TAP GAP Equity Poser 4/11…Does Muthoot Finance IPO look attractive to apply for in the Price band of Rs 160 to Rs 175?

Hip Hip Hip Hurrah ! Winner of the gauravblog hamper announced past midnight on Thursday April 21,2011 ….we have entered Good Friday…..thanks Swaroop,Tushar,Manoj,Raghavendra Ramachandra and Ramurthy for responding to this TAP GAP Equity Poser 4/11…..Tushar you ran close but the gauravblog hamper for this Equity Poser is won by RR that stands for Raghavendra Ramachandra…I know this as he send me the response by email too with his name…RR please email me your postal address and telephone nos…strong conviction comes through with some points that one cannot find in the RHP….well done

TAP GAP….. Equity Poser 4/11…Respond by Thursday ,April 21,2011

Winning Response wins the gauravblog hamper

Does Muthoot Finance IPO look attractive to apply for in the Price band of Rs 160 to Rs 175 ?

 

 

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

130

49

2.7

1100

250

6

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

Some guidance to respond to increase the probability of your’s being the winning response

Briefly support your views to explain why you think what you think…I’ve given a comparative table above to help you along…if you feel the brevity sought in the response box will not do justice to your views,you could first simply mention your Views in brief as a response to this blog and then detail out why you think so in a seperate email to [email protected] …Both will be considered

…so get your mind gums working….responses inside five days will be appreciated to help me select the winner from them by the time the IPO closes on April 21,2011.It opens Monday April 18,2011

Cheers !…and all the Best  

9 thoughts on “TAP GAP Equity Poser 4/11…Does Muthoot Finance IPO look attractive to apply for in the Price band of Rs 160 to Rs 175?

  1. Muthoot Finance, being the market leader in Gold finance & nearly double in terms of income, profit & scale of operation should trade at a premium to the listed peer Manappuram(the second largest player).
    So a fair multiple would be around 22-25x that gives a price band of 240-270 a 35%+ premium over the higher end of price band!
    Now the catch, since this is the first IPO of the financial year 2012, along with market fancy for leader in high-growth/low default business of Gold loan you are gonna see huge over-subscription in retail by more than 20-23(conservative estimate!!) times leading to low allotment even for full application of Rs 196000
    Assuming you get allotment for around 8500(assuming over-subscription of 23 times) and you get a premium of 30% on listing thats a gain of around 2600, a return of 1.3% in 20 days, or around 24% annualised (Annualised Returns will be around 20% after taking into account short term capital gains tax)
    Imponderables (Negatives) are : 1)Huge oversubscription leading to allotrment of 7000 by lottery (1 lot of 40 shares) leading to post-tax annualised returns of 16% or worst case scenario of zero allotment
    2)Recent RBI guidelines derecognising Gold loans as priority-sector lending & hence leading to hardening of costs of funds & squeezing of Net Interest Margins
    3)Company hadn’t disclosed many litigations & was forced to do so later.
    One imp. case in SC is inclusion of gold-financing companies in Kerala Money Lenders Act, which may cap the rate of interest we all saw what happened to SKS Microfinance after similar law was passed in AP! BEWARE!
    3)Gold loan is entering a phase of hyper-competition (multiple national level players) & banks could soon leverage on their existing branch network/customer base & lower costs of funds to enter aggressively into this business leading to lower profitability
    4) A highly unlikely crash in Gold prices!!!!!

