Muthoot Pappachan Group-backed Muthoot Microfin's IPO opened for subscription on December 18 and so far has been subscribed over 80 percent. The NBFC provides micro-loans to women customers with a focus on rural regions of India and is the fifth largest NBFC-MFI (micro-finance institution) in terms of the gross loan portfolio as of March 31, 2023, and the third largest in southern India.
Several brokerages have assigned a subscribe rating to the issue owing to decent financial performance, rural-focused operations with a robust risk management framework, strong brand recall and synergies with the Muthoot Pappachan Group.
Also Read: Muthoot Microfin IPO: 10 things to know before you invest in Rs 960-crore issue
However, there are a few concerns that can’t be ignored. The company derives a significant portion of its revenues from South India. As of six months ended September 2023, out of 1,008 branches, 503 or 47.24 percent were in southern India. The South contributed over 52 percent to the company’s gross loan portfolio. Since it depends too much on one particular region, any adverse developments in the southern states may harm the business.
Apart from that, Muthoot Microfin's primary focus customer segment for micro-loan business is women in rural regions with an annual household income of up to Rs 3 lakh. According to RHP, the customers generally have limited sources of income, savings and credit histories. The majority of customers do not have any credit history supported by tax returns, proper proof of income, bank or credit card statements, statements of previous loan exposures or other related documents. Hence, it becomes difficult for the NBFC to consistently carry out credit risk analyses on customers.
Further, the company faces significant competition from other MFIs and banks in India. Also, business is vulnerable to interest rate risk and volatility could hurt net interest income and net interest margin.
Also Read: Muthoot Microfin IPO: Institutional investors buy Rs 285 cr shares via anchor book
Offer details
The company plans to raise Rs 960 crore via the IPO. The offer consists of a fresh issue of 2.61 crore shares worth Rs 760 crore and an offer-for-sale of 0.69 crore shares worth Rs 200 crore by the existing shareholders, including investor Greater Pacific Capital WIV, which will offload shares worth Rs 50 crore. The remaining shares worth Rs 150 crore will be sold by promoters Thomas John Muthoot, Thomas Muthoot, Thomas George Muthoot, Preethi John Muthoot, Remmy Thomas, and Nina George. The price band for the issue, which will close on December 20, has been fixed at Rs 277-291 per share.
Financials
The Kochi-based microfinance institution recorded a 246 percent on-year growth in net profit at Rs 163.9 crore for the year ended March 2023 and revenue during the same period increased by 71.6 percent to Rs 1,428.8 crore. Its profit after tax for six months ended September FY24 increased 16.5-fold to Rs 205.2 crore compared to the year-ago period, while net interest income during the same period jumped 65.6 percent. The total capital ratio (CRAR) stood at 20.46 percent as of September 30, 2023.
Return ratios
Muthoot Microfin’s price-to-earnings (P/E) ratio at 30.3x is cheaper than CreditAccess Grameen (32.4x) and Spandana Sphoorty Financial (551.2x) but more than Equitas Small Finance (20.2x), Ujjivan Small Finance (9.3x), Bandhan (15.6x), Suryoday Small Finance Bank (21.7x) and Fusion Micro Finance (13.5x). The return on equity (RoE) surged to 11.06 percent in FY23 from 4.26 percent in FY22.
Also Read: RBI move to increase risk weight on consumer loans won’t impact microfinance: Muthoot Microfin CEO
Should you subscribe to Muthoot Microfin IPO?
Anand Rathi: Subscribe for long term
The company has a market leadership with a pan-India presence and is a part of the prestigious Muthoot Pappachan group. “At the upper price band company is valued at a P/BV of 2.2X with a market cap of Rs 49,608 million post-issue of equity shares. We believe that the valuation of the company is fairly priced and recommend a ‘Subscribe-Long Term’ rating to the IPO,” said analysts at Anand Rathi.
BP Wealth: Subscribe for medium to long-term
“As the lender will utilize the net proceeds of the fresh equity shares issue to augment its Tier-I capital base, its capital adequacy will enhance and lead to a stable leverage position. We believe the company is fairly valued and advise investors to ‘Subscribe’ from a medium to long-term perspective,” said analysts at BP Wealth.
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