Muthoot Finance Ltd IPO Closes today…will give strong gains on Listing…Problem is a Poor Allotment

I have already posed in TAP GAP an Equity Poser 4/11 on whether Muthoot Finace IPO is worth investing in at Rs 175?

Responses have been terrific in content and I thank all those so far who have taken the trouble to try and win the gauravblog hamper and send in their responses !…..those who have not can do so by midnight tonight for a chance to win…. those who have alreadfy can send in another response too !

Perhaps all of you can get some guidance from the Scriptech Scan Muthoot Finance IPO Template send to Clients by me on April 19,2011 and reproduced below……TAP GAP 4/11 Winner for the hamper will be selected by me tomorrow…all the best 

 
 
For Inspiring Investment Insight into Indian Equity check out www.gauravblog.com
THINK LOAN AGAINST GOLD….THINK MUTHOOT FINANCE LTD 
 
A SCRIPTECH SPARKLE SS 2 STOCK SELECTION
 IPO

OF

MUTHOOT FINANCE LTD (MFL)

RECOMMENDED FOR APPLICATION

Rs 160 – Rs 175 BOOKBUILDING RANGE

Size of Issue at Top end : Rs 901 Crs

 
IPO OPENED MONDAY, APRIL 18, 2011 & CLOSES THURSDAY, APRIL 21, 2011
 
SPECIALISED NBFC MFL SHOULD LIST WITH 30% GAINS AT RS 225 + 
 

Think Loan Against Gold…Think MFL….Two Rating Agencies,CRISIL and ICRA have given MFL a 4/5 IPO Rating indicating above average fundamentals with good growth

Promoter Pedigree

This is the third generation of Muthoots that are running MFL….and they too are either past retirment age or approaching it !

The First Generation, Ninan Nathai Muthoot set up a Trading Business in 1887…the Second Generation,M George Muthoot  set up the Gold Business in 1939…and the Third Generation of Four Muthoots have scaled up fast in the last three years and are taking MFL Public….The Four Muthoots are the Wholetime Directors and constitute 50% of the Board  which also has four Independent Directors

The Group has a host of companies across a host of businesses…from FM Radio Broadcating to Real Estate and Resorts

A Harder look at Promoter Intent & Mindset

Abetting in Private Equity Placement at Differential Pricing in the same month too ! 

But MFL is literally and figuratively the GOLD mine.Owned 100% by the Muthoots,the dilution to 93 % took place in the last year to Private Equity Players at Share Prices ranging from Rs 123 to Rs 173.50….including to Kotak Private Equity Fund and Kotak Investment Advisors….Kotak Bank too is a major financier of MFL receivables and Kotak Mahindra Capital is lead managing the issue.

Let’s  not start a debate here on Conflict of Interest and Investor Protection on Pricing and on who’s really steering the Ship here…the Promoters or the Private Equity Players and the Lead Manager !

But it’s amusing how Pricing can change significantly in the same month of preferential allotment…On September 8,2010  two Kotak entities invested at Rs 133…a fortnight later the same month on September  23,2010 Matrix Partners India Investment LLC comes in again at Rs 173.50 (earlier was at Rs 123 two months earlier on July 23,2010) this time with Wellcome Trust Ltd too at the same price….Clearly Opportunistic and Vested Interests at play here……… 

Reward Self damn well but not the key employees

What catches the eye is this….Every one of the Four Muthoot Directors are currently getting this from the company,while the Top Employees are paid a pittance…top Finance Guy got just  Rs 10 lakhs for the whole year !…while MFL remained private it was nobody’s concern really but now with it going public there are a few eyebrows surely that will be raised 

  • Basic Salary of Rs 20 lakhs every month with increments upto 25% in a year at the discretion of the Board
  • Special Allowance of Rs 20 lakhs a month
  • All Expenses paid for Housing,Travel,Telephones etc
  • Incentive of Rs 1.8 crs or 1% of the Net Profit before taxes and before applying this incentive whichever is higher to be paid at quarterly intervals….FY 11 should close with EBT of close to Rs 600 crs…so that’s Rs 6 crores for each Director as incentive….November 30,2010 results for eight months already shows Rs 12.8 crs debited to Directors Remuneration….  FY 12 should see an EBT of over Rs 800 crs…so that’s Rs 8 crs that will be paid out as Incentive to each
In addition they shall get a royalty from MFL for using the Muthoot Brand Name…more of this below
 
Top Key Employees of a 15500 + strong workforce get Salary packages ranging from Rs 5 lakhs to Rs 10 lakhs for the full year !…something is terribly skewed here…you do not build an Empire simply by rewarding yourselves alone !…If this issue is not addressed,you might soon see a Labour Union in MFL and a high attrition rate…this is a huge risk
 
Muthoot Trademark is owned by MFL but is intented to be reassigned to the Promoters by a rectification process that has already commenced
 
Muthoot Trademark and Logo is owned by MFL…it’s an Intangible Asset…a Brand that has great Value…as rectiification process for reassigning it to Muthoots is the method adopted,no valuation has been done…when this process is completed the Muthoots would grant MFL a non exclusive license to use this Brand for a royalty fee of 1% of gross income but not more than 3% of profit before tax (after charging the royalty) and managerial remuneration payable…this brand should have a value of several hundred crores atleast if not over a thousand crores at this time…Promoters would own this and no longer MFLMFL would have to pay for using it though !   
 
