A deep dive into Muthoot Microfin’s IPO potential

With its robust financials, expanding reach, and digital focus, the company is well-positioned to capture further growth

Muthoot Microfin Limited is tapping the capital markets with its fresh issue of Rs 760 crore and an offer for sale of Rs 200 crores. The price band is Rs 277-291. The issue would be opening on December 18, and closing December 20.

The company is into the business of microfinance and is part of the Muthoot Blue or Muthoot Pappachan group. The trademark Muthoot Pappachan and Muthoot Microfin are owned by the promoters and have been licensed to the company for an annual license fee of Rs 1 lakh. The company’s largest business comes from microfinance loans which are given to women for income generating purposes. These loans are given as group loans to women from rural households and from the bottom of the pyramid upwards. They are aimed at generating income and also aimed at the life-cycle needs of women from rural households.

The company is the fifth largest NBFC-MFI in India with a gross loan portfolio of Rs 10,867 crores. It has 1,340 branches in 339 districts in 18 states and Union Territories. The company has 31.9 lakh active customers with a digital collection of over 25 per cent. The entire disbursement is cashless and Rs 8,104 crore was disbursed. GNPA is 2.37 per cent and Net NPA is 0.33 per cent.

The NBFC MFI share in the microfinance industry is a healthy 39 per cent and is expected to grow to 41 per cent in the coming 15 months till FY25. RBI has made changes in the rules for NBFC MFI which makes it a level playing field. The earlier 10 per cent margin cap for large MFIs has been done away with. Earlier the cap for household income was rural areas 1.25 lakh and urban areas of Rs 2 lakh. Now this has been changed to up to 3 lakh for rural and urban households. Thirdly no more than 2 lenders were allowed per borrower with an overall cap of Rs 1.25 lakh. Now the same has been changed to no limit on lenders per borrower. Limit on all household loan repayments obligation of a household capped at 50 per cent of a household’s income. These changes have really helped the NBFC-MFI players.

The gross loan portfolio of the NBFC has grown at a CAGR of 36 per cent from Rs 4,986 crore in FY21 to Rs 9,208 crore in FY23 and Rs 10,867 crore in first half 23. The number of branches has grown from 755 to 1,340 during September 2023. Tamil Nadu is the biggest market for Muthoot Microfin and they have a market share of over 26 per cent followed by Kerala and Karnataka. Technology plays a key part in the business and the company has developed its own app, Mahila Mitra to help facilitate its customers and meet their all-banking needs through one app. The app is also helping increase the amount of money collected digitally.

The average disbursement and turnaround time has been brought down to 3.8 days for the first loan while it is at 2.5 days for subsequent loans. Loans are given on the basis of a credit score methodology which has been created in house with support from Equifax. This ensures that the NBFC lends to the lowest risk profile.

The promoter holding will continue to be in the majority and the present 59.29 per cent will get marginally impacted with the fresh issue and small offer for sale by the promoters. This would still be above the majority holding.

In terms of financials, the company reported revenues of Rs 1,446.34 crore for the year ended March 23 and Rs 1,047.23 crore for the half year ended September 2023. The profit after tax was Rs 163.88 crore for the year and Rs 205.25 crore for the half year. The EPS was Rs 14.19 for the year and Rs 11.66 on a fully diluted basis. For the half year the diluted EPS was Rs 14.22. The PE band for the full year earnings is 23.76-24.96. The range for the industry is 9.33 at the lowest and 551.18 at the highest. In the peer group, five of the seven are below the PE band of Muthoot while only two are more expensive. A better yardstick for the financial performance to be evaluated is the price to book. Here the price to book for Muthoot is at 2.58 based on September 23 NAV. The peer set again sees five out of seven peers having a lower price to book to Muthoot.

In conclusion, the business of microfinance is growing and has tremendous scope for growth. There are many listed players in this space which offer value for money at the current point of time. Looking at the market fervour and the activity in the grey market, it makes sense to apply for this issue for listing gains. Post issue and capturing listing gains one may look at the share once December results are declared.

(The author is the founder of Kejriwal Research and Investment Services, an advisory firm)