Recommendation From Finance Sector

Acquisition of Belstar Investment and Finance and tie-up with TechProcess Payment Services

Strong financials and high stakes in subsidiaries

Attractive valuations

Muthoot Finance (MFL) is the largest gold mortgage financing company in India in terms of loan portfolio. The company provides personal and business loans secured by gold jewellery and gold items.

MFL’s average gold loan per branch stood at Rs 6.01 crore in Q1FY17 as compared to same period in the previous fiscal. The company’s total weight of gold jewellery pledged stood at 146 tonnes with an increment of 6 per cent in Q1FY17 on yearly basis. Its average loan ticket size was Rs 37,417 in Q1FY17 as against Rs 37,293 in Q1FY16.

On the financial front, MFL’s total income increased 14 per cent to Rs 1,301 crore in Q1FY17 on a yearly basis. Its NIM increased 220 basis points to 11.8 per cent in Q1FY17 on yearly basis. The company’s PAT also jumped 48 per cent to Rs 270 crore in Q1FY17 as compared to the corresponding period in previous fiscal. Its branch network of 4,294 spread across 27 states including Union Territories grew one per cent in Q1FY17. MFL’s AUM increased 6 per cent to Rs 25,860 crore in Q1FY17 as compared to same period in previous financial year.

On the income front, MFL’s topline increased 13.77 per cent to Rs 4,920 crore in FY16 as compared to the previous fiscal. The company’s EBITDA too rose 13.6 per cent to Rs 3,650 crore in FY16 on a yearly basis. Its bottomline increased 21.38 per cent to Rs 815 crore in FY16 as compared to the previous financial year.

During the quarter, MFL completed acquisition of Muthoot Insurance Brokers, an IRDA registered direct broker in insurance products, as a wholly owned subsidiary. The company collected Rs 10 crore in the form of premium collections.

Asia Asset Finance Plc, MFL’s Sri-Lankan subsidiary, has increased its loan portfolio by 50 per cent at Rs 335 crore in Q1FY17 on a yearly basis. The interest income of the company has increased 72 per cent to Rs 19.39 crore in Q1FY17 as compared to the corresponding period in the previous financial year. Its profitability increased 60 per cent to Rs 2.71 crore in Q1FY17 on a yearly basis. Micro finance, gold loans, personal loans and business loans will be the major thrust areas for the company going forward.

Muthoot Homefin (India) has increased its loan portfolio by 46.67 per cent to Rs 44 crore in Q1FY17 as compared to same period in the previous financial year. The company is primarily focusing on affordable housing segment.

MFL has infused Rs 40 crore as fresh capital acquiring 38.23 per cent of the expanded equity share capital of Belstar Investment and Finance (BIFPL). Acquisition of additional 10.32 per cent from the existing shareholders is expected to be completed soon. The total holding in BIFPL would be raised to 57.15 per cent making it a subsidiary. MFL and TechProcess Payments Services have joined hands to facilitate digital repayment of loan EMIs of customers. The platform is a single integration omni-channel payment solution compatible with online and mobile channels.

On valuation front, MFL’s share price is trading at 17.14x as against peers such as Manappuram Finance (18.59x), Sundaram Finance (25.91x), Cholamandalam Investment and Finance Company (26.38x), Shriram City Union Finance (29.38x). The company’s PE is also attractive as compared to industry PE of 20.13x. Hence, we recommend a ‘buy’ on the stock.