IPO: Muthoot Microfin

Muthoot Microfin, a non-banking microfinance company, is coming out with its IPO (initial public offering) on December 18, 2023. Here's a breakdown of the company's strengths, weaknesses, and growth prospects to help investors make an informed decision.

In a nutshell

• Quality: Its three-year average ROE and ROA are 5.4 per cent and 1.1 per cent, respectively. Additionally, it recorded an average net interest margin of 9.8 per cent in the last three financial years.
  
• Growth: In the last three financial years, it grew its AUM and PAT at an annual growth rate of 35 per cent and 382 per cent, respectively. Higher loan disbursement and increasing distribution reach in new areas drove this growth.
  
• Valuation: The stock is valued at a P/E and P/B of 13.9 and 1.9 times, respectively, as compared to its peer's median and average of 15.4 and 2.0 times, respectively.
  
• Overview: Rising demand for small ticket loans and its presence in an underpenetrated segment (rural loans) will drive growth. However, high competitive intensity in the overall lending market and an uptick in gross non-performing assets (GNPAs) may pose a threat.

About Muthoot Microfin

Incorporated in 1992, Muthoot Microfin is India's fifth-largest non-banking microfinance institution by gross loans (in FY23). It primarily extends small ticket loans to women in rural areas.

Strengths of Muthoot Microfin

• Strong brand. It is the second-largest company by AUM in the Muthoot Pappachan Group, a known name in the financial services industry. Muthoot Fincorp, the group's flagship company, holds around 59 per cent stake in the company.

Weaknesses of Muthoot Microfin

• High cost of borrowing. Its cost of borrowing stood at 10.5 per cent in FY23, the second-highest among its peers.
  
• It operates in a highly competitive market comprising various small finance banks, banks, NBFCs, and other microfinance institutions.

Risk report

Management

• Is Muthoot Microfin free from regulatory penalties?
  Yes. We have no information to suggest otherwise. However, in the past, the Ministry of Finance has issued summons to the managing director for some cash deposited during demonetisation. In addition, the audit reports in the financial statement have included some discrepancies in the past.
• Does the NBFC provide for its non-performing assets (NPAs) adequately? Specifically, is the provision-to-gross NPAs ratio more than 50 per cent?
  Yes, its provision coverage ratio (PCR) stood at 86.4 per cent as of Sept 30, 2023.
• Do the top five managers have stock as a significant part of their compensation (more than 50 per cent)?
  No. The top five managers don't have stock as a significant part of their compensation.

Financial strength and stability

• Does Muthoot Microfin have a fresh slippage-to-total advances ratio of less than 0.25 per cent? (fresh slippages are loans that became NPAs in the last financial year
  No, its slippage-to-total advances ratio was 0.93 per cent in FY23.
• Did the NBFC generate a current return-on-equity (ROE) of more than 12 per cent and a return-on-assets (ROA) of more than 1 per cent?
  Yes, its ROE and ROA are 21.7 and 3.9 per cent, respectively (as of September 30, 2023).
• Has Muthoot Microfin increased its loan book by 20 per cent annually over the last three years?
  Yes, its loan book grew by 40 per cent annually between FY21 and FY23.
• Has the NBFC increased its net interest income (NII) by 20 per cent annually over the last three years? (NII is the difference between the revenue generated from a NBFC's assets and the expenses associated with paying out its liabilities.)
  Yes, its net interest income grew by 51 per cent annually between FY21 and FY23.
• Is there a direct relationship between the increase in the loan book and the increase in net interest income?
  Yes. Its loan book grew by 40 per cent annually between FY21-23, while its NII grew by 51 per cent annually in the same period.
• Is Muthoot Microfin's capital adequacy ratio more than 15 per cent?
  Yes, its capital adequacy ratio stood at 20.5 per cent as of September 30, 2023.
• Can the NBFC run its business without relying on any external funding in the next three years?
  Yes. Its healthy cash reserves and proceeds from the IPO will ensure that it can run its operations without external help.
• Did the NBFC generate an average net interest margin (NIM) of more than 3 per cent in the last three years? (Net interest margin or NIM denotes the difference between the interest income earned and the interest paid by a NBFC or financial institution relative to its interest-earnings assets like cash).
  Yes, its three-year average net interest margin (NIM) is 9.8 per cent.
• Is the NBFC's average gross NPA ratio (gross NPAs/total advances) over the last three years less than 1 per cent and the average net NPA ratio (net NPAs/total advances) less than 0.5 per cent?
  No. Its three-year average gross NPA is 5.5 per cent, and its three-year average net NPA is 1.2 per cent.
• Does the NBFC have a cost-to-income ratio of less than 50 per cent?
  Yes, its cost-to-income ratio stood at 46.6 per cent as of September 30, 2023.

Growth and business

• Will Muthoot Microfin be able to scale up its business?
  Yes. Higher demand for small ticket loans and the opportunity size in the underpenetrated rural market will help it scale up.
• Does the NBFC have a loan book of more than Rs 1,00,000 crore?
  No, its AUM stood at Rs 10,867 crore as of September 30, 2023.
• Does the NBFC have a recognisable brand truly valued by its customers?
  Yes. It is part of the Muthoot Pappachan Group, a known name in the finance industry.
• Does Muthoot Microfin have a credible moat?
  No, various small finance banks and microfinance institutions offer similar products.
• Is the level of competition faced by the NBFC relatively low?
  No. It faces significant competition from banks, small finance banks, NBFCs and other microfinance institutions. Moreover, the costs of funds for banks and small finance banks are relatively lower than for microfinance institutions, further intensifying the competitive landscape.

Valuations

• Is Muthoot Microfin's price-to-earnings ratio lower than its peers' median level?
  Yes, it is valued at a price-to-earnings ratio of 13.9, lower than its peers' median level of 15.4.
• Is the NBFC's price-to-book ratio lower than its peers' average level?
  Yes, its price-to-book ratio is 1.9, lower than its peers' average level of 2.0.

Disclaimer: This is not a stock recommendation. Do your due diligence before investing.

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