Apply for Muthoot Finance IPO: Aditya Birla Money

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Apply for Muthoot Finance IPO: Aditya Birla Money

The initial public offering of Muthoot Finance, the non-banking finance company engaged in gold loan business, opened for subscription. Aditya Birla Money has recommended subscribing the issue with a medium to long-term perspective, in its research report.

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The initial public offering of Muthoot Finance, the non-banking finance company engaged in gold loan business, opened for subscription. Aditya Birla Money has recommended subscribing the issue with a medium to long-term perspective, in its research report.

The company plans to raise Rs 901 crore via an initial public offer of 5.15 crore equity shares at the higher end of price band of Rs 160-175 a share.

The report says, "Manappuram General Finance & Leasing Limited (MGF), the only listed company in India which is in the similar business of gold financing with less than half of its size in terms of income is trading at a P/B of 2.81x. We believe Muthoot Finance which has a better reach than its competitors in terms of branch network and higher return on networth compared to MGF, deserves a premium valuation. On the Price to earning methodology, the issue is priced at around 14.9x and 13.6x on the post issue annualised EPS of 11.76 for 8MFY11, which is 20% cheap when compared to MGF which is trading at a P/E of 18.8x on its annualised 9MFY11 EPS of 6.76."

"Muthoot finance enjoys superior return ratios with ROAE at 50% and ROAA at 3.9% mainly driven by it superior credit rating (which enables it to borrow at competitive rates thereby leading to healthy 10%+ NIMs) coupled with its high leverage of 9.0x. The current equity raising initiative by the company will improve its capital adequacy ratio in excess of 23% from 15.06% in November 2010, thereby helping it to maintain loan growth and support NIM going forward."

The report also says, "We believe the company's leadership position in the gold loan business (market share of 20%), strong capital raising ability, superior NIMs and return ratios, established brand image and opportunity in the gold financing business are key value drivers for Muthoot Finance going forward. We recommend investors to subscribe to the issue with medium to long term perspective."

Disclaimer: The views and investment tips expressed by investment experts on moneycontrol.com are their own, and not that of the website or its management.Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

To read the full report click on the attachment