    Positives
    1) Total household gold holding in India is estimated at 18,000 to 20,000 tons assuming 10% of that comes to orgainsed gold lending (currenly around 2.2%!!) & taking Muthoot’s 20% market share as a benchmark, thats a potential gold market for Muthoot of around 360 tons which is nearly 4 fold the current gold assets held by company (97 tons)!!!.
    2)Muthoot has mostly concentrated on the south markets (even here mainly in Kerala). so this leaves huge scope for penetrating the Northern, central, western & to a smaller extent eastern markets.
    Picture abhi shuru huwin hain!!
    VERDICT:
    After all that analysis i’m sticking to Systematic Monthly Investments into Gold ETF vis-a-vis applying in Muthoot IPO as i’m a Gold Bull & believe its a multi-year bull run with inflation , lower worldwide economic growth & Sovereign debt woes worldwide.
    I feel gold can give a CAGR of between 15-25% with big upward spurts as crisis emerge & currencies (esp. $) fall!
    Muthoot looks like a good issue & is well priced but like in all good IPO’s(with the exception of Coal India) Retail investors hardly make any money due to low allotment!

    CAVEAT:
    If Muthoot lists below 200 i may pick up a small stake for a quick trading pop 😉

  2. Positives:

    1) Largest gold finance company. Twice the size in operations than its listed competitor, Manappuram finance.
    2) Very aggressive growth in net income and net profit from 2006 to 2010 (as per RHP) well over 50% CAGR. One can refer to the financials in RHP which clearly shows superior performance over the few years.
    3) A very strong brand name in southern India in gold loan.Recent advertisements by both(Muthoot and Manappuram) companies will strengthen their brands. Clearly Muthoot being a bigger player will manage to grow faster.
    4) Still lot of people in India pledges their gold for the short term needs and the segment is heavily fragmented. But big player like Muthoot and Manappuram with their brand will have opportunity to expand faster.
    5) CRISIL and ICRA rating for the IPO is 4/5 indicating above average fundamentals. This should help improve the sentiment about the listing.

    Negatives:
    1) There are high number of litigations against company and its promoters. Also company has initiated more than 5000 litigations. Adverse impact on the financials of the company cannot be ruled out if these cases go against the promoters and company. A big negative factor against promoters.
    2) Muthoot finance is systemically important non-deposit accepting” NBFC and do not have access to deposits. Company has 4,087.4 million outstanding unsecured debt which matures during the current fiscal year ending March 31, 2011.So co. will need to refinance the debt or raise equity.
    3) Any hike in interest rates will increase the burden on the company as company is restricted to accept any deposit.
    4) A major part of branch network is concentrated in southern India and any disruption or
    downturn in the economy of the region would adversely affect Muthoot’s operations. However looking at growth rate of southern states, this risk is manageable.
    5) Company’s loan agreements with certain banks and financial institution requires company to obtain prior permission of such banks or financial institutions or to inform them with respect to various activities, including, alteration of our capital structure, changes in management, raising of fresh capital or debt, payment of dividend, undertaking new projects, or undertaking any merger or amalgamation, invest by way of share capital or lend to other companies, undertaking guarantee obligations on behalf of other companies, and creation of further charge on fixed assets. However in the past Muthoot finance has breached these agreements, however no bank has taken action against it.
    6) All of the Gold Loans co. issue are due within one year of disbursement. The relatively short-term nature of loans means that long-term interest income stream is less certain than if a portion of loans were for a longer term.
    7) From time to time company sell and assign a group of similar loans from outstanding loan portfolio to financial institutions in return for an upfront fixed consideration. However provisions of the Banking Regulation Act, 1949 do not permit banks to assign debt due to them, including the assignment of debt between two banks. This judgment has been appealed to the Supreme Court of India, which has not passed a final decision on the matter. In the event that one or more of the asset assignment agreements entered into by Muthoot are held by a court of law to be unenforceable, Co may be required to terminate these assignment agreements and may suffer losses. In addition, if such assignments of loans are sought to be regulated, it could adversely affect company’s ability to raise resources through the loan assignment route. As on March 31, 2010 the outstanding portfolio of assigned loans was Rs.20,083.2 million constituting 27.00% of the gross loan portfolio which is significant.
    8) Muthoot trademark and logo which company is currently using will now belong to promoters and promoters will grant no -exclusive license to use Muthoot trademark for the royalty of 1% of gross income to promoters. Again a big negative on promoter’s intentions.

