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Investment Rationale

Low Cost of Capital

The interest charged on loans varies between 12% and 30% per annum. MFL enjoys the lowest cost of capital in the industry of approximately 9.5%. This helps it achieve net interest margin of 9-10% on its loans

Market leading position in the Gold Loan business

MFL is the largest gold financing company in India in terms of loan portfolio. Company's loan portfolio as of March 31, 2010 and November 30, 2010 comprised approx. 2.8mn and approx. 4.1mn loan accounts, respectively, in India with Gold Loans outstanding of Rs.73,417mn and Rs.128,978mn, respectively

Strong presence in underserved rural and semi-urban markets

MFL has the largest branch network among gold loan NBFCs. It has positioned itself to provide loans targeted at the under-served rural and semi-urban markets

Sound Risk Management Systems

To mitigate risks of employee theft, MFL has installed CCTV's at 85% of its branches and plans to reach 100% within a year. It provides extensive training for its employees to accurately appraise the quality of gold and measure its weight. In addition, branches are subject to weekly internal audit where auditors randomly assess the appraisal of gold on file.

Strong capital raising ability

MFL has a track record of successfully raising capital from various sources such as secured redeemable non-convertible debentures to retail investors on a private placement basis, equity shares to institutional investors, borrowings from banks and other financial institutions and selling receivables under bilateral assignments to banks.

Key Risks

- MFL's financial performance is vulnerable to interest rate risks.
- There are a lot of civil suits, consumer complaints, labour, criminal and tax disputes against company, group companies and promoters which could impose financial burden on the company.
- MFL had negative net cash flows from operating and investing activities in the last three fiscal years which, if continues, could impact company?s ability to pay dividends to shareholders going ahead.

Valuation & Recommendation

MFL is a market leader in its segment. It has had an average RONW of 39% which is far better than its competitor (19.61% for Manappuram). The company has major global PE firms invested in it; namely Matrix Partners India Investments LLC, Baring India Private Equity Fund III Limited and The Wellcome Trust Limited.

At the upper and lower ends of IPO price band of Rs160-Rs.175, MFL is available at a P/E of 11.72x and 12.82x respectively as compared to 22.73x for Manappuram.

Considering robust GDP growth of India, increasing purchasing power and evergrowing appetite for gold, the company looks well poised for a sound growth trajectory in the years to come.

Hence, we recommend SUBSCRIBE with a medium to long term perspective.

Source : Equity Bulls

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