Muthoot Finance IPO - Sharekhan

Key investment positives

Market leader in gold loan segment

MFL is the largest gold financing company in India in terms of loan portfolio. The company's outstanding gold loans portfolio was around Rs9,810 crore in the eight months ended FY2011. The company has approximately 20% market share in the gold loan segment, which is served by several specialised NBFCs, banks etc.

Wide geographical presence

Being a dominant player in the southern region, the company is expanding into the northern region and select areas of the eastern region which would be a key driver of its growth in the coming years. It has about 2,600 branches (as in November 2011) of which approximately 70% are in the southern region. In addition, the company's branch network remains the highest among the other NBFCs which gives edge to its business.

Strong brand name, track record and promoter support

The company has an operating history of over a period of 70 years since M George Muthoot founded a gold loan business in 1939. The business is also well supported by the high net worth promoters, who are members of the Muthoot family.

Strong funding profile

MFL has a diversified funding mix and sources funds through multiple channels like bank borrowings, securitisation, nonconvertible debentures (gold bonds) etc. The company funds a large part (about 50%) of its requirement through Muthoot Gold Bonds, which is popular among investors. It has been assigned an "A1+" rating by ICRA for commercial paper and for short-term non-convertible debentures of Rs200 crore and a "P1+" rating by CRISIL for short-term debt instruments of Rs1,000 crore. MFL intends to tie up for long-term institutional funding by improving its ratings for long-term debt instruments which will further improve its cost ratios.

Quick turnaround time a key differentiator

The company's branches are located close to customers and operate as per their convenience. Further, the branch employees are well trained to appraise collateral and disburse loans in minimum time. The company disburses an average loan ticket size of Rs20,000 within five minutes from the time gold is tendered to the appraiser. High quality customer service and short response time are significant competitive strengths that differentiate MFL's services and products from those provided by commercial banks.

Robust operational metrics

With an average net interest margin of 11% and return on equity in excess of 30%, the company's operational metrics stand among the best in the industry. Its non-performing assets (NPAs) were at 0.35% of loans for 8MFY2011, suggesting strong asset quality.

Key risks

Regulatory risks

The biggest risk for these companies would be the sustainability of regulatory arbitrage vis–a-vis banks and other NBFCs. For example, MFL benefits in terms of easy Know Your Client norms, and independence to price products (unlike micro-finance institutions), expand branch network and recovery loans.

Macro risks

The key macro concerns can affect the company's performance. For example, a sharp increase in the interest rates may squeeze its margin while a sharp correction in gold's price may contribute to its NPAs.

Valuations

At the upper end of the price band the issue is priced at 3.2x M8FY2011 book value, which is at a premium to Manapuram General Finance and the other NBFCs. The premium pricing is due to a leadership position in its segment, strong brand visibility and better operational metrics. However, considering the regulatory risks in the sector and the other macro factors the company should trade at a slight discount to the larger NBFCs.

Source : Equity Bulls

Keywords