Muthoot Microfin

Fifth largest microfinance NBFC

Focused on income generating micro loans to rural women customers through a wide distribution network

Muthoot Microfin is the fifth largest NBFC-microfinance company in terms of gross loan portfolio. The company is the part of the Muthoot Pappachan Group, a business conglomerate with presence across financial services, automotive, hospitality, real estate, information technology infrastructure, precious metals and alternate energy sectors. The group relationship provides the company with brand recall and significant marketing and operational benefits. The target customer segment of the Muthoot Pappachan Group as well as the company itself is low-income customers, providing significant business synergies.

The company provides micro-loans to women customers primarily for income generation purposes with a focus on rural regions of India. The loan products comprise (i) group loans for livelihood solutions such as income generating loans (ii) life betterment solutions including mobile phones loans, solar lighting product loans and household appliances product loans (iii) health and hygiene loans such as sanitation improvement loans and (iv) secured loans in the form of gold loans and Muthoot Small & Growing Business (MSGB) loans.

Muthoot Microfin has a customer base of 31.9 lakh active customers, who are serviced by 12297 employees across 1340 branches in 339 districts in 18 states and union territories in India. The gross loan portfolio of the company has increased at a strong pace of 46% yoy to Rs 10867 crore end September 2023.

The company has significantly implemented the use of technology across microfinance operations developed through in-house information technology team helping to maintain high levels of customer service, enhancing operational efficiency and creating competitive advantages for organization. Key technology related aims include increasing digital penetration, reducing risks associated with cash transactions, improving risk management and underwriting processes, increasing operational efficiency, improving customer analytics and simplifying sourcing. Leveraging on technology initiatives, the company has achieved quicker turn-around times for loan approval and disbursement processes.

Muthoot Microfin has developed a unique credit score card along with Equifax to evaluate the creditworthiness of customers by assigning individual credit scores to customers that helps to strategically allocate more capital to low-risk customers. The company has launched a proprietary application, called ‘Mahila Mitra‘, in 2021, which facilitates digital payment methods leading to an increase in digital collection to 25.47% of repayments in H1FY2024.

The company is in the process of developing a Super App along with the Muthoot Pappachan Group‘s products and databases on a single platform, allowing customers to access all the Group‘s loan offerings on a single platform, thereby maximizing cross-selling opportunities.

The strong risk management framework, customer selection methodologies and regular end use and payment monitoring have resulted in healthy portfolio quality indicators such as high collection efficiency, stable PAR and low rates of gross NPAs and net NPAs. The collection efficiency was 98.89% in the six months ending September 2023. Further, the gross NPA ratio was 2.37% and net NPA ratio was 0.33% end September 2023.

The company has a well-diversified funding profile that underpins liquidity management system, credit rating and brand equity. It has received an upgraded credit rating of A+/Stable by CRISIL in October 2022. The average effective cost of borrowings has declined from 11.08% for FY2021 to 10.94% for FY2023.

The capital adequacy ratio stands at 20.46% of risk-weighted assets end September 2023 which is above the requirement of 15%.

The Offer and the Objects

The initial public offer (IPO) consists of fresh issue to raise Rs 760 crore through issuance of 2.74 crore equity shares at the lower band of Rs 277 per share (face value Rs 10 per share) and 2.61 crore equity shares at the upper band of Rs 291 per share.

The issue also consists of Offer for Sale (OFS) to raise Rs 200 crore through issuance of 0.69 crore equity shares at upper price band. The corporate promoter Muthoot Fincorp is not participating in the OFS, while the individual promoters intend to raise Rs 150 crore. Further, the investor Greater Pacific Capital WIV also intends to raise Rs 50 crore through OFS. The promoter shareholding in the company would decline to 55.5% post- IPO from 69.1% pre-IPO.

The issue is to be made through the book-building process and will open on 18 December 2023 and will close on 20 December 2023.

The equity shares worth Rs 10 crore are reserved for employees with a discount of Rs 14 per share.

The company proposes to utilize the Net Proceeds from the Fresh Issue towards augmenting the capital base to meet future capital requirements, arising out of the growth of business and assets. The company expects to receive the benefits of listing the Equity Shares on the Stock Exchanges, including to enhance brand image among existing and potential customers and creation of a public market for the Equity Shares in India.

Strengths

Muthoot Microfin is the fifth largest NBFC-MFI in India in terms of gross loan portfolio. The company is also the third largest amongst NBFC-MFIs in South India, the largest in Kerala and a key player in Tamil Nadu.

The company has a well-diversified portfolio across 339 districts in 18 states and union territories in India. The company has expanded operations in North, East and West India over the past five years, diversifying customer base and loan portfolio.

