Muthoot Finance IPO - Subscribe - SPA Securities

Investment Rationale

Largest Gold Financing company in India

Muthoot Finance Ltd (MFL) is the largest gold finance company in India, in terms of Loan Book, Branch presence as well as market share, as per IMaCS report. MFL has the largest Branch network for LAG business, with 2611 branches as on February'11.

Efficient Fund raising

MFL has been able to garner good confidence of retail investors as well as PE investors alike, who have subsribed to the capital of MFL in the form of NCDs called Gold Bonds to the tune of INR 33bn and PE investors who contribute 7% of equity of MFL.

Healthy Profitability, Return ratios

MFL has demonstrated healthy Spreads on its Loan book, which coupled with increased branch efficiency and decreased Operating Cost ratios have added to the Return Ratios growth. Going forward, however, we expect the spreads to start tapering off due to likely increase in Cost of Funds and also compression in Yields due to regulatory changes.

Investment Concerns

- Dependence on single line of business; regional concentration
- Increasing competition to lower gold loan yields to put pressure on margins
- Regulatory Hiccups for MFL with respect to state government statutes like State Money Lenders Act, any adverse regulatory rulings would impact growth prospects of the company
- Potential risk of brand dilution due to use of the moniker 'Muthoot' by other gold loan financiers, may have a brand dilutive effect

Valuation

MFL, being the largest Gold Loan provider in the country, would likely grow in line with the industry growth and we expect it to post an EPS of INR 14.81 and ABV of INR 50.19 for FY11E. This makes it trade at 12x and 3.5x its P/E and P/ABV at higher price band. We believe the current pricing captures the likely growth of MFL, we recommend "SUBSCRIBE".

Source : Equity Bulls

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