the strong growth
opportunities in the rapidly growing gold loan market, given its robust
distribution strength and strong brand. MFL is expanding its footprint by
diversifying its presence into the non‐Southern regions. Although return ratios
are likely to compress in the near term on account of capital raising, we expect
it to still remain higher compared to other financing companies (we expect RoEs
to remain in the region of 25‐30% in the medium term). Moreover, despite
steep asset growth witnessed in the past (72.4% CAGR for MFL during FY07‐10
v/s industry CAGR of 43%), we expect MFL to continue to outpace industry
growth. Valuations remain reasonable, we recommend ‘Subscribe’.