Company Overview
Incorporated in 1992 in Mumbai, Muthoot Microfin Ltd. is a part of Muthoot Pappachan Group, 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. The NBFC is a microfinance institution providing micro-loans to women customers (primarily for income generation purposes) with a focus on rural regions of India. Muthoot has a wide range of lending products catering to rural households’ life-cycle needs. The company primarily provides loans for income-generating purposes to women customers living in rural areas. Its loan products comprise (i) group loans for livelihood solutions such as income-generating loans, Pragathi loans (which are interim loans made to existing customers for working capital and income-generating activities), individual loans and Suvidha loans (which are digital loans accessible through the Mahila Mitra application and made to existing customers to enable quick access to funds); (ii) life betterment solutions including mobile phones loans, solar lighting product loans and household appliances product loans; (iii) health and hygiene loans such as sanitation improvement loans; and (iv) secured loans in the form of gold loans and Muthoot Small & Growing Business (“MSGB”) loans. As of September 30, 2023, the NBFC had 3.19 million active customers, who are serviced by 12,297 employees across 1,340 branches in 339 districts in 18 states and union territories in India. Through its branch network, it focuses on under-served rural markets with growth potential, to ensure ease of customer access. Muthoot Microfin is the fifth largest NBFC-MFI in India in terms of gross loan portfolio as of March 31, 2023, 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.
Objects of the issue:
The net proceeds from the fresh issue will be used towards the following purposes:
- Towards augmenting the capital base to meet future capital requirements; and
- General corporate purposes.
Investment Rationale:
Brand recall and synergies with the Muthoot Pappachan Group
The Muthoot Pappachan Group has a history of over 50 years in the financial services business. The NBFC is the second largest company under the Muthoot Pappachan Group, in terms of AUM for FY23. Due to its relationship with the Muthoot Pappachan Group, the NBFC benefits from the brand recall and significant marketing and operational benefits. With the history of its group company catering to customers in economically weaker sections, Muthoot Microfin better understands the needs of women in rural households and designs lending products to cater to their requirements. For the growth of its operations and expansion of its customer base and geographical footprint across India, Muthoot Microfin leverages cross-selling opportunities to offer diverse products to meet multiple needs of its target customers. It is interesting to take note that the NBFC is also in the process of developing a Super App along with the Muthoot Pappachan Group, wherein it plans to integrate its Mahila Mitra application with all Muthoot Pappachan Group products and databases on to a single platform. This will allow customers to access all the Group loan offerings on a single platform, thereby maximizing cross-selling opportunities.
Access to diversified sources of capital and effective cost of funds
Muthoot Microfin has a well-diversified funding profile that underpins its liquidity management system, credit rating, and brand equity. The NBFC received an upgraded credit rating of A+/Stable by CRISIL on October 19, 2022, which was reaffirmed on January 19, 2023. The lender secures cost-effective funding through a variety of sources, including public sector banks, private sector banks, small finance banks, foreign banks, other non-banking financial institutions, developmental financial institutions, and public investors, together with NCDs, pass-through certificates, and direct assignment of loans. Muthoot Microfin’s promoters and its holding companies have not provided any corporate guarantees in relation to the borrowings availed by it, which demonstrates the trust of the lenders in its business model. Muthoot Microfin maintains a conservative ALM policy recognizing its operating metrics. It has an aggregate loan provision of 2.05% of its total loan portfolio as of September 30, 2023, which is higher than the regulatory requirements applicable to NBFCs. The NBFC reduced its average effective cost of borrowings from 11.08% in FY21 to 10.94% for FY23. Further, between FY22 and FY23, its aggregate cost of borrowings increased by 0.50% to 10.94%, notwithstanding a 2.50% increase in the policy rate by the RBI, which reflects its ability to secure cost-effective funding. In addition, its ability to continue securing cost-effective funding during the NBFC crisis in 2018 and the COVID-19 pandemic reflects its resilient business model. Furthermore, its ability to secure cost-effective funding will allow it to improve margins without increasing the cost of securing a loan for its customers.
Valuation and Outlook:
Although India’s household credit penetration on MFI loans has increased, it is still on the lower side. As of FY23, the microfinance industry had clocked a CAGR of 21% between FY2018-23. With economic revival and unmet demand in rural regions, it is expected that the overall portfolio size will reach Rs. 4.9 trillion by the end of the FY25. During FY2023-25 period, NBFC-MFIs are expected to grow at a much faster rate of 25-30% compared with the MFI industry. Key drivers behind the superior growth outlook include increasing penetration into the hinterland and expansion into newer states, faster growth in the rural segment, expansion in average ticket size, and support systems like credit bureaus. Muthoot Microfin has a long-standing track record of high customer retention in loan cycles 2 and 3. Its well-balanced customer distribution across loan cycles indicates a focus on acquiring new customers, as well as retaining existing ones. Muthoot’s group loans (including income-generating loans and Pragathi loans) are based on a group lending model, catering exclusively to women. An informal JLG (typically comprising between eight to 45 members) provides joint and several guarantees for loans obtained by each member of the JLG. While the lender’s operations have historically been concentrated in South India, they have in recent years expanded into North, East, and West India and have a total of 707 branches across North, West, and East India as of September 30, 2023, representing 52.8% of its total branches as of September 30, 2023. Moving forward, the NBFC expects a significant portion of its future geographic expansion to include rural areas in these regions of India and intends to grow the branches in four key states: Uttar Pradesh, Bihar, Rajasthan, and Punjab, which are underpenetrated. As the lender will utilize the net proceeds of the fresh equity shares issue to augment its Tier-I capital base, its capital adequacy will enhance and lead to a stable leverage position. At the current P/BV multiple of 2.3x, we believe the company is fairly valued and advise investors to “Subscribe” from a medium to long-term perspective.
