IPO Review: Muthoot Finance

This is one fever not many would mind to catch. The appeal of gold remains universal. For Muthoot Finance, a leading player in gold financing, this provides an added dose of glitter where earnings numbers are doing all the talking, be it the loan book or just the plain profit. A rosy growth view makes the company all the more attractive

 

THE Kerala-based Muthoot Finance has certainly trained its sights higher. It is lining up a mega initial public offer (IPO) of some 5.15 crore shares in an attempt to mobilise 825-900 crore. The nonbanking finance company (NBFC) has fixed a price band of 160-175 a share for the IPO, which is slated to go on stream on April 18.

   Post-issue, the promoter group's stake will come down to 80% from the current 93%. The company may offer a 10% discount to retail investors, which will be announced two days before the IPO opens. The proceeds will go into disbursing more loans, general corporate purposes, and meeting expenses of the public offering.

BUSINESS:

Muthoot Finance is into the business of lending against gold jewellery. It is the largest gold financing company in the country with a 20% market share. The company's loan disbursals as of November 2010 stood at almost 13,000 crore.

   The company has close to 2,600 branches, with over 1,000 added in the last one year alone. The gold loans usually have a shorter tenure, with the maximum being 12 months. Muthoot Finance, which has a large network in South India, caters to the needs of small businesses, vendors, traders, farmers and salaried individuals. The company meets its funding requirements by issuing nonconvertible debentures called 'Muthoot Gold Bonds', bank loans and by selling receivables to banks.

FINANCIALS:

Rising gold prices and improving awareness have added much sparkle to the gold loan industry in India. Muthoot's loan book grew at a compounded annual growth rate (CAGR) of 74% between FY06 and FY10. Interest income shot up from 140 crore in FY06 to 1,080 crore in FY10, registering a CAGR of 66% . During the same period, net profit grew at 70% annually to 227.6 crore in FY10.

   The company's growth curve has relentlessly climbed in the first eight months of FY11, adding 13 lakh new loan accounts — a 46% jump over the Marchend 2010 numbers. The loans disbursed during this period accounted for 75% of the loan book at the end of FY10. The interest income for the period was 1,289.3 crore and net profit 291.5 crore. However, the high growth led to a 100-bps fall in its average interest income to 18.9% of average loans under management. The net interest margin (NIM) also dropped to 10.4% in the first 8 months of FY11, from 11.2% of FY10.

   The company's gross non-performing assets (NPAs) have remained below 0.5% over the past three years. Its return on equity (RoE) has been 33.5% on a 3-year weighted average basis. The company's capital to risk-adjusted ratio (CRAR) stands at 15%, in line with the guidelines issued by the Reserve Bank of India (RBI). In 2010, the company raised close to 250 crore from private equity players. With the IPO sum, the company expects to disburse 5,500-6,000 crore in additional loans, which are almost half its existing loan portfolio, before it needs another round of capital infusion.

VALUATIONS:

At the upper end of the price band, the company's stock would trade at a price earning value of around 15, considering its annualised net profit for the 8-month period ended November 2010. This is lower compared to its smaller peer Manappuram General Finance, which is trading at a PE multiple of around 23 times.

CONCERNS:

In a rising interest rate scenario, the company could find it difficult to maintain its NIM, particularly when it has embarked on an aggressive growth path. A sustained fall in gold prices could also affect profits. In February 2011, the RBI removed the 'priority sector lending' status to gold loans for the agriculture purpose. This will make it difficult for the company to continue selling parts of its loan portfolio to banks and increase its cost of funds. Furthermore, there are about 7,000 litigation cases against the company.