Despite uncertainty on the regulatory front and rising competition, the company’s track record, strong growth prospects, high margins and reasonable valuations stand it in good stead.
Muthoot Finance’s Initial Public Offer (IPO) provides an opportunity to investors to gain from the fast growing domestic gold loan business. Despite uncertainty regarding likely changes in the regulatory regime, increasing competition from banks and high business concentration (in terms of region and segment), Muthoot Finance’s track record, leadership position, first mover advantage and focus on expanding into new regions stands it in good stead. More important, the IPO pricing is also reasonable.
ROBUST BUSINESS
Muthoot Finance, India’s largest non-banking gold loan company, which provides personal and business loans against gold ornaments, had assets under management (AUMs) or outstanding loans worth Rs 13,004 crore as of November 2010. With a market share of 19.5 per cent in the organised space, it aims to garner Rs 824-901 crore (51.5 million equity shares at a price band of Rs 160-175 each) to fund its gold loan business. Notably, unlike in many cases, the existing PE investors in Muthoot will not sell their holding in the company, which provides confidence.
| GOLDEN TOUCH | |||
| FY09 | FY10 | 8M FY11 | |
| Net Interest Income (Rs crore) | 296 | 604 | 707 |
| Total Income (Rs Crore) | 620 | 1089 | 1302 |
| Net Interest Margin (%) | 10.6 | 11.2 | 10.4 |
| Profit after tax (Rs Crore) | 98 | 229 | 291 |
| Source: Company RHP | |||
| ISSUE DETAILS | |
| Price band (Rs) | 160-175 |
| Size (Rs crore) | 824-901.25 |
| Opened on | April 18 |
| Closes on | 21-Apr |
| Crisil rating | 4/5 |
| ICRA rating | 4/5 |
| HOW THEY COMPARE | ||
| As on March 2010 | Muthoot | Mannapuram |
| Branches | 1605 | 1005 |
| AUM (Rs crore) | 7438.1 | 2598.7 |
| NIM (%) | 11.2 | 19.3 |
| RoAE (%) | 48.3 | 44 |
| Gross NPA (%) | 0.46 | 0.39 |
| AUM per branch (Rscrore) | 4.6 | 2.6 |
| Net interest income (Rscrore) | 604 | 331 |
| Net profit (Rscrore) | 229 | 120 |
| Source: Analyst reports, company data | ||
Given the vast potential in the business, it is not surprising that Muthoot Finance has grown at a fast clip. Low penetration levels in the industry and rapid branch expansion by Muthoot has helped its loan book increase at a compounded annual growth rate (CAGR) of 75.7 per cent during FY06–10. As of March, the company’s AUMs were nearly three times that of the only other listed peer, Mannapuram General Finance (market share 6.8 per cent).
Targeting the unbanked population, providing finance to customers in need at rates that are lower, as compared to money lenders, has aided Muthoot in growing fast and sustaining high net interest margins (NIMs) of around 10 per cent. However, high margins for players such as Muthoot could be at a risk, as banks are aggressively vying for the gold loan business. Banks such as ICICI Bank are currently charging an interest rate of 15-16 per cent, lower than Muthoot’s average yield on loans of 19-20 per cent.
In addition, Muthoot Finance’s NIMs could soften as interest costs on new loans from banks would rise 150-200 basis points, as the latter will no more be able to classify these as priority sector loans.
But, what makes this company stand apart is its strong market knowledge, well-established systems (like risk management, operating processes), strong profitability and the quality of assets (bad loans of just 0.35 per cent). Thanks to its high-credit ratings and its status of a RBI-registered non-banking financial company (non-deposit taking), it has been able to raise funds at relatively competitive rates. The company’s strength can also be measured from its ability to garner funds from retail investors that currently account for about 27 per cent of the total debt. With average loan tenure being between three and six months and loans taken with a relatively longer maturity, it has a favourable asset-liability management (ALM).
CONCERNS
The biggest concern for players such as Muthoot comes from the likely regulatory changes. The Kerala state government is looking at regulating lending rates and operations of money lenders in the state. This case is pending with the Supreme Court and any adverse ruling could impact the company’s operations in Kerala (16 per cent of its loan book).
Second, gold loans account for 98 per cent of its loan book, which exposes it to volatility in gold prices. Any large unprecedented fall in gold prices will diminish the value of its collaterals and possibly hit its asset quality. However, some comfort can be derived from the loan-to-value ratio of 60-85 per cent as well as lower loan ticket size of Rs 31,553 (maximum loan tenure of a year). Importantly, the emotional attachment gold ornaments hold for Indian households reduces risk of defaults.
Last, Muthoot has 74 per cent of its loan portfolio (and 67 per cent of its 2,611 branches) in southern India, thereby, exposing it to any event risk arising in these states.
THE ROAD AHEAD
The Rs 37,500-crore organised gold loan market grew at a compounded annual growth rate of 40 per cent during FY02-10, but still forms less than two per cent of the total value of gold holdings in India. Notably, it is expected to grow 35-40 per cent annually over the next three years, indicating huge growth potential for players like Muthoot.
The company is also aggressively expanding presence in other regions. The share of other states in its portfolio has risen to 33 per cent by this February from 15 per cent in March 2008, and should increase further.
While banks are also stepping up presence in the lucrative gold loan markets, factors such as flexibility, quicker disbursements and higher turnaround time give an edge to Muthoot.
In terms of valuations, after annualising the company’s eight months 2010-11 results, the PE on a post-offer equity works out to be 14.9 times at the upper price of Rs 175—analysts estimate its 2011-12 PE at 9.7. This is cheaper than Mannapuram’s estimated FY11 and FY12 PE of 19.4 times and 11.9 times, respectively. Its price-to FY12 estimated book value at 2.2 times compares well with 2.3 times for Mannapuram. Subscribe.