    These are some negatives, I could find out from RHP.

    Conclusion
    Long term prospects: There could be some issues on the corporate governance front (see negatives above). Also rising interest rates will put pressure on Muthoot’s margins. Also RBIs policy towards NBFC need to be clear. So I’ll wait and watch till some clarity prevails about this doubts. Also these negatives (if materializes) could drag the price down in next few months.

    However I think, stock should show some handsome listing gains. Current PE of Manappuram is around 19. Muthoot being a larger company and with better financials can command PE of 20-22 with EPS around 10.5-11. So my guess is that it will list around 220. Listing of IPO is mostly sentiments driven. Current rally in gold also can help improve the sentiments of stock listing. So I think one can book the profit on the listing day and get out.

  3. Come on Guys,Swaroop and Tushar have responded well…you’ll need to do so too by Thursday…it would be fun choosing from more entries for the winner…otherwise it is Eeena Meena Deeka between the above two !….even a crisp short response could be a winner ! Cheers !

  4. 1) (a) Being from south India, I know how gold here is treated like…visit a south Indian wedding of even a lower middle class and see how gold is treated here , Also the working class of south Indians in gulf adds on to the gold glitter.
    (b) Every family will have golden ornaments far more than what can be worn at one or two occasions. Iam telling this to just indicate the gold market and potential customer size for these institutions.
    c) Considering the quantum of gold the families own and Gold loans being short term loans ( 3 month onwards) ,it is convenient for any family to rotate gold ornaments for their use for various occasion with the lender .

    2) In India, gold was treated same as ones’ house.. Not to be sold /traded/Mortgaged. To be just preserved. An old movie will show how the mother will bring the gold with her when the family is in financial crisis to bail out the family. It was the last resort during financial crisis and not be used till then.
    3) Situation is changing now. Gold loans being (a) short term loans, (b) easily accessible , (c) quickly processed are almost like credit cards. The advantage is the very low interest rate compared to credit card. Hence people have started realizing this and are using it extensively. The notion of “ Gold as Last resort” is reducing. I know people pledging gold who are not the poor / low class people in desperate need of money. This phenomenon is going to catch up.
    4) Gold loan market is very very very BIG. Your market is almost all the houses in India. Even a very small % of this market being converted to customer is more than enough for a fantastic CAGR . Hence there is market available for everybody’s grabs . Banks’ NBFC’s etc. No major risk in terms of somebody capturing somebody’s market share. The brand , 70 yr history , expertise of Muthoot helps it to stand out.
    5) I don’t see the risk like what happen to SKS Micro finance here. Regulation / capping of interest will not happen and the target customers are different. SKS’s target and Politicians vote banks were same—Very poor , uneducated people. Hence SKS had to burn the fingers. I don’t see this risk here.
    6) Operational risks in terms of fraud, burglary etc are inherent which is a manageable risk. Loans are also well secured in terms of recoverability.
    7) I have written all about industry here and not much about the company because, Muthoot is the biggest organized player and all the above is automatically true for muthoot. Financial parameters are well known and hands down this is a GREAT IPO to go … The icing of cake is the banking license …

  5. I am not well versed with Fundamental Analysis so will skip that part. I have a few simple observations.

    1. Every bit of news coming on Muthoot Finance IPO is calling it GOLD PLAY…in my opinion if you want to play gold then its very prudent to go for sip’s on goldbees. A mucho better alternative and a mucho safer alternative!

    2. Like other NBFC’s the inherent risks are same. Like SKS it will also be under scrutiny and also fall under a risk of political intervention and regulatory control after all as they say “GOLD GLITTERS” and “ATTRACTS”.

    3. There was a disturbing trend reported in Delhi a few months ago…most of the stolen gold, be it from robbery/chain snatching was being traced to Muthoot Finance branches..thanks to their 5 minutes loan against gold policy.