Liquidating some part of the Promoter Holding to Private Investors
 
On September 21,2010 Promoters have offoaded 3202128 shares at Rs 173.50 to The Wellcome Trust Ltd of UK to cash in Rs 55.55 crs…MFL also issued 1761206 Fresh shares at the same price to The Wellcome Trust Ltd ,UK on September 23,2010
 
The IPO & Pre IPO Placements
 
MFL is offering 5.15 cr Equity shares of Face Value Rs 10 in the Bookbuilding Price band of Rs 160 to Rs 175
 
Equity is currently Rs 320 crs and will move to Rs 372 crs Post IPO of which the Muthoots will hold 80.12 % .Networth which is estimated to be Rs 1251 crs at March 31,2011 will move to Rs 2142 crs with this Rs 901 crs Issue at top end price of Rs 175
 
It has just announced that it has successfully placed,the maximum allowed, 15 % of Shares on Offer to Eleven cornerstone Anchor Investors at Rs 170.These include Citigroup Global Markets Mauritius, Abu Dhabi Investment Authority, Goldman Sachs India Fund and Baring India Private Equity Fund 
 
The Issue will be heavily subscribed…The Qualified Institutional Body  Portion is 50% or 25750000 Shares,the Non Institution or High Networth Investors Portion is 15% or 7725000 shares while Retail Investors can apply for 35% of the Issue or 18025000 shares
 
The Retail Portion needs Rs 315 crs for subscription at Rs 175…Minimum Application is for 40 shares and then in multiples thereof.It is likely to attract over Rs 6000 crs…so even if you put in the maximum application for Rs 196000 (1120 * Rs 175),you’ll probably be allotted just 50 shares or thereabouts…If it lists at Rs 225 as expected in May 2011,the gains of Rs 50+ may look super at 30% absolute but it translates to just Rs 2500 !…on an application of Rs 196000 !…Annualised gains would be between 18% to 24%….some ponderables though !….may get a lower allotment than even 50 shares if retail portion is oversubscribed even more heavily than 20 times….may get a lower or higher price than Rs 225 on listing 
 
This is the Problem that Retail Investors face in a relatively Good Issue…Poor Allotments and insignificant Gains….this IPO will make you money…but not as much as it does the Promoters and the Private Equity Players….the Old Game being played out by a crafty Lead Manager !
 
Nevertheless,do go ahead and apply…monies otherwise are sitting earning far less in your Bank Accounts
 
Oh ! and don’t grudge the Private Equity Players who have cornered shares in preferential allotments …they carry a 14 month lock in  as per Shareholders Agreements or longer as per SEBI IPO Rules…Anchor Investors who have just received firm allotments at discretion of Promoters as advised and ‘controlled’ by Lead Managers have only a 30 days lock in…None of them get any Bonus Issue benefit…that was cleaned up by the Promoters,and they had the right to do so too, in two liberal issues of 7:1 on October 21,2008 and 36:7 on August 29,2009 after they had invested fresh Equity in 2006 and 2008 at Rs 250 per share 
 
 
MFL : Peer Valuations
 
   

Two Leading ‘Financing against Gold’ Companies

Company

Price

 in Rs

Book Value in Rs

P/BV

Estimated

 Total Income

 March 31,2011

Rs Crs

Estimated

Net Profit

March 31,2011

Rs Crs

EPS

Muthoot Finance

175

 58 *

 

3

1950

400

10.8

Manappuram General Finance

127

49

2.6

1100

250

6

Book Value and EPS adjusted for  FY 11 Profit Estimates * Post IPO

  

MFL is the Market Leader

There is simply no doubt MFL is the Market Leader in LAG Segment…Impressive…Have a Look

Market Leaders in ‘Loan Against Gold’ Financing Segment

Source : IMaCS Report updated 2010

Ranking

Lender

FY 10 Loan Book

( Rs Crs)

% of Market Share

1

Muthoot Finance Ltd

7342

19.5

2

Indian Overseas Bank

5220

13.9

3

Indian Bank

3920

10.4

4

Manappuram Finance

2560

6.8

5

South Indian Bank

2350

6.3

6

Muthoot Fincorp

2220

5.9

7

State Bank of Travancore

1930

5.1

8

Andhra Bank

1440

3.7

9

Federal Bank

860

2.3

As of November 30,2010,The Loan Book of MFL has climbed to Rs 13004 crs…It’s got a bigger share than even the big Southern Banks…and No ,Muthoot Fincorp is not a related company…so a potential and clear confusion and clash of Brand recall exists 

