Muthoot Finance - Stay Away
Atin Kumar / 18 Apr 2011
Provider of loans against gold, Muthoot Finance (MFL) is coming out with a public issue of 5.15 crore equity shares to be issued in a price band of Rs 160 – Rs 175 per share aggregating to Rs 824 crore to Rs 901 crore at the lower and higher price band respectively. Coming down to the valuation part of the company the issue price of Rs 160-175 a share translates into price to book value of 4.95 times of book value at the end of 8MFY11. However, considering other risk factors like corporate governance, regulatory concerns, southern concentration etc, we advise our readers to stay away from the scrip.
Issue
Provider of loans against gold, Muthoot Finance (MFL) is coming out with a public issue of 5.15 crore equity shares to be issued in a price band of Rs 160 – Rs 175 per share aggregating to Rs 824 crore to Rs 901 crore at the lower and higher price band respectively. The issue constitutes 13.85 per cent of the post-issue paid-up capital of the company with a minimum bid lot of 40 shares. Presently 7 per cent of the equity is held by private equity players while 93 per cent is with the promoters. Post-issue promoters will hold 80 per cent of the equity while the remaining 20 per cent will be with the public.
About the Company
MFL is a gold financing company primarily concentrated in the southern part of India. It is among the largest gold financing companies in terms of loan portfolio according to 2010 update provided to IMaCS Research & Analytics Industry Reports, Gold Loans Market in India, 2009. The company is classified as a ‘Systemically Important Non-deposit taking NBFC’ under the RBI guidelines.
Gold loan financing is a relatively old phenomenon but has largely been an unorganised business in India. Within that, MFL has been a front-runner in bringing this business into the organised fold. The company has been able to spread its wings on a pan-India basis through 2611 branches (as of February 2011) spread across 25 states and union territories. With more than Rs 13,000 crore in assets under management the company enjoys a market share of 20 per cent in the gold loan financing business in India. A retail-centric business, the company claims to have more than 67,000 walk-ins per day in its branches. The average ticket size of loans provided by the company stands at Rs 31,533, with an average turnaround period of 6 – 12 months. The company operates through a family oriented kind of a management structure with very few professionals on its board.
Risk Factors
The principal risk factor associated with gold loan financing is the lack of time in carrying out a due diligence of the pledged assets (gold ornaments). Also as far as MFL is concerned the USP of the business lies in its trademark which according to the management creates a trust among customers. The trademark is proposed to be registered in the name of the promoters. The promoters in turn will grant to the company a non-exclusive licence to use the Muthoot trademarks in return for which they will be paid a royalty equivalent to one per cent of the gross income of the company subject to a maximum of three per cent of the profit before tax (after charging royalty) and managerial remuneration payable by the company. Another very important factor that needs to be considered in case of MFL is the large number of litigations that are in force against the company and many other group companies. Many of these according to reports have not been listed in the main prospectus by the company and an addendum has appeared in the news papers at a later date enlisting these complaints in force against the management and group companies. In addition to this there are other corporate governance issue that really reduce the confidence in company. Though the trademark has been registered in the name of the promoters it is the company that is bearing the cost of promoting the brand as well as paying a royalty to the promoters. The other major risk that company is facing is the regulatory risk. We have seen in the past how RBI and different state governments took action against the exorbitant rates charged by some micro finance companies which resulted into the hammering of the scrip. Even MFL is exposed to such an event risk - ‘Kerala Money Lender’s Act’ (KML), which empowers the state government to regulate lending rates of money lenders operating in the state and requires money lenders to register branches with the state authorities apart from other things. The matter is subjudice at the Supreme Court level. Any adverse ruling in this case could impact the growth prospects of the company in the state of Kerala, which accounted for around 16 per cent of its portfolio as on September 30, 2010. However, the impact on asset quality may not be significant as the company can auction the pledged gold ornaments. Major part of the company’s business originates from southern part of India (75.28 per cent) and any slowdown in the southern Indian economy could affect business and profitability.
Financial Performance
For the four year ending FY10, total income of the company increased at a CAGR of 65 per cent and was Rs 1089 crore for FY10. And if we look the 8MFY11 the total income recorded was Rs 1301 crore. What is important to note is that last year the sales grew substantially up by 76 per cent. If we take the bottomline it has exhibited a better growth than the topline and has grown at a CAGR of 71 per cent. But if we look the profit of the company for FY10 on a yearly basis it has more than doubled to Rs 228 crore from Rs 97.8 crore recorded at the end of FY09 while topline has increased only by 76 per cent. This growth in profit looks to be slightly out of place in terms of the quantum of growth. The total gold loans at the end of 8MFY11 stand at Rs 12897.8 crore. One more important thing to note is the negative cash flow through operating activities which could well be due to the nature of business of the company.
Valuation
Coming down to the valuation part of the company the issue price of Rs 160-175 a share translates into price to book value of 4.95 times of book value at the end of 8MFY11. However if we calculate the price to book value post equity issue it comes to around 3.2 times at higher price band. This is above many of the best managed private sector banks like Axis Bank trading at 3 times of its book value. With NIM as high as 9.2 per cent and return on networth of 25.8 per cent it looks little bit stretched. Nevertheless if we consider other risk factors like corporate governance, regulatory concerns, southern concentration etc, we advise our readers to stay away from the scrip.
| Issue Information |
Rating:
|
|
| Issue Opens on |
18-Apr-11
|
|
| Issue closes on |
21-Apr-11
|
|
| Issue Size (No. of Shares) |
51.50 lakh equity shares
|
|
| Price Band (Rs.) |
` 160 - 175
|
|
| Issue Route |
Book Building
|
|
| Promoters |
M G George Muthoot, George Thomas Matthews, George J Matthews and George A. Matthews
|
|
| Post-issue Equity |
37.17 crore equity shares
|
|
| Lead Managers |
ICICI Securities, Kotak Mahindra Capital, HDFC Bank
|
|
| Listing |
BSE, NSE
|
|
| Retail Portion |
25.75 lakh equity shares
|
|
| QIB Portion |
18.03 lakh equity shares
|
|
| Non-institutional Portion |
7.72 lakh equity shares
|
|
| Financial Performance (`/Cr) | ||
|
8MFY11
|
FY10
|
|
| Interest Earned |
1,289.30
|
1,077.50
|
| Interest Expenses |
582.60
|
473.70
|
| NII |
706.70
|
603.80
|
| Other Income |
11.90
|
14.20
|
| Tax |
149.63
|
117.98
|
| Depreciation |
10.50
|
14.89
|
| Net Profit |
291.48
|
227.58
|
| Share Holding Pattern | Pre Issue | Post Issue |
| Promoter & Promoter Group |
93
|
80.12
|
| Other Institution |
7
|
7
|
| Public |
0
|
12.88
|
| Total |
100
|
100
|
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