Industry Issue Details Issue Opens Issue Closes NBFC 18-Apr-11 21-Apr-2011 Price Band ` 10-175 Issue Size (Bn) 8.2-9.0 Mar Cap @lower and upper band (` Bn) 59.5-5.0 Face value ` 10 Lot Size 40 IPO Grading (CRISIL) 4/5 Shareholding Pattern (%) Promoter and Promoter Group Non Promoter (PE players) Pre IPO Post IPO 93% 80% 7% % Public - 14% Share Reservation (%) QIB 50 Non Institutional 15 Retail 35 Company Management Muthoot Finance Kerala-based Muthoot Finance Ltd (MFL) has lined up a mega initial public offer (IPO) of 5.15 crore shares in an attempt to mobilize around ` 825-900 crore. The non-banking finance company has fixed a price band of ` 10-175 a share for the IPO, which would be open for subscription from 18 th to 21 st April, 2011. Post-issue, the promoter holding will come down to 80% from the current 93%. The proceeds of the IPO will be utilized into disbursing more loans, general corporate purposes, and improving Capital Adequacy ratio to around 15%. Company Background Muthoot Finance, a flagship company of the Muthoot Group based in Southern India, is into the business of lending against gold jewellery. It is the largest gold financing company in the country with a 20% market share. The company's loan disbursals as of November 2010 stood at almost Rs 13,000 crore. The company has close to 2,11 branches serving close to 4.1mn customers. Muthoot Finance, which has a large network in South India, caters to the needs of small businesses, vendors, traders, farmers and salaried individuals. The company meets its funding requirements by issuing nonconvertible debentures called 'Muthoot Gold Bonds', bank loans and by selling receivables to banks. Objective of the Issue M.G.George Muthoot George A Muthoot Oommen K. Mammen Chairman Managing Director CFO Augment capital base to meet the capital adequacy norms for future capital requirements and growth in assets. Key strengths Untapped Gold Loan market Immense opportunities India is one of the largest markets for gold and as of fiscal 2010, accounts for ~10% of the total world gold stock with an annual demand for ~700 tonnes. Gold-based financial products viz gold coins and bars, ETFs and lending against gold have gained 1
traction particularly amongst retail consumers. With organized gold loan market estimated at ` 350-400bn, lending against gold has emerged as a most popular instrument in recent past. Moreover, the company has a dominant presence in Southern India which augurs well for the company as it is the largest market accounting for ~40% of the gold demand. Robust Business Model MFL provides personal and business loans secured by gold jewellery, or Gold Loans, primarily to individuals who possess gold jewellery but could not access formal credit within a reasonable time, or to whom credit may not be available at all, to meet unanticipated or other short term liquidity requirements. MFL operates through 2,11 branches spread pan-india and has catered to needs of over 4.1mn customers predominantly based in underserved rural and semi-urban areas. MFL s customers are typically small businessmen, vendors, traders, farmers and salaried individuals, who avail credit facilities by pledging their gold jewellery with the company. The company offers products with varying loan amounts and interest rates. The gold loans typically have a maximum term of 12 months with a small ticket size. As on November, 2010, the company s average disbursed gold loan amount outstanding was Rs. 31,553 per loan account. Also, its gross NPAs stood at 0.35%. Stable source of funds limited risks MFL raises funds at relatively competitive rates from banks and institutional investors. It enjoys high credit ratings of LAA- and A1+ from ICRA, which support its ability to raise funds at competitive rates. The company depends on the following sources of funds for its financing business: a) Bonds: The Company has issued secured non-convertible debentures called Muthoot Gold Bonds on a private placement basis. The issuance of Muthoot Gold Bonds forms a significant source of funds for its Gold loan business. b) Bank loans and subordinated instruments. 2
c) The company also raised capital by selling a portion of its loan receivables under bilateral assignment agreements with various banks. Diversified business In addition to gold loan business, MFL also acts as sub-agent of various registered money transfer agencies and provides money transfer services through its branches. It has also commenced the business of providing collection agency services and operates three windmills of 1.25MW each in the state of Tamil Nadu. Going forward, MFL plans to expand its reach in North and West India and also tap upper-middle income and upper income group by introduction of gold loan product Lifestyle product. Valuation and View MFL has larger presence (2,11 branches) with a higher scale in terms of gold loan portfolio of Rs.128.9bn as compared to its peer Manappuram General Finance Ltd. (MGFL) with 1,800 branches and gold loan portfolio of Rs.5bn. We believe the stock valuation of P/BV of 3.2x at the upper end of the price band of Rs. 175 is reasonable. We recommend Subscribe to the issue. Key Risks In a rising interest rate scenario, MFL could find it difficult to protect its NIMs at such high levels. In February 2011, the RBI removed the 'priority sector lending' status to gold loans for the agriculture purpose. This will make it difficult for the company to continue selling parts of its loan portfolio to banks and increase its cost of funds. Furthermore, there are about 7,000 litigation cases against the company. 3
Key Financials Income Statement Particulars (Year end March) (` Mn) FY08 FY09 FY10 8mFY11 Interest Earned 3,579.0,02.0 10,775.0 12,893.0 Interest Expended 1,798.0 3,098.0 4,737.0 5,82.0 Net interest income 1,781.0 2,94.0,038.0 7,07.0 Other Income 107.0 142.0 119.0 123.0 Net total income 1,888.0 3,10.0,157.0 7,190.0 Total Operating Expenses 919.0 1,25.0 2,701.0 2,780.0 Operating Profit 970.0 1,482.0 3,45.0 4,411.0 Total Provisions 0.0 0.0 0.0 0.0 Profit before Tax 970.0 1,482.0 3,45.0 4,411.0 Provisions for Tax 339.0 503.0 1,171.0 1,49.0 Tax Rate (%) 34.9 33.9 33.9 33.9 Net Profit 31.0 979.0 2,285.0 2,915.0 Balance Sheet Particulars (Year end - March) (` Mn) FY08 FY09 FY10 8mFY11 Networth 2131.0 314.0 5842.0 11315.0 Secured Loans 18400.0 30087.0 45471.0 80330.0 Unsecured Loans 753.0 158.0 7334.0 10499.0 Other Non Interest Bearing Liabilities 1574.0 2331.0 5754.0 518.0 Total Capital and Liabilities 22858.0 3700.0 4401.0 10772.0 Cash and Cash Equivalents 2580.0 8825.0 570.0 407.0 Investments 183.0 85.0 75.0 75.0 Loan Financing 18047.0 2573.0 5417.0 98105.0 Fixed and other assets 2048.0 2954.0 3949.0 4975.0 Total Assets 22858.0 3700.0 4401.0 10772.0 8mFY11 4
Valuation Ratios Profitability Ratios (%) FY08 FY09 FY10 8mFY11 Net Interest Margins 8.2 8.2 9.3 9.2 ROE 33.9 34.1 48.3 34.0 ROA 3.2 3.2 4.5 3.4 Interest Expended/Interest Earned 50.2 51.1 44.0 45.2 Non Int Inc/Total Inc 5.7 4. 1.9 1.7 Cost to Income Ratio 48.7 52.3 43.9 38.7 Asset Liability Profile (%) FY08 FY09 FY10 8mFY11 Gross NPAs 9.3 74.3 72.2 75. Net NPAs 30.1 28.5 2.9 27.1 Gross NPA to loans 1.09 0.83 0.87 1.38 Net NPA to loans 0.1 0.18 0.17 0.43 Capital Adequacy Ratios (%) FY08 FY09 FY10 8mFY11 Tier I 10. 12.5 9.9 10.8 CAR 12. 1.3 14.8 15.1 5
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