There is no doubt about the fact that Indians have an obsession with gold. Gold is considered a status symbol and also considered auspicious.
Indian is the biggest consumer of gold and there are tonnes of gold stored in the lockers of India without having any productivity. But there is a company that decided to encash this golden opportunity. We are talking about Muthoot Finance.
Welcome to the 12th episode of the fundamental analysis series where we will discuss Muthoot Finance. As usual, we will start our analysis with the company and its business, its competitive strength, its future growth prospects and its financials. Based on the analysis, we will decide if Muthoot Finance is a fundamentally strong company or not. Then we will check the valuations of the company to decide it is worth investing in Muthoot finance at current levels. So lets get started!
Company Profile
- Incorporated in 1939, Muthoot Finance is the flagship business of the Muthoot Group and India’s largest gold financing company. So Muthoot Finance is more than 80 years old company!
- Muthoot Group began its journey in 1887 in the remote village of Kozhencherry in Kerala.
- Over the past 133 years, the Group has grown into a flourishing conglomerate, reaching out into India’s small and large towns as well as its major cities through as many as 20 business divisions and 5,300+ branches.
- As of today, the company has a market cap of ~50,000 Cr.
Business of Muthoot Finance:There are many people in rural part of the country who need loans for business. But many people either do not have a good credit history or do not have anything for collateral to pledge as security against the loan. Hence, most of the loan applications get rejected or take a lot of time before approval.
That’s where Muthoot Finance decided to bridge this gap by providing business loans against gold jewellery as collateral. The best part of the gold financing business is that, unlike house, gold is a highly liquid asset class and can be sold easily in case of non repayment of loan.
Moreover, gold prices tend to increase in the long term which means there is very low risk of bad loan.How it gives loan? On the basis of LTV i.e. Loan to Value. It is caped at 75%.
It means, if you deposit gold worth Rs 1 lakh, then you can get a loan of Rs 75k.
Business segments of Muthoot Finance:
Muthoot finance which started as a gold loan company has now diversified into various businesses with multiple subsidiaries in segments like home loan, vehicle loan, microfinance, etc. It has also expanded its business in Sri Lanka.
If we look at the profits, the biggest contributor in the profits is the gold loan business with a profit of Rs 3,018 Cr which is 95% of the company’s total profit. At the current price point, 176 tonnes of gold is worth roughly around Rs 88,000 Cr. Overall, looking at the business of the company, I would rate it 10/10.
Competitive Strength
- Established track record and brand name: Muthoot Finance has sustained its leadership position in the gold financing segment, supported by the long and established track record of 80 years of its promoter family.
- Strong Network: Muthoot Finance has a large operational base of over 4,500 branches - spanning across India, which has continued to support its market share of >45% within the universe of NBFCs carrying out gold loan business over the years.
- Diversified Business: Although the company’s major revenue is from Gold loan, it is slowly diversifying in various other spaces including home loan, vehicle loan, education loan, insurance brokerage, money transfer business, etc.
- Strong Financials: Due to its prudent financial management, the company enjoys high profit margin as compared to its peers and has high profitability.
Weakness: Despite the gradual increase in diversification over time, Muthoot Finance's operations have a high degree of geographical concentration in operations. South India accounted for 49% of the company's AUM and 60% of its branches as on March 31, 2020.
Significant regional concentration exposes the company vulnerabilities of economic, social, and political disruptions in the region.
If we look at the competitors, Muthoot finance is the biggest company in Indian in the gold loan category. Another company in this category is Manapuram finance. Although now banks have also entered into the gold loan business. In the other NBFC business, Bajaj Finance is the biggest company. Overall, looking at the established track record and brand name of Muthoot Finance, its strong network and strong financials with diversified business, on competitive strength, I would rate it 9/10.
Future Growth Prospects
In FY20, Indian economy faced many challenges with GDP growth slowing down every quarter. Contraction in the auto sector and delays in the construction sector, along with subdued investment and private consumption, resulted in India recording its lowest growth rate in FY20 in over a decade. This has badly impacted the NBFC sector in India.
However, Muthoot Finance has around 87% of the consolidated loan book in the gold segment. And within the gold segment, the portfolio loan to value (LTV) is comfortable due to the sharp increase in the gold prices. Due to this, Muthoot Finance has been in a very comfortable position.
The gold loan book grew at 14.4%% CAGR over last 3 years while the non-gold segments registered a growth of over 300%.
Long term growth prospects:
Strong gold loan demand in India: India is one of the largest consumers of gold in the world, accounting for an estimated 23% of the global gold demand between 2009 and 2018. The rural economy counts among the biggest drivers of the demand for gold in India, with rural communities accounting for ~67% of this demand.
Gold loan industry in India is still highly fragmented. Organized players with large networks, sophisticated inventory management and well crafted advertising campaigns would continue to gain the market cap.
In India, people have a strong sentimental connection with the gold. Hence, they do not prefer to sell their gold. They can use it for collateral to get the loan but would make sure to pay the loan and secure their gold jewellery.
Moreover, if you look at the gold loan penetration in the organized sector in 2019, it is around 5.5% of the total household gold holdings in India. Clearly, there is a very low market penetration of gold loan which provides a high great opportunity for gold loan companies to grow.
Now, for Muthoot finance to give loans to its customers, it needs to raise money. And the great news for Muthoot Finance is that the cost of capital borrowing has come down. Earlier, company raised capital at the rate of 9%-10% but company has recently raised Rs 2000 Cr at 7%-8% rate. Since, this is fully secured against gold, the issue was subscribed on the 1st day itself. So the company has raised capital at a much cheaper rate which would increase its profitability.
Muthoot finance has also increased its penetration of gold loan via campaigns like gold loan in 24 hours, online gold processing, etc. This has eased out the process of gold loan disbursement and would fuel the company’s growth.Overall, gold loan sector would continue to see more demand in the future and Muthoot finance, being the leader in the industry, would significantly gain from this demand.
Also considering the fact the company has diversified in other businesses like home loan, microfinance, vehicle loan, etc. I think there is huge scope of growth for Muthoot Finance. Hence, on future growth prospects, I would rate it 10/10.
Financials
1. Revenue and Profit Growth:
In the last 5 years, the revenues of the company have grown at a CAGR of 17% and profits have grown at a CAGR of staggering 36%. That’s an outstanding growth. Hence, on growth ratio, I would rate it 10/10.
2. Profitability Ratio:
Operating profits are well above 70% which is phenomenal. ROE and ROA are increasingly consistently and ROE is well above 20%. Hence, overall on profitability, I would rate it 10/10.
Valuations
Currently, the company is trading at the levels of Rs 1180. Considering the PE multiple of 13.6 which is close to its median PE of last 3 years, Muthoot Finance is fairly failed company. In terms of PB ratio, it is trading at a PB of 3.5 which is again very reasonable. Hence, on valuations, I would rate it 7/10.
Conclusion
Overall, Muthoot Finance is fundamentally superstrong company with a good future growth prospects and current trading at fair valuations.
PS: If you want to learn every aspect of fundamental analysis of stock and other important concepts of personal finance, you can explore my video course on "Everything about money management".
Disclaimer: This article is only for education purpose. Consult your financial Advisor before investing your money.
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