SECTOR: NBFC

Muthoot Finance

STOCK INFO.

BSE Sensex:19,765

S&P CNX:6,009

BLOOMBERG

MUTH IN

REUTERS CODE

MUTT.BO

(

Rs

CRORES)

04 January 2013

Initiating Coverage

Buy

Rs230

(Rs)

Y/E MARCH

NII (Rs Cr.)

OP (Rs Cr.)

NP (Rs Cr.)

EPS (Rs)

EPS Growth (%)

ABV/Share (Rs)

P/E (x)

P/ABV (x)

RoE (%)

RoA (%)

Div yld (%)

STOCK DATA

FY12

2,177

1,373

892

24

55

75

9.6

3.0

42

5.0

1.7

FY13E

2,518

1,569

1,022

27

15

98

8.4

2.4

31

4.4

2.0

FY14E

2,864

1,806

1,174

32

15

127

7.3

1.8

28

4.5

2.2

We recommend to BUY Muthoot Finance(MF) for a target price of

Rs350

with 12 months view.

INVESTMENT ARGUMENTS:

Indian Gold Loan Market - Huge opportunities:

Gold loan is an

"urgent and essential" loan for the consumer, who wants to

monetize his/her "unproductive" gold for productive use due to

lack of other quick funding opportunities (mean disbursement time

~15-30 mins for gold loans). Going forward, huge gold holding in

Indian household (~19000 tonnes, ~10% of world gold) coupled

with emotional attachment to not sell family gold will ensure

healthy growth in gold loans, which grew at CAGR of 47% during

FY07-12.

Recent changes, a positive step:

RBI constituted a committee in

April 2012 to review operations of gold loan NBFCs in the wake of

huge growth during FY07-12. Committee submitted its draft

recommendations, where it emphasized that there is a need for

encouraging gold loan NBFCs since they are doing socially useful

function of putting gold into more productive use. This report will

allay fears in the minds of investors about regulatory overreach to

curb and close the NBFC gold loan business. Although the growth

rate will moderate due to more competition from Banks but it will

continue to function as any lending business.

Market Leadership:

MF is the largest gold financing company in

India (Market Share 20% in FY12 vs 11% in FY07, Gold Loan AUM of

Rs23400

Cr at H1FY13), with the highest RoE in the industry at ~32%.

Market leadership with Pan India presence offers various

advantages in terms of scale and geographical diversification, which

will help in healthy and sustainable growth.

Valuations and View:

Muthoot Finance is trading at 2x FY14E ABV

and 7.3x FY14E EPS, which is reasonable considering healthy growth

prospects, high RoE (25%+) and low delinquencies. Other NBFCs

(Shriram City Union Finance & MMFSL) with similar return ratios of

~25% are trading at 0%-25% premium to MF. We believe, given the

removal of overhang on viability of business, better growth

potential than other lending businesses and security and liquidity

of the collateral (more than 60% LTV not allowed) will ensure stock

price growth in line with earnings growth. Recommend BUY with a

target price of

Rs350

(2.7x FY14E P/ABV and 11x FY14E EPS)

52-W High/Low Range (Rs)

Major Shareholders (as of Sep'12)

Promoter

Non Promoter Corp Holding

Public & Others

Average Daily Turnover(6 months)

Volume

Value (RsLac)

1/6/12 Month Rel. Performance (%)

1/6/12 Month Abs. Performance (%)

KEY FINANCIALS

Shares Outstanding (Cr)

Market Cap. (RsCr)

Market Cap. (US$ Mn)

Past 3 yrs NII Growth (%)

Past 3 yrs NP Growth (%)

Dividend Payout (%)

246/112

80.1

10.5

9.4

410,215

7.4

12/49/23

14/63/49

37.17

8549

1,566

61

65

19

Maximum Buy Price :

Rs

240

Rakesh Tarway

(rakesh.tarway@MotilalOswal.com); Tel: +91 22 30896679

Muthoot Finance

About the company

Muthoot Finance is the flagship company of the Muthoot Group and commenced

gold loan business in year 1939. Group started its retail loan business under the name

Muthoot Bankers, a partnership firm. Muthoot Finance Ltd was incorporated in 1997

and commenced business as NBFC in 2001. It is classified as a Systemically Important

- Non Deposit taking NBFC. It has Pan India presence with 3,853 branches spread

across 21 Indian states incl. NCR region and 4 union territories has 24,857 employees

CONCERNS:

Correction in gold prices:

A substantial and sudden correction in gold prices (30%+) in a short duration of time(2

to 4 months) will have negative impact on collateral value and thus delinquencies in

the business. Sustained lower gold prices will lead to lower AUM and lower business

growth.

Regulatory changes:

Any kind of regulatory change to contain source of funding from Banks and NCDs will

have a negative impact on margins. Committee has recommended interest rate cap

on gold NBFCs, which will impact margins. Our projections take into account a lower

margin. However, committee's comment that gold loan NBFCs should be encouraged

reinforces the belief that any regulatory change will be more to strengthen the long

term prospect of the business rather than detrimental to it.

