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Muthoot Microfin Share Listing Gain: Should we Buy, Sell or Hold

  


Muthoot Microfin Share Listing Gain: Should we Buy, sell or hold

Muthoot Microfin Share Listing Gain: Should we Buy, sell or hold

Muthoot Microfin Ltd (MML), a leading microfinance institution in India, made a strong debut on the stock market on Tuesday, December 26, 2023, despite listing at a discount of over 5% to the issue price. The stock opened at Rs.275.30 on the NSE and Rs.278 on the BSE, as against an offer price of Rs.291, but soon recovered and gained momentum as the day progressed.

The strong performance of the stock was backed by the positive sentiment in the grey market, where Muthoot Microfin was commanding a premium of Rs.27, suggesting gains of 9% at the time of its listing. The grey market premium (GMP) is an indicator of how the company’s shares are stacked up in the unlisted market and are subject to change rapidly.

 

What Makes Muthoot Microfin an Attractive Investment?

Muthoot Microfin, a part of the Muthoot Pappachan Group, provides micro-loans to women customers (primarily for income generation purposes) with a focus on rural regions of India. MML’s business model helps in driving financial inclusion, as it serves customers who belong to low-income groups and have limited access to formal credit sources.

The company has a strong brand recall and synergies with Muthoot Pappachan Group, which has a history of over 50 years in the financial services business. The company also has a pan-India presence with emphasis on under-served rural markets, where it operates in 18 states and UTs through 1,340 branches.

The company has a robust risk management framework and effective use of technology for streamlining operations. The company has access to diversified sources of capital and experienced and professional management. The company has also shown impressive financial performance in the past few years.

According to its prospectus, the company’s revenue surged 72% year-on-year to Rs.1,042 crore, while profit increased multifold to Rs.205 crore for the six months ended September 2023 period. In terms of gross loan portfolio, Muthoot Microfin is the fifth largest NBFC-MFI in India, third largest amongst NBFC-MFIs in South India and the largest in Kerala in terms of MFI market share, and a key player in Tamil Nadu with an almost 16% market share, as of March 2023.

As of September 2023, gross loan portfolio amounted to Rs.10,870 crore. As of Sep-23, it has 31.9 lakh active customers, who are serviced by 12,297 employees. The company has a low gross non-performing asset (GNPA) ratio of 0.67% and a high capital adequacy ratio (CAR) of 25.64%, as of September 2023.

Speaking with CNBC-TV18 after the listing, Sadaf Sayeed, CEO of Muthoot Microfin, commented, “Currently, our yields on the portfolios are at 22.94% and our net interest margins are around 12.34%. So, as the interest rate cycle turns and RBI starts reducing rates, definitely the interest rate margin will further expand, and we would like to pass some benefit to our customer and the bottomline would also get benefit from there.”

 

 

 

Detailed Video

 

How Was the IPO Received by the Market?

The Rs.960-crore IPO of Muthoot Microfin was subscribed 11.52 times at close. The issue was open for subscription from December 18 to December 20, 2023. The issue was booked 2.83 times on the second day and 0.83 times on the opening day.

The quota reserved for qualified institutional buyers (QIB) was subscribed 17.47 times, followed by the non-institutional investors (NII) category at 13.20 times. The retail individual investors (RIIs) category was subscribed 7.61 times.

Muthoot Microfin offered its shares in the range of Rs.277-291 apiece, where investors could bid for a minimum of 51 shares in one lot. The company raised Rs.288 crore from anchor investors, including HDFC Mutual Fund, ICICI Prudential Mutual Fund, SBI Mutual Fund, Axis Mutual Fund, Sundaram Mutual Fund, and Edelweiss Mutual Fund.

The company plans to use the net proceeds from the IPO for augmenting its capital base to meet future capital requirements and for general corporate purposes.

 

What is the Valuation of Muthoot Microfin?

At the upper price band of Rs.291, Muthoot Microfin was valued at Rs.3,600 crore, or 1.9 times its book value on a trailing twelve months (TTM) basis. The issue was attractively priced (discount of 39% when compared to peers set average), according to brokerage firm Indsec Securities and Finance Ltd.

