IPO Analysis: Muthoot Microfin Ltd

IPO Rating: Apply for the long-term

About the issue

Promoted by Muthoot Pappachan Group, Muthoot Microfin, is hitting the primary capital market, with its initial public offering. The issue of the company will open on December 18, 2023, for subscription and closes on December 20, 2023. Investors can bid for a minimum of 51 Equity Shares and in multiples of 51 equity shares thereafter.

The public issue with a face value of Rs 10 per equity share comprising a fresh issue aggregating up to Rs 760 crore, and an offer for sale of up to Rs 200 crore by existing shareholders. The company has fixed the price band at Rs 277 to Rs 291 per equity where for its maiden public offer.

The company proposes to utilize the net proceeds from the Fresh Issue towards augmenting its capital base to meet future capital requirements.

Company profile

Muthoot Microfin, which was incorporated as ‘Panchratna Stock and Investment Consultancy Services’, is a microfinance institution providing micro-loans to women customers (primarily for income generation purposes) with a focus on rural regions of India. Muthoot Microfin is the 5th largest NBFC-MFI in India in terms of gross loan portfolio as of March 31, 2023. They are also the 3rd 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 per cent market share as of March 31, 2023. The company is a part of the Muthoot Pappachan Group (MPG), a business conglomerate with a presence across financial services, automotive, hospitality, real estate, information technology infrastructure, precious metals and alternate energy sectors.

The Muthoot Pappachan Group has a history of over 50 years in the financial services business. They are the 2^nd largest company under the Muthoot Pappachan Group, in terms of AUM for the FY2023. MFL, the flagship company of the Muthoot Pappachan Group, currently holds 59.29 per cent of the pre-offer equity share capital in the company, on a fully diluted basis. Their relationship with the Muthoot Pappachan Group provides them with brand recall and significant marketing and operational benefits. Further, there are significant synergies between the financial services business of the group and their micro-finance business.

As of September 30, 2023, the company’s gross loan portfolio amounted to Rs 10,867.07 crore. The gross loan portfolio of their income-generating loans amounted to Rs 10,211.87 crore, representing 93.97 per cent of the total gross loan portfolio. They primarily adopt a joint liability group model which caters exclusively to women in lower-income households and is premised on the fact that if such individuals are given access to credit, they may be able to identify new opportunities and supplement and grow their existing income. Their business model helps in driving financial inclusion, as they serve customers who belong to low-income groups.

As of September 30, 2023, they have 0.32 crore active customers, who are serviced by 12,297 employees across 1,340 branches in 339 districts in 18 states and union territories in India. They have built their branch network with an emphasis on under-served rural markets with growth potential, to ensure ease of access to customers. Their branches are connected to their IT networks and are primarily located in commercial spaces which are easily accessible by their customers.

Further, to expand their digital collections infrastructure, they launched a proprietary application, called “Mahila Mitra”, in 2021, which facilitates digital payment methods such as QR codes, websites, SMS-based links and voice-based payment methods. As of September 30, 2023, 0.15 crore customers have downloaded the Mahila Mitra application, and 0.25 crore customers have transacted digitally with them. They are also in the process of developing a Super App along with the Muthoot Pappachan Group, which they plan to use to integrate their Mahila Mitra application with all of the Muthoot Pappachan Group’s products and databases onto a single platform.

Financials

For the period between FY21 and FY23, the company’s revenue and PAT clocked CAGR of 44.5 per cent and 382 per cent respectively, while EBITDA grew by 55 per cent during FY21-23. The company reported revenue of Rs 1428.8 crore in FY23, up 71 per cent YoY, while EBITDA increased to Rs 788.5 crore in FY23 from Rs 425.66 crore in FY21. PAT for FY23 stood at Rs 163.89 crore from Rs 47.4 crore in FY22 and Rs 7.05 crore in FY21. The company’s RONW increased from 0.79 per cent in FY21 to 10.08 per cent in FY23.

For the six months ending September 2023, the revenue and profit of the company have increased by 72 per cent and 1546 per cent respectively to Rs 1042 crore and Rs 205 crore.

Valuation and Outlook

The issue is available at a price to earnings (PE) of 13x after accounting for expanded equity post-issue and annualizing H1FY24 earnings per share. Compare this with other listed players, which on average are available at much higher PE ratio. Even if we look at price to book value, the issue seems to be fairly priced.

*Post issue and annualised earnings

Looking at expanding its geographical footprint and sourcing platform across India along with fair valuation, we recommend our readers to subscriber with a long term perspective.