Muthoot Finance IPO - Subscribe - Latin Manharlal Securities

INVESTMENT ARGUMENTS

Leading Position in Gold Loan Business

According to IMaCS Industry Report (2010 Update), MFL is the largest gold financing company in India in terms of loan portfolio. As of March 31, 2010 and November 30, 2010 MFL's loan portfolio comprised of ~2.8 mn and ~4.1 mn loan accounts, respectively, with Gold Loans outstanding of Rs.7341.73 Crs and Rs.12897.77 Crs, respectively.

MFL also leads in terms of largest branch network among gold loan NBFCs. As of February 28, 2011, it had 2,611 branches across 25 states, the national capital territory of Delhi and two union territories in India.

Strong Track Record and Brand Name

MFL has a history of over a period of 70 years in gold loan business. We believe that the experience, skills and goodwill acquired the company over these years cannot be easily replicated by the competitors. MFL's retail loan portfolio has grown from Rs.2226.38 Crs as of March 31, 2008 to Rs.13003.68 Crs as of November 30, 2010. The Net Interest Income of MFL grew at a CAGR of 67% over FY06-10 whereas the PAT and total income grew at 71% and 65% respectively over the same period.

Strong Credibility

MFL raises funds through issue of secured redeemable non-convertible debentures to retail investors on a private placement basis as a means to access capital for Gold Loan business. The company also issued equity shares in three tranches to institutional investors between July-September 2010 at an average issue price of Rs.133.

MFL has been assigned an "A1+" rating by ICRA for commercial paper and for short-term nonconvertible debentures of Rs.200 crs, and a "P1+" rating by CRISIL for short term debt instruments of Rs.2000 Crs. the company has also been assigned a "AA-/Stable" rating by CRISIL for Rs.400 Crs nonconvertible debentures and Rs.100 Crs subordinated debt.

Robust Asset QualityMFL has strong asset quality largely aided by its comfortable loan-to-value (LTV) ratio at origination and robust systems and processes. The loan against gold business is highly secured in nature. The company maintains the LTV ratio between 60%-85% with an average LTV of 70%. The average maturity of loans is also quite low at 3-6 months and the average ticket size of the loan is ~ Rs.30,000. MFL has very low gross non-performing assets (NPA) of 0.35% as on November 30, 2010. The company follows the practice of lending only against household jewellery. Sentiment attached to the household ornament supports low NPA.

Comfortable Capital Adequacy ratio

MFL's Capital Adequacy Ratio (CAR) stands at 15.06% as on November 30, 2010. As per the RBI guidelines the minimum capital adequacy prescribed for an NBFC is 15% (from March 31, 2011 onwards). The IPO proceeds would help MFL to augment its capital base and thereby support its future growth.

Increasing Geographical Presence

MFL is aggressively expanding its footprint outside the Southern region, especially in northern and western India where it sees huge business potential. Over the past 2-3 years, MFL's branch concentration in the southern market has reduced from 85% in FY08 to around 67% in February 2011.

VALUATIONS

MFL is catering to niche lending market which has huge potential for growth. Given its early entry into this industry makes it well placed to benefit from the growth opportunities. MFL also benefits in terms of lower cost which is being reflected in its high Net Interest Margins. The company has also shown consistent growth of FY06-10 which we believe is likely to continue.

At the price band of Rs.160-175, the stock is priced at 13.6x/14.88x and 3.14x/3.21x its FY11E annualized EPS of Rs.11.76 and post issue book value of Rs.52.61/Rs.54.68 respectively; whereas its closest competitor Manappuram General Finance & Leasing is trading at 22.37x and 2.87x its FY11E annualized EPS of Rs.5.79 and BV of Rs.45.12 respectively. We recommend SUBSCRIBE to the issue for the investors with a medium to long-term perspective.

Source : Equity Bulls

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