The company’s closest peer, CreditAccess Grameen Ltd, which is also a leading NBFC-MFI in India, is currently trading at 3.1 times its book value on a TTM basis. Other listed NBFC-MFIs, such as Spandana Sphoorty Financial Ltd and Satin Creditcare Network Ltd, are trading at 2.5 times and 1.2 times their book value on a TTM basis, respectively.

The company’s valuation also looks reasonable when compared to its return ratios. The company has a return on equity (ROE) of 23.8% and a return on assets (ROA) of 5.8% on a TTM basis, as of September 2023. These ratios are higher than the industry average of 18.4% and 4.4%, respectively, as per CRISIL Research.

 

 

What are the Risks and Challenges for Muthoot Microfin?

Like any other business, Muthoot Microfin also faces some risks and challenges that may affect its growth and profitability in the future. Some of these are:

  • Regulatory risk: The microfinance sector in India is subject to various regulations and guidelines issued by the Reserve Bank of India (RBI) and other authorities from time to time. Any adverse change in the regulatory framework, such as caps on interest rates, loan amounts, tenures, or borrower eligibility, may impact the company’s operations and financial performance.

  • Competition risk: The microfinance sector in India is highly competitive and fragmented, with several players operating in the same geographies and segments. The company faces competition from other NBFC-MFIs, small finance banks, regional rural banks, cooperative banks, self-help groups, and fintech platforms. The company may lose its market share or margins if it is unable to differentiate itself from its competitors or offer superior products and services to its customers.

  • Credit risk: The company’s loan portfolio is exposed to the risk of default or delay in repayment by its customers, who are mostly low-income and unbanked individuals. The company’s credit risk may increase due to various factors, such as economic slowdown, natural calamities, social unrest, political instability, or health emergencies. The company may also face higher provisioning or write-offs if its asset quality deteriorates.

  • Operational risk: The company’s operations are dependent on its ability to maintain and expand its branch network, recruit and retain qualified and trained employees, leverage technology for efficient and secure processes, and ensure compliance with applicable laws and regulations. The company may face operational disruptions or losses due to human errors, frauds, system failures, cyberattacks, or legal actions.

 

Conclusion

Muthoot Microfin Ltd (MML) is a leading microfinance institution in India, with a focus on rural women customers. The company has a strong brand recall, pan-India presence, robust risk management, and impressive financial performance. The company made a strong debut on the stock market on Tuesday, December 26, 2023, despite listing at a discount of over 5% to the issue price. The stock closed at a premium of over 4% to the issue price, reflecting the positive sentiment in the grey market and the attractive valuation of the company. The company faces some risks and challenges in the microfinance sector, such as regulatory changes, competition, credit risk, and operational risk. However, the company has the potential to overcome these challenges and grow its business in the future, given its strong fundamentals and growth prospects.

I hope you liked my blog. Please let me know what you think of it. 😊

 

 

Disclaimer

Please note that this blog is not a recommendation for buying or selling any stock. We encourage readers to conduct thorough research, consider their risk tolerance, and consult with financial advisors before making investment decisions.

 


Frequently Asked Questions

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Motisons Jewellers witnessed a substantial listing gain due to overwhelming investor interest during its IPO, evidenced by a 159.6 times oversubscription, reflecting strong confidence in the company's prospects.

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The company's success is attributed to its diverse product range, online presence, exceptional customer loyalty, brand recognition, awards for excellence, robust financial performance, and strategic plans for expansion.

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While suggesting booking a portion of profits (at least 50%) on the listing day, the recommendation is to consider holding the remainder for long-term investment, considering the company's growth potential, expansion plans, and positive prospects in the jewellery market.

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The company aims to expand its showroom presence in Tier I and Tier II cities, enhance its online reach, introduce new products, and improve customer service and loyalty programs, aligning with the growing trends and demands in the Indian jewellery market.

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It's crucial for investors to conduct comprehensive research, assess their risk tolerance, and seek advice from financial experts before making investment decisions. This blog post serves as informative content and not as investment advice.



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