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Investment Argument

Leadership position and vast scope: MFL is the market leader in gold financing with a ~20% market share amongst the organized players. India is one of the largest markets for gold and as of fiscal 2010, accounts for approximately 10% of the total world gold stock with an annual demand of approximately 700 tonnes. The organized Gold Loans market in India was estimated between Rs.350 - Rs.400 bn with a CAGR of ~40% during FY02–FY10. However, the organized market accounted for merely 1.2% of the value of total gold stock in India.

Strong brand name & track record: MFL was one of the early entrants into the business of gold financing and they have a major concentration in the rural & semi-urban areas. This is seen from the fact that ~67% of their branches are in south & 75% of their AUM is from the southern India. MFL has been in this business for more than 7 decades now.

Strong asset quality: Though the asset under management (AUM) of MFL grew at a CAGR of ~82.8% between FY08-FY10, the gross non-performing assets (NPA) increased slightly from 0.46% to 0.56% during the said period; however, it is still lower when compared to the industry. This has been mainly on account of the sentimental value attached with the gold instruments to the customers which lead to repayment and redemption of the collateral.

Investment Concerns

- The sustainability of the NIMs at the current level is a concern.
- The RoAE of MFL has been on the higher side. However, it will reduce in the near term due to the IPO proceeds and then move northwards.
- The business is sensitive towards the bullion (gold) prices.

Valuations

The shares of MFL are priced at price to book value of 1.46x & 1.6x on the lower & upper band of the issue price of its FY13E book value. This is lower than the peer i.e. Manppuram General Finance & Leasing Ltd (MGFL) which is trading at ~1.9x FY13E. Thus there is some upside available for the investors. We believe that the market leadership & the opportunity available in the gold financing business should aid in the growth of the business of MFL going forward. The firm does face competition from other banks & NBFC's. However, its NPA levels are one of the lowest seen in the industry. The firm enjoys strong brand image over its peers and it has the largest branch network in India, in its segment. The strong track record of the management should enable the firm to maintain a healthy growth rate going forward. Hence we recommend "Subscribe" to the issue.

Source : Equity Bulls

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