All you wanted to know about Muthoot Finance

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The Offer

The present IPO is a fresh Issue of 5.15 cr Equity Shares of  Rs 10 each by the company which constitutes 13.85% of the company's post-issue paid-up capital. The offer is being made in the price band of `160 - `175 a piece. Thus, the issue size amounts to Rs 824 cr to Rs 901 cr. 

Parentage

The Kerala-headquartered Muthoot Finance Ltd (MFL) is a Muthoot M George enterprise whose lineage dates back to 124 years!  The father of the 14-year old MFL's promoters, M George Muthoot, founded a gold loan business in 1939 under the heritage of a trading business established by his father, Ninan Mathai Muthoot, in 1887. 

Business

Classified as a "Systemically Important Non-deposit taking NBFC", MFL is reportedly the largest gold financing company in the country today. MFL's gold loan portfolio comprised of about 41 lakh loan accounts spread across 20 states, NCT of Delhi and four Union Territories in India. Up to February 2011, the company had a network of more than 2600 braches and employed 15664 people serving an average of 67953 customers per day.

The Customers of MFL are typically small businessmen, vendors, traders, farmers and salaried individuals, who for reasons of convenience, accessibility or necessity, avail the company's credit facilities by pledging their gold jewellery. These loans have a maximum term of 12 months.

Besides gold loans, MFL also offers money transfer services through its vast network of branches as sub-agents of various registered money transfer agencies, and recently has started providing collection agency service. MFL claims to have three wind mills too in Tamil Nadu, possibly to avail tax shelter.

Growth Prospects

In the past three years, MFL has clocked a phenomenal growth. The company's Gold Loan portfolio recorded a CAGR of 94.6% since fiscal 2008 and stood at `12,898 cr at the end of November 2010.

During this period, the Company's Net Profit clocked a CAGR of 76.9% to reach `291.48 Cr for the 8-month period ended November 2010. MFL's annualized net profit of `437 Cr against its post-issue equity of Rs 371.71 crore augurs well for the prospective investors.

Concerns
• Possible over dependence on the `Muthoot' logo, whose ownership is unclear at this point in time.
• Financial performance is greatly vulnerable to interest rate risk.
• Even while MFL charges its borrowers about 19% it has not paid any dividend to its shareholders till date. Given this backdrop, it remains to be seen if public shareholders after the IPO would be left to seek their gains through capital appreciation alone.

• Promoters, directors and related entities have interests in a number of entities which are in business similar to MFL. This may undermine the long term growth prospects.

• None of the key employees of MFL drew remuneration of even `1,00,000 per month during fiscal 2010. What's more, there is no reservation in the IPO for MFL's 15,000-plus employees. When MFL operates an employee-centric business, such instances of employee unfriendliness may not be in the long term interests of the Company.

• During the last two years, Gold price has remained bullish. However, should the yellow metal witness a sharp decline in price in future, MFL's NPAs might burgeon.

• Due to a stipulation by RBI in February 2011 that loans sanctioned by Banks to NBFCs for on-lending to individuals and other entities against gold jewellery would not be eligible for classification as Priority Sector advances, MFL's pace of growth may be impaired.

Recent Micro-fin IPO experience

In the recent past, there were two IPOs from the micro-finance segment. SKS Microfinance, lead-managed by Kotak Mahindra Capital along with Citigroup and Credit Suisse, priced `10 paid up share at an exorbitant Rs 985 discounting its pre-IPO EPS of `32.98 nearly 30 times. Microsec Financial, managed by SBI Capital, offered its `10 paid-up share at `118 discounting its pre-issue EPS about 21 times. Post-issue both these companies indeed improved their EPS to over `35 and `8 respectively. But, their P/E less than halved, which resulted in a capital loss of 46.6% and 65.5% respectively!
Perhaps keeping SKS Microfinance's bitter experience in mind, the investment bankers have treaded cautiously and have advised MFL to offer the shares at a reasonable P/E of 12.5 times.

RECENT NON-BANKING MICROFINANCE IPOs AT A GLANCE

ISSUER  NAME	SKS Microfinance	Microsec Fin	Muthoot Finance
LEAD MANAGERS	Kotak, Citigroup,	SBI Capital	ICICI Sec, Kotak,
	Credit Suisse		HDFC Bank
OFFER DATE	28-Jul-10	17-Sep-10	18-Apr-11
OFFER AMT (Cr)	1,654	148	824-901.25
IPO RATING	CARE (4/5)	CRISIL (2/5)	CRISIL (4/5), ICRA (4/5)
FACE VALUE (`)	10	10	10
PRICE BAND-HIGH	985	118	175
PRICE BAND-LOW	850	113	160
OFFER PRICE	985	118	175 (assumption)
OFFER EPS	32.98	5.67	13.95
OFFER P/E	29.9	20.8	12.5
TIMES SUBSCRIBED	11.44	11.99
RETAIL SUBSCRIP'N	2.8	10.8
LIST-DAY PRICE	1,036.00	135.1
LIST GAIN/(LOSS) %	5.2	14.5
13-04-11 PRICE	525.5	40.7
Curr. Gain/(Loss) %	-46.6	-65.5
CURRENT EPS (`)	35.22	8.08
CURRENT P/E (X)	14.9	5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Valuation

From a valuation perspective, MFL's offer at the higher end of the price band discounted its FY 2011 annualized EPS of `13.65 about 12.5 times. Currently, the market composite P/E works out to 18.7x and NBFC industry as a whole enjoys a higher P/E of 24 times though the Micro-finance composite (17.9x) is slightly below the overall market composite.

With regard to peers' comparison, Manappuram General, which is also head-quartered in Kerala, commands a market cap of Rs 5293 cr at a P/E of more than 22x. Thus, MFL which is much larger in size should get a valuation on listing significantly higher than the Rs 6500 crore arrived at the higher end of the price band.

CONSUMER/MICRO FINANCE PEER GROUP COMPARISON
PEERS/INDUSTRY/MARKET	COS	M-CAP	P/R	P/E	P/BV	P/FV	PRICE
		(` Cr)	(X)				(`)
Manappuram General		5,293	5.6	22.7	3	63.5	127.05
SKS Microfinance		3,790	2.9	14.9	2.3	52.6	525.5
Microsec Financial		129	2.6	5	0.6	4.1	40.7
MICRO FIN COMPOSITE	3	9,212	4	17.9	2.5	48.1
NBFC INDUSTRY	263	225,393	5.2	24	3.7	47.9
MARKET COMPOSITE	3,009	6,993,723	1.9	18.7	3.1	35
Muthoot Finance (pre-IPO)	Hi-Band	5604	2.9	12.5	5	17.5	175
	Lo-Band	5123	2.6	11.5	4.5	16	160

 

 

 

 

 

 

 

 

Syndicated by India Aarthik Research (Feedback to vsf@iarlive.in )

* V S Fernando is a veteran IPO Analyst who has been tracking domestic Public Offerings since 1986.