Unlocking opportunities: Muthoot Microfin IPO analysi

Muthoot Microfin Ltd – IPO Note

Price Band: Rs. 277-291

Issue Date: 18th Dec-20th Dec

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Company Overview: 

Muthoot Microfin Limited, a subsidiary of the Muthoot Pappachan Group, is a microfinance institution dedicated to empowering women in rural areas across India. Specializing in micro-loans, the company offers a diverse portfolio of financial products, including group loans for livelihood solutions, individual loans, and life betterment solutions such as mobile phone and solar lighting loans. Additionally, it addresses health and hygiene needs through sanitation improvement loans. Muthoot Microfin Limited also provides secured loans in the form of gold loans and its unique Muthoot Small & Growing Business (MSGB) loans, emphasizing support for small businesses. The company’s focus on social impact is evident in its commitment to fostering economic growth and improving living standards in underserved communities.

Company Profile:

• Muthoot Microfin Limited is a leading microfinance institution in India, with a strong focus on serving women entrepreneurs in rural areas. The company is a part of the Muthoot Pappachan Group, a diversified conglomerate with a presence in various sectors.
• Muthoot Microfin is the fourth largest NBFC-MFI in India in terms of gross loan portfolio. The company has a wide reach across 18 states and UTs, with over 1,340 branches and 3.19 million active customers. Muthoot Microfin has a robust IT infrastructure and a focus on digital collections. The company also has a strong presence in Tamil Nadu, with a market share of over 16%.
• In recent years, Muthoot Microfin has been expanding its operations beyond South India. The company has opened over 700 branches in North, West, and East India, constituting 52.76% of its total branches. This expansion is a key part of Muthoot Microfin’s strategy to become the leading microfinance institution in India.
• Muthoot Microfin is a well-established and respected company with a strong track record of financial performance. The company is well-positioned to continue to grow and expand in the future.

The Objects of the Issue:

• Fund existing operations and exciting new initiatives like tech upgrades and geographic reach.
• Boost capital to meet future needs and ensure growth.
• Gain stock market visibility and access future capital.
• Facilitate sale of shares by existing investors.

Outlook and Valuation:

• Historically concentrated in South India, Muthoot Microfin has recently expanded its operations into North, West, and East India.
• As of March 31, 2023, the company has 596 branches in North, West, and East India, representing 50.85% of total branches.
• This expansion strategy is aimed at increasing the company’s footprint and customer base across diverse regions in India.
• Growth Strategy: The company’s strategy of expanding across various geographies in India is expected to contribute to its ongoing growth in the coming years.
• Competitive Landscape: According to the Red Herring Prospectus (RHP), Muthoot Microfin identifies Equitas Small Finance Bank Limited, Ujjivan Small Finance Bank Limited, CreditAccess Grameen Limited, and Suryoday Small Finance Bank Limited as some of its listed competitors.
• Understanding the competitive landscape helps investors assess the market dynamics and positioning of the company.
• Valuation and Peer Comparison:

• 1. The company’s valuation is compared with peers in the microfinance and small finance banking sector.
  2. Peers’ average P/E (Price-to-Earnings) ratio is 18.22x, ranging from 6.33x to 26.67x.
  3. Muthoot Microfin’s P/E multiple, based on post-issue diluted FY23 EPS of Rs.11.54, is 25.23x at the higher price band.
  4. The assessment suggests that, compared to peers, the issue is considered fully priced in or fairly valued.
  5. At the higher price band, Muthoot Microfin’s listing market capitalization is projected to be approximately – Rs.4159.96 crores.
     

