Muthoot Finance – Investors Should Wait for the Share Price to Decline to Rs.125

Plans to raise Rs.6000 crore

Muthoot Finance plans to raise Rs.6000 crore in 2012. It is mainly a gold finance company from Kerala. Now it is spreading its wings to other States also. Muthoot Finance needs the money to meet its working capital needs. In the next three years, the promoters of Muthoot Finance will dilute their stake to the extent of 5%. For this fiscal year, Muthoot Finance raised Rs.1000 crore through Non Convertible Debentures (NCD). The balance amount will be raised through various options including bank loans. At present, the promoters hold 80% stake in the company.

Priority to retail investors

In the NCD issue, Muthoot Finance reserved 60% for retail investors. It was a Rs.500 crore issue with a greenshoe option of another Rs.500 crore. Muthoot Finance is the largest gold loan NBFC in India that gives loan against the pledge of household jewellery. The average amount lent in per gold loan is Rs.35000. The average period of the gold loan is one year. In order to attract retail investors, Muthoot Finance offered a coupon rate of 12.25% for tenors of three and five years and 12% for two years. For institutional investors, the coupon rate offered was 12% for three and five years and 11.75% for two years. The company was raising money for long term of five years but lending money for one year. This will stabilise its operations. George Alexander Muthoot is the Managing Director of Muthoot Finance. The face value of each NCD is Rs.1000 and minimum application allowed was five for Rs.5000. The NCDs will be listed in Bombay Stock Exchange and National Stock Exchange.

Agreement with Tatas

The company’s reputation can be gauged from the fact that even Tatas have entered into a pact with the company. Goldplus, a jewellery chain from Tatas with presence in rural and semi-urban areas has floated a scheme called ‘Swarna Samridhi’ jointly with Muthoot Finance. Under the scheme, Muthoot Finance will lend money to buyers of jewellery from Goldplus. The scheme will start from Tamil Nadu and later on will be extended to Andhra Pradesh. Buyers of Goldplus jewellery will be given loan for 85% of the value of the jewellery by Muthoot Finance at 11.5% p.a. interest repayable in two years.

Loan against gold ETF

For the quarter ended 30.06.11, Muthoot Finance’s net profit grew by 125% to Rs.190 crore over the corresponding period of the previous year. Total income grew by 140% to Rs.920 crore. The loan assets of the company increased by Rs.2080 crore to Rs.17949 crore. Capital adequacy ratio of the company is high at 19%. Return on loan assets is at 4.51%. Muthoot Finance launched a loan scheme against Gold ETF. Investors can get hassle free loan by merely pledging their Gold ETF units with the company. Gold ETF refers to the mutual fund units issued by an Asset Management Company against 995 purity physical gold deposited with a custodian registered with SEBI. ETFs are listed and traded in the stock exchanges. The instrument has lot of liquidity. The customer can sell it at any time if he is in need of money. But if his need is only short term, he can pledge his unit with Muthoot Finance and obtain that money, Total Gold ETF size is around Rs.5000 crore contributed by around 320000 investors. With such a huge money in the kitty of ETFs, Muthoot Finance senses business opportunity to tap this money profitably.

Money transfer business

Muthoot Finance has 2800 branches countrywide. It is no more a Kerala company. It is the largest gold finance company in India. It has launched Western Union money transfer services. Western Union has a network of more than 400000 locations spread over 200 countries. They will be linked with Muthoot Finance’s 2800 branches in India. There is a huge potential for money transfer business in India as Indian economy is growing sizeably. Western Union has a 17% global market share in the money transfer business. It has completed 214 million client-to-client transactions worldwide, transferring $76 billion.

Investors disappointed

But there are also some negatives about the company. Muthoot Finance entered the capital market a few months back with its IPO of 5.15 crore equity shares and offered them in the price range of Rs.160-175. The company raised Rs.901.25 crore to augment its working capital needs. But the share price is currently ruling at Rs.166.25. Investors have been disappointed naturally. Even on its debut day, the share price closed in NSE at below its offer price. Most investors borrowed funds at 12% to invest in the IPO of Muthoot Finance. They were hoping that the share will get listed at a high premium and fetch them decent profits. But disappointment awaited them. Global investors lined up to subscribe to the issue. Famous foreign investors like Goldman Sachs, Morgan Stanley, Fidelity and Temasek scrambled to have a share of the gold finance pie in Indian markets. The returns from the investment of Muthoot Finance’s rival Manappuram Finance raised hopes of making profit in this issue also. But disappointment awaited them all. If ordinary investors lost money in their investment, one can blame their judgment or rather the lack of it. But what can one say about the judgement of financial giants like Morgan Stanley and Goldman Sachs? Other than these companies, many other global giants like Mirae (South Korea), GMO (USA), Jupiter (USA), Tudor (USA), DKR Oasis (USA), Geosphere (USA), Congruix (USA), Barings and Wellcome Trust (USA) and others burned their fingers if not their hands. Many towering giants in India like SBI, HDFC, Reliance, Birla, IDFC and others ate humble pie by dipping their fingers into the issue. All these investors were blinded by the fact that gold was rising to dizzy heights. They never thought for a while that what is rising must also fall, according to law of gravity.

Gold price has peaked

Secondly, gold prices have peaked now. It is time that gold starts moving down to complete the economic cycle. Investors opted for gold as the safe haven dollar was battered due to the economic crisis in USA. But now the US crisis is at least temporarily over and the dollar has started rising again. So, many investors are switching back to the dollar, dumping gold. If gold price crashes, as is likely, then the business of gold financing companies will be affected. Just as nobody could speculate as to how high gold price would rise, nobody can speculate as to how low the price will fall.

Gold loan no longer comes under priority sector

Thirdly, investors failed to take notice of the Reserve Bank of India’s notification that gold loans no longer enjoy the priority sector status in banking industry. This meant that cost of borrowing for Muthoot Finance was bound to increase by 1.5%. Before this notification, NBFCs were borrowing from banks at an average of 11% p.a. Of course, Muthoot Finance could easily pass on this increase to the borrowers as its loans are fully secured.

Wait for the share price to decline to Rs.125

Can one invest in the shares of Muthoot Finance at the present market price of Rs.166? I would rather recommend that investors wait patiently for the share price to come down. The share price is already in a downtrend. It may drop further appreciably to around Rs.125 in the worst case scenario. Around that price, the shares will offer decent returns for the medium term.