Interest Dynamics of MFL for the Eight Months at November 30,2011

Interest Income =>

Rs 1289 crs

Charged to Customer

Average 19.94 %

Interest Expense=>

Rs 583 crs

Cost of Funds

9%

Now that’s a fabulous mark up of 120% on Cost of Funds !…MFL simply plays the Numbers game with such  a great Net Interest Margin…It had 4.1 million accounts across 20 states (predominantly in the South),Delhi and Four Union Territories being serviced by 2263 Branches…it held 97.6 Tonnes of Gold as collateral…that’s worth over Rs 20000 crs against a Retail Loan Book of Rs 13004 crs.The Average Loan was Rs 31553 and Interest earned was an average of 1.67% every month….the Loan Book was funded by Muthoot Gold Bonds outstanding at Rs 3364 crs + Loans from Banks and Financial Institutions of Rs 4709 crs + Selling Receivables under bilateral assignments to banks of Rs 3246 crs….  

Network of Branches

As of February 28,2011 the branches were 2611,the accounts had swelled past4.5 million,the Employees were 15664 that served an average of 67953 customers every day in February 2011…there is no Labour Union…yet

Except 14 Branches which are owned by MFL,all Branches are rented or leased.It takes an average of Four to Six Weeks and Rs Five lakhs to Rs Ten Lakhs to set up a branch…each requires a Strong Room to hold the Gold Collateral plus a Burglar Alarm and Security Personnel Arrangements at high risk branches…Eight Months figures at November 30,2010 show the average cost of setting up a branch was Rs 6.5 lakhs read more

Interesting and Amusing….Shree Ganesh Jewellery House Ltd prices it’s IPO at Rs 260…lists much lower on April 9,2010 and closes at Rs 163…and on this first day itself Standard Chartered Bank (Mauritius) Limited A/c Emerging India Fund sells at a huge loss,over half a million shares in a Bulk Deal at Rs 169.23 !

The Listing of Kolkata based Nilesh and Umesh Parekh promoted Gold Jewellery House,Shree Ganesh Jewellery House Ltd on Friday,April 9,2010 has spooked everybody

The IPO was priced at the lower band of Rs 260,but listed lower and crashed to 160 levels pretty fast

……An interesting Bulk Deal caught my eye on this first day of listing itself…Standard Chartered Bank (Mauritius) Limited Emerging India Fund (SCBMLEIF) sold 531484 shares at Rs 169.23 aggregating Rs 8.99 crs

I checked the Prospectus and found that they were not part of the Pre IPO Non Promoter Shareholders…of these there were merely two…Shares were allotted in August 2009 at Rs 300,after conversion of fully convertible debentures to Bennet Coleman who ,after a 1:1 Bonus in September 2009 ,now hold 333334 shares at a cost of Rs 150 aggregating Rs 5 crs Investment and Credit Suisse PE Asia Investments (Mauritius) Limited who had invested Rs 80 crs in a CCP Issue and after conversion at Rs 300 and the bonus held 5333334 shares also at a cost of Rs 150…but now hold 3200000 shares after offering for sale shares in the recent IPO

The March 2010 Book Building IPO was made in the Price range of Rs 260-Rs 270,with Rs 260 finally fixed as the Issue Price….It was for 14269831 shares aggregating Rs 371 crs…of this  the fresh issue component was Rs 316 crs through 12136497 shares and an Offer for Sale by Credit Suisse of 2133334 shares aggregating Rs 55.47 crs

In fact SCBMLEIF also does not feature as an Anchor Investor…Of these there were three…IFCI,India Max Investment Fund and Bank Muscat India Fund who together committed Rs 65 crs for 25 lakh shares at Rs 260

The Issue was oversubscribed 1.96 times…QIB portion 1.38 times…Non Institutional Portion 6.12 times and the Retail Portion 1.39 times

So,I assume SCBMLEIF must be a FII allottee in the IPO at Rs 260….Selling off at Rs 169 levels and at a huge Loss of  nearly Rs 91 per share on the first day of listing begs the question “But Why!?”…the loss is Rs 4.83 crs as the Investment was Rs 13.82 crs

As I blog this,markets have just closed at 3.30 pm on Monday,April 12,2010 and the second day of listing for Shree Ganesh Jewellery House and it’s share price is yet Rs 163

Financials show a post IPO Equity of Rs 60.68 crs (FV Rs 10,Promoters hold 70% +)) and a Post IPO Networth estimated to be around Rs 900 crs ( Rs 481 crs at 30/9/2009 + Rs 100 crs second half profit + Rs 316 crs IPO Proceeds to the Company)…that’s a Book Value of close to Rs 150…Debt was Rs 377 crs at the half year at 30/9/2009….After recording a PAT of Rs 80 crs for the half year,the full year FY 10 PAT should be over Rs 180 crs and close to Rs 200 crs…that’s an EPS of atleast Rs 30…the Earnings Multiple is just over 5 times with the Share Price of Rs 163 and under 9 times at the issue Price of Rs 260 and the Book Multiple is just over 1 read more