Apply only for listing gains
Muthoot Finance Limited is tapping the capital markets with its IPO which opens on Monday the 18th of April and closes on Wednesday the 20th of April for QIB’s and for all other investors on Thursday the 21st of April. The price band is Rs 160-175 and the company has allotted 77.25 lakh shares to anchor investors at Rs 170.
| Price Band | Rs 160 – Rs 175 |
| Offer size in shares | 5,15,00,000 Equity Shares |
| Issue Size | Rs 824 crs at Rs 160 to Rs 901.25 crs at Rs 175 |
| Anchor Investors | Anchor Investors alloted 77,25,000 Equity Shares at Rs 170 |
| QIB’s | 1,80,25,000 Equity Shares |
| Non Institutional Investors | 77,25,000 Equity Shares |
| Retail Investors | 1,80,25,000 Equity Shares |
| Book Running Lead Manager | ICICI Securities Limited |
| Kotak Mahindra Capital Company Limited | |
| HDFC Bank Limited | |
| Isssue Opening Date | Monday 18th April |
| Isssue closing date for QIB’s | Wednesday 20th April |
| Isssue closing date for other than QIB’s | Thursday 21st April |
| IPO Grade | CRISIL grade 4/5 and CARE grade 4/5 indicating above average fundamentals |
| Paid -up Capital Pre IPO | 32,02,12,768 Equity Shares |
| Paid -up Capital Post IPO | 37,17,12,768 Equity Shares |
| Market Cap post listing | Rs 5,947.40 crs at lower band to Rs 6,54.97 crs at higher band |
| Bid Lot | 40 shares |
| Bidding Amount for Retail | 1120 shares at Rs 175 or Rs 1,96,000 per application |
Business
The company as the name suggests is in the business of finance. This is not normal finance but it is the finance of gold loans. The company is the largest gold financing company in India in terms of loan portfolio. Muthoot finance 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.
The company has a branch network of 2,611 branches as of 28th February 2011 and serves on an average 67,953 persons per day. The company has a very strong presence in Southern India with 1,753 branches, followed by 465 branches in Northern India and 297 branches in Western India and 96 branches in Eastern India. The company employs 15,664 people as of 28th February 2011. The assets under management of the company are Rs 13,003.68 crs as of 30th November 2010 and they have grown from Rs 2,226 crs as of 31st March 2008 to the current levels. The average loan size is about Rs 31,500.
Muthoot Finance is a public limited company classified as a Systemically Important – Non Deposit taking NBFC. There are other factions of the family like the Muthoot Pappachan Group and the Mini Muthoottu group who are in similar lines of business activity. There are no financial dealings within these groups but the name Muthoot is widely used by all and is synonymous with money lending.
The rate of interest charged by the company is between 20-30% against 13% charged by PSU banks. There are various customised product and the rate of interest varies according to the amount of loan per gram of gold pledged, In the case of Muthoot Vanijya loan the ticket size is about Rs 1.24 lakhs and the loan per gram of gold is between Rs 1125-1350, with interest rates varying from 24-30%. The company has a market share of 19.5% followed by Indian Overseas Bank which has 13.9% and Indian Bank has 10.4%. What is important to note is that this business is very heavily concentrated in the Southern states of India and irrespective of whether it is Muthoot, public sector banks, private banks or even pawn shops and money lenders the business is very strong in South India. The size of the industry as of March 2010 was Rs 37,640 crs.
The business uses a key element of sentimentality attached to gold jewellery as the key to its recovery of gold loans. Loans are only provided against used jewellery and not against gold bars. The loan given is between 60-85% of the value of the gold in the jewellery and other precious stones are not included for valuation purposes. The average duration of loan is five months and there is no up-front, pre-payment penalty or any hidden charges included. This ensures that gold loans as a whole are almost at any time priced close to the market price and risk of default is reduced or eliminated. The company hires local people at each branch because it becomes easy for them to identify the borrower and ensure the recovery.
Financials
The company has been seeing a compounded annual growth rate in income of 73.5% over the period 2008-2010. The same figure for profit after tax has been even more impressive at 90.4%. What is of concern is that the yield on average advances are coming under pressure and have fallen from 21.9% in FY09 to 19.9% in FY10 and further in the current eight months ending November 2010 to 18.9%.
| year 2009 | year 2010 | 8 months | |
| Nov-11 | |||
| Interest Income | 6062.39 | 10774.52 | 12893.47 |
| Other Income | 141.63 | 119.28 | 123.17 |
| Total Income | 6204.02 | 10893.8 | 13016.64 |
| Interest Expense | 3097.7 | 4737.28 | 5825.56 |
| Profit Before Tax | 1481.7 | 3455.53 | 4411.15 |
| Tax payments | 504.5 | 1179.78 | 1496.31 |
| Net Profit After Tax | 977.2 | 2275.75 | 2914.84 |
The close competitors for the company include PSU banks like Indian Overseas Bank and Indian Bank and listed company Manappuram General Finance and Leasing Limited.
Concerns
There are a few concerns in this company which potential investors should take note of prior to putting their money.
| 1) | The remuneration paid to each of the four executive directors who are members of the family is a staggering 4.8 crs Rs each which means that Rs 19.2 crs or a staggering 8.43% of the net profit for the year ended March 2010 was paid as remuneration. |
| 2) | As if this is not enough the brand and logo which was hitherto owned by the company is now transferred to the family. The company would pay a royalty of 1% of the gross income of the company subject to a maximum of 3% of profit before tax (after charging the royalty) and managerial remuneration payable by our company each year. This royalty is payable to the promoters for the use of the family name “Muthoot” and the logo. It may be mentioned here that the name Muthoot is used by a half dozen people in Kerala and is a name which is synonymous with money lending. This would become yet another case of Jet Airways where the promoter did not want to assign the brand at the time of going public and wanted a very hefty valuation. |
| 3) | The company is a non-deposit taking company but issues retail debentures. There is a strong possibility that going forward there could be a possibility that these debentures issued to retail investors could be termed as deemed deposits. |
| 4) | The company and its group companies has a huge number of cases pending at various levels. What is causing concern that they had to issue a corrigendum for some 91 cases that were not included in the Red Herring Prospectus and had to inform the potential investors at large about the same. The big concern is that when these omissions happen during the period of the issue what would happen post issue and whether proper corporate governance is in place or not. |
| 5) | The company charges upto 30% interest currently compared to a mere 13% charged by PSU banks. The possibility of some sort of control or cap on interest similar to what happened in the case of the microfinance business can knock the wind out of the sails of the company. This is a very big cause of concern and one must understand that this business is primarily concentrated in South India. |
Valuations
The company earned a net profit of Rs 227.57 crs in the year ended March 2010 and Rs 291.48 crs in the eight months ended November 2010. The EPS based on the fully diluted equity capital of 37.17 cr shares would be Rs 6.12 for the period ended March 2010, and has increased to Rs 11.76 on the basis of annualised eight months period ended November 2010. Based on these earnings the share is being offered at 13.61 times at the lower end of the price band and 14.88 times at the upper end of the price band. The share compares favourably with the only other stand alone competitor in the listed place but compares very unfavourably with the PSU banks who have a smaller market share but the loan against gold forms a very small business of the overall business of the bank.
Conclusion
The business is interesting and seems to have become a way of life in Southern India. There are issues on the corporate governance front and the sustainability of the business at current levels. There may be some returns on listing. In the midterm risks on rate of interest, regulations and restrictions by the regulators may not provide large returns to investors. Apply only for listing gains if any.
Apply only for listing gains.
SEBI Disclaimer: – I do not intend to apply for the issue as it looks like offering only listing gains.
