Muthoot Microfin Limited (Subscribe)

Highlights

Muthoot Microfin Limited (MML) is a part of Muthoot Pappachan Group, a business conglomerate with presence across financial services, automotive, hospitality, real estate, information technology infrastructure, precious metals and alternate energy sectors. MML is a microfinance institution which provides micro-loans to women customers (primarily for income generation purposes) with a focus on rural regions of India.

Their loan products comprise (i) group loans for livelihood solutions such as income generating loans, Pragathi loans, individual loans and Suvidha loans (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 Their Muthoot Small & Growing Business (MSGB) loans.

The company is the 2 nd largest company by AUM under the Muthoot Pappachan Group for FY23. MML is the 5 th largest NBFC-MFI in India in terms of gross loan portfolio as of March 31, 2023. They are also the 3 rd 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 pct market share, as of March 31, 2023.

As of September 30, 2023, they have 3.19 mn active customers, who are serviced by 12,297 employees across 1,340 (100 pct digital disbursement across branches) branches in 339 districts in 18 states and union territories in India. They have built their distribution platform with an emphasis on under-served rural markets with growth potential, in order to ensure ease of access to village level customers and rural households.

Out of the total proceeds of Rs. 9,600 mn, Rs. 7,600 mn would be utilised towards augmenting its capital base to meet future capital requirements, which are expected to arise out of growth of their business and assets and onward lending under their Company’s lending verticals and Rs. 2,000 mn would go towards the existing selling shareholders of the company.

Key Highlights

• The microfinance industry’s gross loan portfolio increased at a CAGR of 21 pct since the FY18 to reach approximately Rs 3.3 trillion in the third quarter of the FY23. The growth rate for non-banking financial companies – microfinance institutions, is the fastest as compared to other player groups. Going forward, the microfinance industry will continue to see strong growth due to the Government’s continued focus on strengthening the rural financial ecosystem, robust credit demand, and higher-ticket loans disbursed by microfinance lenders.
• The company’s average ticket size of the loan is ~Rs.51,000. Where they give loans to group of 10 women people and recover this loan amount in less than equals to 24 months which allows company to manage asset liability management.
• Muthoot Pappachan Group provides MML with Brand recall and significant marketing and operational benefits where MML can leverages cross-selling opportunities to offer diverse products to meet multiple needs of target customers.
• MML developed a unique credit score card along with Equifax to evaluate the creditworthiness of customers by assigning individual credit scores to their customers. As a result, they can risk profile each of their customers individually based on parameters such as payment track record, demographics, age and location. This allows them to strategically allocate more capital to ‘very low risk’ and ‘low risk’ customers, as compared to ‘medium risk’ and ‘high risk’ customers, in order to maximize their collection efficiency.
• 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. Through Mahila Mitra, their customers are able to pay directly from their bank account through a secure platform.
• Their collection efficiency was stood at 95.84 pct and 98.89 pct for the Financial Year 2023 and the six months ended September 30, 2023, and Their GNPA ratio was 2.37 pctr and NNPA ratio was at 0.33 pct, as of September 30, 2023. As of March 31, 2023, they had the 5 th lowest GNPA ratio, and as of September 30, 2023, They had the 3 rd lowest net NPA ratio among the selected NBFC-MFIs.
• As of FY23 the Gross loan portfolio of the company stood at Rs. 92,083 mn which has grown by 36 pct CAGR from gross loan portfolio of Rs. 49,867 mn in FY21. As of FY23 the disbursement of the company stood at Rs. 81,045 mn. Over FY21-23 the cost to income ratio of the company is come down to 64.41 pct to 51.39 pct and as of H1FY24 the cost to income stood at 46.61.

Key Risk

• As a non-banking financial company – microfinance institution, they are subject to periodic inspections by the RBI. Non-compliance with observations made by the Reserve Bank of India during these inspections could expose them to penalties and restrictions.
• They derive a significant portion of their revenues from South India, and any adverse developments in the southern states of India may have an adverse effect on their business.
• The audit reports on MML audited financial statements as at and for the FY21, FY22 and FY23 contain an emphasis of matter paragraph and certain negative observations.

Valuation

Muthoot Microfin is a part of prestigious Muthoot Pappachan group has a market leadership with a pan India presence. At the upper end of the price band, the issue is quoting at a P/B multiple of 1.91x based on FY24 post issue fully diluted Book Value which appears to be reasonable. One may Subscribe from a longer-term perspective.

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Disclaimer: The views expressed in the blog are purely based on our research and personal opinion. Although we do not condone misinformation, we do not intend to be regarded as a source of advice or guarantee. Kindly consult an expert before making any decision based on the insights we have provided.