Microfinance is a business model which helps in driving financial inclusion, as the customers belong to low-income groups.

The company has a history of serving rural markets with high growth potential in the microfinance segment and has maintained a track record of financial performance and operational efficiency.

The company has developed strong digital capabilities delivering superior services to rural customers.

The relationship with the Muthoot Pappachan Group serving 87 lakh customers with a history of over 50 years in the financial services and provides significant marketing and operational benefits. Group branches and expertise are utilized in specific areas of operations including cash management, gold assessment and storage etc.

The company has implemented well-defined key risk management policies which primarily focus on addressing credit risk, operational risk and financial risk.

The company has access to diversified sources of capital and effective cost of funds.

Weaknesses

Microfinance customers generally have limited sources of income, savings and credit histories. It is difficult to consistently carry out credit risk analyses on customers. Such customers may pose a higher risk of default as compared to customers with greater financial resources and established credit histories.

Microfinance loans are primarily unsecured loans to customers in a high-risk category. They rely on non-traditional guarantee mechanisms rather than collateral.

The company does not own the ‘Muthoot Pappachan‘ and the ‘Muthoot Microfin‘ trademarks and the logos and the license to use them is valid for a period of 10 years from January 2017.

The company has added 44% of its existing branches, 42% of customers and 54% of loan book in last two-and-half years, so significant portion of new branches, customers and loan book is yet to stabilize.

The gross loan portfolio in top three states, Kerala, Karnataka and Tamil Nadu, together accounted for 51.36% of total gross loan portfolio and any adverse developments in these states may have an adverse effect on business.

Competition from other MFIs, banks and financial institutions, as well as state-sponsored social programs, may adversely affect the business.

There are challenges in operating rural-focused business model such as high cost of reaching to customers, lack of financial awareness, vulnerability of customers household income and high proportion of cash collections etc.

Valuation

EPS on post-issue equity for TTM ended September 2023 works out to Rs 20.9. At the price band of Rs 277 to Rs 291, P/E works out to 13.2 to 13.9 times of EPS for TTM ended September 2023.

Post-issue, the book value (BV) will be Rs 152.9, while the adjusted BV (ABV) net of net NPAs works out to Rs 148.4 per share at the upper price band. The scrip is being offered at price to ABV multiple of 2.0 times at the upper price band.

Among peer NBFC-MFIs, CreditAccess Grameen is trading at P/ ABV multiple of 4.9 times (consolidated basis), Fusion Micro Finance 2.4 times, Spandana Sphoorty Financial at 2.3 times (consolidated basis) and Satin Creditcare Network at 1.4 times (consolidated basis).

In terms of PE, CreditAccess Grameen is trading at 23.2 times its consolidated EPS for TTM ended September 2023, Fusion Micro Finance at 12.9 times, Spandana Sphoorty Financial at 17.8 times (consolidated basis) and Satin Creditcare Network at 7.0 times(consolidated basis).

RoA of the company was strong at 3.3% for TTM ended September 2023. The peer MFIs have also exhibited strong RoA at 5.1% for CreditAccess Grameen for TTM ended September 2023 (consolidated basis), 4.6% for Fusion Micro Finance, 3.8% for Spandana Sphoorty Financial (consolidated basis) and 3.8% for Satin Creditcare Network(consolidated basis).

RoE of the company was at 13.7% for TTM ended September 2023. RoE of CreditAccess Grameen was healthy at 20.8% for TTM ended September 2023 (consolidated basis), Fusion Micro Finance at 18.0%, Spandana Sphoorty Financial at 12.5% (consolidated basis) and Satin Creditcare Network at 18.5% (consolidated basis).

The company has maintained healthy asset quality with Net NPA ratio at 0.33% compared with 0.24% for CreditAccess Grameen, 0.65% for Fusion Micro Finance, 0.42% for Spandana Sphoorty Financial and 1.89% for Satin Creditcare Network.

AUM of the company has surged 46% year on year to Rs 10867 crore end September 2023. The AUM of CreditAccess Grameen has moved up 36% to Rs 22488 crore, Fusion Micro Finance 25% to Rs 10026 crore, Spandana Sphoorty Financial 69% to Rs 9784 crore and Satin Creditcare Network 39% to Rs 8894 crore.

The net interest margin (NIM) of the company was healthy at 12.4% for H1FY2024. The NIM of CreditAccess Grameen was at 13.1%, Fusion Micro Finance at 11.0%, Spandana Sphoorty Financial at 13.0% and Satin Creditcare Network at 12.8%.