Muthoot Finance Limited – IPO (18-21st April 2011)

Update on April 20th

  • Muthoot Finance got over subscribed 7.09 times till today. The IPO closed today for QIB bidders and tomorrow for retail and HNI.
  • Of the categories, the QIB portion was subscribed 25 times; HNI 0.98 times and Retail 1.34 times
  • This indicates a likely surge tomorrow in the latter two categories.
  • The Maximum Subscription Amount for Retail Investor is now Rs 2,00,000
  • For Retail, if you want to maximise your subscription, bid for 1120 shares at cut off (likely 175) for an investment of Rs 1,96,000
  • Good luck !!

Business Profile

  • Kerala-based Muthoot Finance is a non-deposit taking, non-banking finance company with a focus on Loans against Gold
  • Primary Product – Small consumer Loan against gold (jewellery/ coins) as collateral. As per the company, the maximum tenure for a gold loan is one year, while the average tenure is three to six months.
  • The cost of borrowing is 9.5% (may increase by 1% soon), while their loans start at 12%.
  • Muthoot’s network stands at 2500+ branches across India employing 15000+ persons.
  • The market is large because Muthoot falls somewhere between a microfinance firm and a traditional bank, in terms of loan size and consumer profile. It is exploiting the customer’s gradual shift from pawnbrokers to organised lenders
  • At the same time, having Gold as collateral for personal loans provides for a low risk model to Muthoot, comparable to Home loans. Other loan categories are riskier.

Snapshot of key financial parameters

Muthoot Finance IPO

(click on graph above to expand)

USP of Muthoot

  • Market leader in Gold Loans (click on graph below to expand)
Muthoot Finance IPO

Chart 2: Market shares in % of Industry

  • The loan-to-value ratio for a 22 carat jewellery piece typically varies from 55- 65% for banks while it increases to 70 – 80% for NBFCs like Muthoot.
  • High brand recall due to recent ad campaigns and high visibility branch locations.
  • There are very few Gold loan only players – listed Mannapuram General Finance comes to mind. Most other players are Banks, and NBFCs having a broader loan portfolio. In that sense, Muthoot is a leader.
  • Gold loan market shares: NBFCs are rapidly growing their market share of the Gold Loan market (click on graph below to expand)
Muthoot Finance IPO

Chart 3: Growth of NBFC market share in Gold Loans

  • Growth Potential – Muthoot’s gold loan book of Rs 13,000 crores (Nov 2010), is expected to grow by Rs 10,000 crores in one year.
  • As of November 2010, Muthoot holds 97 tonnes of gold. NBFC sources estimate the gold held by households in India at 20,000 tonnes out of which 10% (2,000T) is held by lenders across the country. Of this 10%, only 25% (500T) is with the organised players like NBFCs and banks. So there is visible potential for this organised market to grow.
  • Gold Prices have been on an upswing. This helps the gold held as collateral for loans to appreciate in value. This lowers Muthoot’s collateral risks. (click on graph below to expand)
Muthoot Finance IPO

Chart 4: Gold Prices over last five years

  • However, if Gold prices fall, the risks will increase, along with possibly default rates

Negatives/ Challenges/ Concerns

  • A recent RBI directive says that bank credit to NBFCs for giving loans against gold jewellery will not be treated as exposure to priority sector. This will raise Muthoot’s cost of funds by 50 to 100 basis points.
  • For the past three fiscals, Muthoot Finance had negative net cash flows. This is unhealthy. The company explains in its RHP that it is primarily on account of high growth in borrowing under financing activities for the purpose of lending under operating activities.  But also Muthoot is investing heavily in additional branches and employees.
  • There are a number of civil, criminal, consumer, and tax cases by and against Muthoot and group companies. One pending in the SC is related to the Kerala Money Lender’s Act (KML). Any adverse ruling here can curb operations in Kerala.
  • Muthoot Finance has agreed to sizeable royalty payments to promoters for the Brand.
  • There are also anti-dilution guarantees provided to four institutional investors – Baring, Matrix, Wellcome, & Kotak – these are concerns left unaddressed.
  • Complex web of 55 Promoter group companies are mentioned in the RHP. Some are in similar or related businesses. There is no clear future path on conflict of interest, M&A by promoters, etc.
  • As a single sector focus player in Gold loans, Muthoot is exposed to several risks:
  1. Fall in price of Gold. This is not expected in the immediate future, but in a 3-5 year period, there may be a sharp appreciation followed by a sharp fall in prices. This can expose Muthoot to a collateral risk.
  2. As Banks and other NBFCs note the high growth in Gold loans, they will also become aggressive in this sector, and competition will intensify

IPO offering, Valuations and Investment Advice


  • The IPO pricing of Rs 160-175 per share will help raise Rs 824-910 crores, on sale of 13.85% of the equity capital, valuing the firm at over Rs 6000 crores (lower end)
  • The IPO opens April 18, and closes on April 20 for QIB and April 21 for retail and HNI
  • ICRA graded it ‘IPO Grade 4′ – above average fundamentals; Crisil also graded “4/5”
  • The IPO proceeds will be utilised to meet the company’s capital adequacy norms (>15%) in the future, funding of loans and for general corporate purposes.
  • 7% of the equity capital is held by PE players like Baring India, Matrix Partners, Kotak India PE Fund and Wellcome Trust.

Valuations comparison

Muthoot Finance IPO

Chart 5: Valuations comparison (JainMatrix projections & graphics)

Conclusion and Investment Advice

  • The issue is a High Risk and potentially High Gain offering
  • There should be a good listing due to leadership position, fair valuations and high growth
  • Invest for 1-2 years. If Muthoot broad bases it’s business using it’s strong brand and reach, and simplifies it’s organization/ promoter group companies, it can sustain and extend it’s market position
  • Check back on this website for updates  :-)
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These reports and documents have been prepared by JainMatrix Investments Ltd. They are not to be copied, reused or made available to others without prior permission of JainMatrix Investments. Any questions should be directed to the director of JainMatrix Investments at

Also see:

Performancing Metrics


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