Muthoot Microfin IPO - Investment Rationale, Issue Details, Financials, Valuations: Anand Rathi

Anand Rathi's IPO Report

Muthoot Microfin Ltd., the microfinance subsidiary of Muthoot Pappachan group will launch its initial public offering on Dec. 18, 2023 and the bid closes on Dec 20. The company has fixed a price band in the range of Rs 277- Rs 291 per piece. The minimum order quantity is 51.

The Rs 960 crore IPO includes a fresh issue of equity shares worth Rs 760 crore, and an offer for sale of up to Rs 200 crore.

Objects of the fresh Issue

1. To undertake their existing business activities.

2. To undertake the activities proposed to be funded from the net proceeds.

Strengths:

• Market leadership with a pan-India presence

• Rural focused operations, with a commitment towards health and social welfare of the customers

• Brand recall and synergies with the Muthoot Pappachan Group

• Robust risk management framework leading to healthy portfolio quality

• Streamlined operating model with effective use of technology

• Experienced and professional management, with strong corporate governance and support from promoters and investors

About the company

Muthoot Microfinance are a microfinance institution providing microloans to women customers (primarily for income generation purposes) with a focus on rural regions of India.

They are the fifth largest NBFC-MFI in India in terms of gross loan portfolio as of March 31, 2023.

They are also the third largest amongst NBFC-MFIs in South India in terms of gross loan portfolio, the largest in Kerala in terms of MFI market share, and a key player in Tamil Nadu with an almost 16% market share, as of March 31, 2023.

Valuation

The company has a market leadership with a pan India presence. Also, the company is a part of prestigious Muthoot Pappachan group.

At the upper price band company is valued at price/book value of 2.2 times with a market cap of Rs 49,608 million post issue of equity shares.

We believe that valuations of the company is fairly priced and recommend a 'Subscribe-Long Term' rating to the IPO.

Key Risk:

• The microfinance industry in India faces certain risks due to the category of customers that it services, which are not generally associated with other forms of lending. As a result, they may experience increased levels of non-performing assets and related provisions and write-offs that may adversely affect their business, financial condition and results of operations.

• Their business is vulnerable to interest rate risk, and volatility in interest rates could have an adverse effect on their net interest income and net interest margin, thereby affecting their results of operations

• The market capitalisation to revenue, market capitalisation to tangible assets, and enterprise value to Ebitda, based on the offer price of their company, may not be indicative of the market price of their company on listing or thereafter.

• They are subject to certain conditions under their financing arrangements, which could restrict their ability to conduct their business and operations in the manner they desire.

• Concerns about terms of loans provided by them may adversely affect their reputation and thereby the growth and the market acceptance of their products and services.

• They may not be able to sustain the significant growth in their business and relatively high profit after tax that they recorded for the Financial Year 2023 in the future.

• They have experienced negative cash flows from operating, investing and financing activities in the past.

• Their non-convertible debentures are listed on the BSE and they are subject to rules and regulations with respect to such listed non-convertible debentures. Additionally, as a ‘high value debt listed entity’, they are subject to additional compliances under the SEBI Listing Regulations. If they fail to comply with such rules and regulations, they may be subject to certain penal actions, which may have an adverse effect on their business, results of operations, financial condition and cash flows.

• They have availed loans which may be recalled by the lenders, subject to the terms and conditions of their grant, at any time.

• They depend on the recognition of the 'Method' brand, and failure to use, maintain and enhance awareness of the brand would adversely affect their ability to retain and expand their base of customers.

• An increase in the level of their non-performing assets or provisions may adversely affect their financial condition and results of operations.

• They derive a significant portion of their revenues from South India, and any adverse developments in the southern states of India may have an adverse effect on their business, results of operations, financial condition and cash flows

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