VALUATION TABLE

VALUATIONS

Muthoot Finance

Manappuram

MMFSL

Shriram City

P/E

FY14E

7.28

6.03

12.81

9.18

P/ABV

FY14E

1.78

1.08

2.98

1.97

ROE

FY14E

27.4

19.0

24.6

24.5

EPS CAGR

FY12-14E

15%

0%

25%

34%

04 January 2013

2

Muthoot Finance

Financials and Valuation

Income statement

Y/E March

FY10

1,077

479

598

100

12

610

101

262

348

134

3

346

118

34

228

133

-

348

134

FY11

2,316

1,040

1,276

113

0

1,276

109

481

795

128

34

761

267

35

494

117

-

795

128

FY12

4,549

2,372

2,177

71

0

2,177

71

803

1,373

73

42

1,331

439

33

892

81

173

1,373

73

FY13E

5,569

3,051

2,518

16

0

2,518

16

949

1,569

14

44

1,525

503

33

1,022

15

153

1,569

14

(Rs Cr)

Rs

FY14E

6,333

3,470

2,864

14

0

2,864

14

1,057

1,806

15

54

1,753

578

33

1,174

15

176

1,806

15

Expect NII CAGR of

15%OVER FY 12-14

Interest Income

Interest Expenses

Net Interest Income

Change (%)

Non Interest Income

Net Income

Change (%)

Operating Expenses

Pre - Provision Profits

Change (%)

Provisions (excl tax)

PBT

Tax

Tax Rate (%)

Profit for Equity Sh

Change (%)

Equity Dividend (Incl tax)

Core (PPP*)

Change (%)

FY12-14 PAT CAGR of 15%

Balance Sheet

Y/E March

Equity Share Capital

Reserves & Surplus

Net Worth

Borrowings

Change (%)

Other Liabilities

FY10

301

284

585

5,281

67

-

5,865

7438

5,703

153

8

1

5,865

FY11

320

1,014

1,334

11,934

126

126

13,394

15868

11,715

189

8

1,484

13,394

FY12

372

2,554

2,926

19,376

62

269

22,571

24674

21,367

268

98

838

22,571

FY13E

372

3,382

3,754

19,988

3

269

24,011

25956

22,649

238

100

1,023

24,011

(Rs Cr)

Rs

FY14E

372

4,333

4,705

23,488

18

269

28,462

31618

28,311

238

100

(188)

28,462

Expect 13% loan CAGR over

FY12-14

Total Liabilities

Total AUM

Loans on Book

Fixed Assets

Investments

Net Current Assets

Total Assets

Ratio

Y/E March

Spread Analysis (%)

Avg. Yield on AUM

Avg. Cost of Funds

Spread

Profitability Ratios (%)

RoE

RoTA

Int. Expense/Int. Income

Efficiency Ratios (%)

Cost Income ratio

Emp. Cost / Operating Expenses

Loan Losses to Net income

Loan Losses to Advances

Tier1 CAR

Asset Quality

GNPA

NNPA

GNPA % to AUM

NNPA % to AUM

43.4%

44%

0.10%

0.01%

9.9

34

31

0.5

0.41

40.3%

43%

0.14%

0.02%

10.6

46

-

0.3

-

38.8%

49%

0.32%

0.03%

12.8

139

121

0.6

0.49

39.4%

50%

0.29%

0.03%

13.8

146

121

0.6

0.47

38.8%

51%

0.31%

0.03%

14.8

178

121

0.6

0.38

FY10

19.9%

8.7%

11.2

47.7

4.8

44

FY11

19.9%

8.9%

10.9

51.5

5.1

45

FY12

22.4%

11.7%

10.7

41.9

5.0

52

FY13E

22.0%

12.1%

9.9

30.4

4.5

55

FY14E

22.0%

12.1%

9.9

27.8

4.5

55

Asset quality to remain

stable

04 January 2013

3

Muthoot Finance

Valuation

Y/E March

Adjusted Book Value (

Rs

)

Change (%)

Price-ABV (x)

EPS (

Rs

)

Change (%)

Price-Earnings (x)

Dividend Per Share (

Rs

)

Dividend Yield (%)

FY10

18

-

-

8

-

-

-

-

FY11

38

109

-

15

104

-

-

-

FY12

75

99

3.0

24

55

9.6

4.0

1.7

FY13E

98

30

2.4

27

15

8.4

4.5

2.0

FY14E

127

30

1.8

32

15

7.3

5.0

2.2

Reasonable Valuations

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Retail:

Vijay Kumar Goel

Phone: (91-22) 39825500 Fax: (91-22) 22885038. E-mail: reports@motilaloswal.com

Motilal Oswal Securities Ltd, 3rd Floor, Hoechst House, Nariman Point, Mumbai 400 021

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Muthoot Finance

No

No

No

No

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