    4. Most of the branches I have seen are kind of franchises in DELHI in small establishments and storage as well security becomes a concern. Btw MUthoot and your pawn shop are same..the only diff that Muthoot is tryin2break that mould and emerge as THE PAWNSHOP CONGLOMERATE!!! A choice between the two… ppl will still trust their neighborhood pawn broker (sonar in most cases) coz in all likely hood that gold also would have been purchased at that shop only and he would(infact cant deny) give better valuation to the GOLD.

    5. Ok now coming to the IPO…should you invest in it….yes you can and treat it as a lottery only…get premium on listing (if the operators play it well!) and exit. Investing for value creation and stuff like that..why not wait for a few quarters and then test the waters.

    6. I dunno whats the banking license buzz all about…better to just ignore these news..for last three years whenever i have seen IFCI being operated its only on two news; Disinvestment and Banking License !!!

    Therefore like I mentioned earlier if playing the IPO then treat it as a lottery only…if lucky take your winnings and stand aside…If thinking on investing then wait…history is replete with examples that you will get better valuations!!!

    Cheers!!!

  6. BREAKING NEWS:

    Manappuram has carried out an advertisemnt in leading Malayalam newspaper(Malayala Manorama) that they will be giving loans @ 1% monthly interest (annualised rate of 12%!!).
    Until now most Gold loan companies used to charge 24% interest, so thats a 50% reduction in interest costs in a few months time when interest rates in the system have been shooting up & are headed for even higher rates in the future.
    I think Manappuram is doing this on the basis of QIP money (1000 crore) raised last year & like i said industry is entering hyper-competitive stage
    There also seems to be a ‘ego’ race between promoters of Manappuram & Muthoot for being largest/highest credit rated etc.
    Todays’ advt. read “Manappuram is the largest LISTED gold-loan company with highest credit rating alas Muthoot claims the same !!Only diff being Muthoot is unlisted!
    So both players are willing to go to any extend (including suspect Corp. Governance, unbridled & unremunerative branch expansion, destructive competitive tacticts, Manappuram is giving 2000 rs per gm of Gold which is almost 95% of the value until recently they used to give loans of upto 70-85% value of gold!!

    CONCLUSION:
    All thats glitters is not Gold!
    Avoid IPO , buy the ‘asli maal’- Gold ETF!!

  7. My reply above had factored this low interest rate..and i stand by what I had written .. I cannot digest comparing muthoot with gold ETF..It is a different ball game altogether

  8. sir,
    avoid even if ur looking for listing gains bcos allotment may be poor.
    avoid if ur looking for long term for simple reason- for every % increase in their business that is lending they need money at first (mostly they borrow)
    their entire business model depends on the rate of one commodity GOLD which is not in our hands.anything can happen.
    so big avoid avoid

  9. There are 2 arguments here by ramuthyd: Dependency on gold rate & they need to Borrow to lend
    a) Dependency on gold rate:
    • Loan is provided around 60-80% of gold value ( LTV ratio)
    • Also considering the making charges , wastage, VAT etc charged for ornaments when one purchases, the “replacement cost” is higher by at least 10% for the borrower.
    • Also, there is sentimental attachment for personal jewellery .
    • This means margin of safety is very high. Also, gold loans are short duration loans. There is no history of downward fluctuation of this magnitude in such a short duration in gold. It can happen in stocks but not gold.
    • Therefore, It is not right to say that daily gold rate fluctuation has any significant bearing on the business model.

    b) they need to Borrow to lend:

    • Agree to some extent because, gold loans are out of “priority sector lending” now and it has caused increase in cost of borrowing for these co.s.
    • But the loans being short term loans, it help them to map interest against the current interest rate trend.
    • With very negligible default rate ( considering recoverability against collateral) the balance sheets of these companies will be very sound which will provide easy money to them.
    • Also, this IPO will provide low cost funds

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