     ISSUE OFFER
     Price band (INR)	277-291
     Bidding date	DEC 18 – DEC 20, 2023
     Total IPO size (Cr)	960
     Fresh issue (Cr)	760
     Offer for sale (Cr)	200
     Market lot	51
     Face value (INR)	10
     Listing on	NSE, BSE
     Retail Allocation	35%
     Rating	Subscribe

Competitive Strengths:

• Strong Brand and Market Leadership: Backed by a highly established financial services conglomerate, ensuring trust and brand recognition. Holds a significant market share in India, demonstrating experience and operational expertise.
• Reliance on rural economies makes the company susceptible to agricultural downturns and economic fluctuations. Fosters income generation and economic activity in rural areas.
• Focus on underpenetrated regions and product diversification indicates significant growth potential.
• Aligns with social responsibility goals, potentially attracting ESG-conscious investors.
• Wide geographical reach with over 1,340 branches, ensuring customer accessibility.
• In-house technology development facilitates efficient loan disbursement and monitoring.
• “Mahila Mitra” app promotes convenient payment methods for customers.
• Offers various loan products, mitigating risk and catering to diverse needs.

Key Strategies:

• Expand branch network and identify borrowers across India, not just South.
• Build user-friendly platforms for smooth loan access and service.
• Offer new loans and leverage referrals to grow customer base.
• Diversify Funding: Tap new investors beyond traditional channels to fuel expansion.
• Highlight social impact and invest in talent for sustainable growth.

Key Concerns:

• Rural Vulnerability: Microfinance primarily serves rural populations, susceptible to agricultural downturns, weather fluctuations, and economic shifts. These external factors can impact borrowers’ repayment capacity and expose the company to loan defaults.
• Regulatory Risks: The microfinance sector faces evolving regulations, some potentially affecting interest rates, loan sizes, and lending practices. Adapting to these changes without compromising profitability could be challenging.
• Competition: The microfinance space is increasingly competitive, with established players and new entrants vying for market share. Maintaining a competitive edge in terms of interest rates, customer service, and technology could be costly.
• High Credit Exposure: Muthoot Microfin’s loan portfolio is concentrated in a specific market segment. This concentration, while offering potential rewards, also exposes the company to higher risks if economic conditions in that segment deteriorate.
• Customer Risk: Microfinance institutions (MFIs) often serve customers in the lower-income segments. Economic uncertainties or shocks affecting these customers may impact their ability to repay loans, leading to increased default risks.
• Interest Rate Risk: The microfinance industry is vulnerable to interest rate fluctuations. Changes in interest rates can affect borrowing costs for both the MFI and its customers, influencing repayment dynamics.
• Non-Performing Assets (NPA) Risk: An increase in non-performing assets or provisions can adversely affect the company’s financial health. This may result from economic downturns, borrower distress, or other factors impacting the repayment capacity of the customer base.
  

  Company	Total income        (ML)	EPS	P/E	NAV	Face value/Share
  Muthoot Microfin Limited	14463.44	14.19	20.5	139.15	10
  Peer group				1
  Equitas Small Finance Bank Limited	48314.64	4.71	17.57	46.44	10
  Ujjivan Small Finance Bank Limited	47541.90	5.88	6.33	20.25	10
  CreditAccess Grameen Limited	35507.90	52.04	26.67	326.89	10
  Spandana Sphoorty Financial Limited	14770.32	1.74	381.72	436.58	10
  Bandhan Bank Limited	183732.50	13.62	17.32	121.58	10
  Suryoday Small Finance Bank Limited	128811	7.39	22.31	149.28	10
  Fusion Micro Finance Limited	17999.70	43.29	12.60	230.74	10

  PARTICULARS (In millions)	FY23	FY22	FY21
  Equity share capital	1401.98	1333.33	1141.71
  Other equity	14856.51	12032.46	7757.19
  Net worth	16258.49	13365.79	8898.90
  Total Borrowings	51230.25	32969.85	25382.26
  Revenue from Operations	12906.45	7286.23	6227.84
  EBIDTA	7884.86	4256.60	3272.17
  PBT	2128.70	647.21	90.55
  Net profit	1638.89	473.98	70.54
  PAT	1639	474	70.4
  Total assets	85292	55915	41839

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