Subscribe to Muthoot Finance IPO - Quantum Securities

Key Positives:

- Bright Prospects of Gold Financing in India – India is one of the largest markets for gold, accounting for 10% of world gold stock with an annual demand of ~700 tons in FY10. Lending against gold has been one of the most popular instruments based on gold, and it works well with the Indian rural population, which views gold as an important savings instrument that is liquid. In FY10 gold loans market in India was estimated between Rs 350bn and Rs 400 bn with a CAGR of ~40% during FY02-FY10. Within this the organized gold loan market was 1.2% of total gold loans. The gold loans market is significantly under-penetrated and is expected to continue growing at the rate of 35-40% in the future.

- Strong Regional Presence and Brand Name – Due to early entry in the gold finance business MFL has built a recognizable brand in the rural and semi-urban markets of India, particularly in the southern states of Tamil Nadu, Kerala, Andhra Pradesh and Karnataka. As on November 30, 2010 these southern states constituted 75.28% of the company's gold loan portfolio and as on February 28, 2011 out of the 2611 branches, 1753 branches were located in South India.

- Good Track Record and Management Expertise – The company's promoters have been in this business for over past 70 years. Its senior management team has extensive experience in the gold loan industry and has demonstrated the ability to grow the business through their operational leadership, strategic vision and ability to raise capital. As a result its gold loan portfolio grew to 129bn as on November 30, 2011, thus making it the largest gold loan company in India.

- Strong Asset Growth without impact on Asset Quality – MFL's assets and net profits have grown at a CAGR of 61.8% and 70.2% respectively over FY06-FY10. The company has been able to achieve this growth while keeping its Gross NPA levels low at 0.35% as on November 30, 2011.

Key Concerns:

- Gold loan business constituted 98.5% of revenues as on November 30, 2011. So any major decline in gold prices in future can adversely impact the company's revenue and net profit growth.

- Major part of business and branch network is concentrated in South India. So any disruption or downturn in the economy of the region can adversely affect the company's operations.

- Increased competition from other NBFCs and banks in gold financing can put downward pressure on the net interest margins.

- As per recent RBI notification by RBI, loans sanctioned by banks to NBFCs for lending against gold cannot be classified as priority loans. This may put upward pressure on cost of funds of MFL in future.

- Deterioration in asset quality is a key risk to our investment call.

Valuation and Recommendation:

At the upper band of Rs 175 the issue is priced at 2.2x FY12E book value of Rs 78. This valuation is at par with its competitor Manappuram General Finance which is trading at exactly the same valuation of 2.2x its FY12E book value, but is having lower RoE than MFL. Considering the larger size and strong brand image of MFL, the bright prospects of gold financing in India, good track record of management and lower NPA levels we recommend investors to 'SUBSCRIBE' to the issue.

Source : Equity Bulls

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