Muthoot Finance IPO - Subscribe - Mehta Equities

Muthoot Finance Ltd (MFL) is a Kerala based non-banking finance company which provides loans against gold, fixed investment options, money transfer services, insurance, securities, foreign exchange, vehicle, and asset finance services. It is primarily in the business of lending against used household gold jewellery to individuals. Since 2001, Muthoot Finance is the registered NBFC licence from the RBI. Muthoot Finance Limited is a subsidiary of Muthoot Capital Services Ltd.

Investment Rationale:

Leader in gold financing segment: MFL is one among the largest gold financing company in India in terms of loan portfolio. As on March 2010 Gold Loan portfolio comprised appx 2.8 Mn loan accounts in India. It has outstanding advance of Rs 13,000 cr as of November last, against gold ornaments, which is worth 97 tn. MFL is also expecting to grow the gold loan book by another Rs 10,000 cr in the next one year. The IPO proceeds will too be utilized to expand lending further. Muthoot Finance enjoys a 20 % market share (Imacs) in the Rs 65,000-cr organised gold loan market.

Wide Network and it's the largest in the category: It has a nationwide presence with branches around 2611+ spanning across 25 states barring the Northeast. As of 30th Nov 2010, over 75% of the company's gold loan portfolio was from Kerala, Karnataka, TN, AP and Pondicherry. Muthoot Finance has 97 branches in the eastern states of the country. With the IPO proceeds MFL is planning to tap the growing opportunity in the northeast states and will set up more branches there which are new market to crab.

Strong management capabilities to lead the business: Muthoot has operating experience evolved over a period of 70 years since M George Muthoot (the father of the current promoters) founded a gold loan business in 1939 under the heritage of a trading business established by his father, Ninan Mathai Muthoot, in 1887.

Continuous support from the private investors: One among the best funds in the industry is been with the company for the couple of years and expects to continue go forward. The investors are Baring India, Matrix Partners India, Kotak India PE, Welcome Trust UK and Kotak Investment Advisors - which all together holds around 7% in the company from which MFL has received a fund infusion of Rs 2.5 bn in 2010.

Strong financial performance: As of March 31, 2008, 2009 and 2010, MFL portfolio outstanding gross Gold Loans under management was Rs.21,790 Mn, Rs.33,000 Mn and Rs.73,417 Mn, respectively, & approximately 30 tons,38.9 tons and 65.5 tons, respectively, of gold jewellery was held by MFL as security for Gold Loans . Gross NPA were at 0.42%, 0.48% & 0.46% of gross retail loan portfolio under management as of March 31, 2008, 2009 & 2010, respectively. In the years ended March 31, 2008, 2009 and 2010, MFL total income was Rs.3,686 Mn Rs.6,204 Mn and Rs.10,893 Mn, respectively, demonstrating an annual growth rate of 57.56%, 68.29% and 75.59%, respectively. PAT in the years ended March 31, 2008, 2009 and 2010 was Rs.636 Mn, Rs.977 Mn and Rs.2,275 Mn, respectively, demonstrating an annual growth rate of 44.61%, 53.65% and 132.88%, respectively. Networth as of March 31, 2008, 2009 and 2010 was Rs.2,131 Mn, Rs.3,614 Mn and Rs.5,841 Mn, respectively.

We believe MFL is a pure gold play in the burgeoning Indian consumer Gold Loan market with is growth 15-18% CAGR. We are positive on the business outlook on the loan against gold. With the above rationale like Strong brand, track record and management expertise, we advice investors to park there investment with a medium-to-long term horizon. With less competition in the business segment MFL is well set in its segment because of it brand loyalty they have retained in the south Indian states. Now main focus is to penetrate the North Indian markets by adopting new strategies and also increasing sales from other investment alternative. Comparable peers like Manappuram and other NBFC are trading at price to earnings multiples of 18-23x and MFL is available at 18x. Hence, we recommend investors to subscribe for the IPO.

Source : Equity Bulls

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