Muthoot Microfin Limited – IPO Note

Investment Rationale:
The penetration of credit in the rural economy of India provides huge growth opportunities for MFIs.

• The share of the rural segment in the MFI business is expected to remain higher, with increasing demand expected from this segment. Despite 65% of the population and 45% of GDP contribution, the rural segment’s share in credit remains fairly low at 9% of the bank credit outstanding, thereby opening up a huge opportunity for savings and loan products.
• Although the rural economy has been adversely affected by the second wave of COVID-19, it is structurally far more resilient and is expected to bounce back strongly.
• And, with the government’s focus on financial inclusion, financial institutions are opening new branches in unbanked areas. The share of the rural segment in the overall MFI portfolio increased to 42% of the GLP from 35% in fiscal 2018. In the case of NBFC-MFIs, the rural share increased to 45% as of December 2022 from 35%.

MFI industry GLP to grow at 18-22% CAGR between FY23 and FY28: 

• The microfinance industry’s joint liability group (JLG) portfolio has recorded healthy growth in the past few years. The industry’s GLP increased at 21% CAGR between FY18 and FY22 to reach approximately INR 3.3 trillion.
• The growth rate for non-banking finance institutions (NBFC)-MFIs is the fastest as compared with other player groups. Going forward, the overall microfinance industry will continue to see strong growth on the back of the government’s continued focus on strengthening the rural financial ecosystem, robust credit demand, and higher-ticket loans disbursed by microfinance lenders.
• The MFI industry is expected to log an 18-22% CAGR during FY 2023-2025. During the period, NBFC-MFIs are expected to grow at a much faster rate of 25-30% compared with the MFI industry.

Muthoot expanding its geographical footprint and sourcing platform across Rural India: 

• In FY23, India’s Northern and Western regions had relatively low financial penetration as compared to the pan-India average penetration, indicating probable growth potential from India’s Northern and Western regions which have relatively lower penetration.
• While operations have historically been concentrated in South India, there has been an expansion in recent years into North, East, and West India, with a total of 707 branches across these regions as of Q2FY23, representing 52.76% of the total branches as of Q2FY23.
• Moving forward, there is an expectation that a significant portion of future geographic expansion will include rural areas in these regions of India. The intention is to grow branches in four key states: Uttar Pradesh, Bihar, Rajasthan, and Punjab, which are underpenetrated or moderately penetrated states that may have potential for growth and customer expansion, as of FY23. Muthoot operates 1,340 branches across 339 districts in 18 states and union territories in India, as of Q2FY23.

Muthoot Microfin holds the majority market share in Kerala and Tamil Nadu: 

• The largest states for Muthoot Microfin as per GLP as of March 2023 are Kerala and Tamil Nadu.
• The company holds a majority share in Kerala in terms of MFI market share which makes them the largest in the state and almost 16% in Tamil Nadu, where Muthoot Microfin is a key player.
• Also, in South India, Muthoot Microfin is the third largest amongst the NBFC-MFIs in terms of GLP. Muthoot Microfin had the fifth lowest credit cost in FY23 among the top 10 NBFC-MFIs indicating its ability to effectively manage its credit risk and in turn, maintain a robust portfolio quality.

Muthoot’s digital focus to reduce risks: 

• To reduce risks associated with cash transactions, they have expanded the digital collections infrastructure through their proprietary application “Mahila Mitra”, which facilitates digital payment methods such as QR codes, webpages, SMS-based links and a voice-based payment method, and provides customers with a secure platform to transact digitally.
• For FY23 and the six months ended September 30, 2023, 20.30% and 25.47% of the repayments were collected on a digital basis (i.e. in a cash-less manner by direct bank credit into bank accounts), respectively.

Strong Customer retention: 

• Muthoot Microfin has a long-standing track record of high customer retention in loan cycles 2 and 3. Its well-balanced customer distribution across loan cycles indicates a focus on acquiring new customers, as well as retaining existing ones. However, as it continues to acquire new customers, the portfolio share in cycle 1 may increase.
• Among the top 10 NBFC-MFIs, Muthoot Microfin reported the third-highest disbursement growth in the financial year 2022 and fifth fifth-highest during the financial year 2023. Its growth rate turned positive to 80.90%, in the financial year 2022 followed by 73.57% during the financial year 2023.

Valuation and outlook: As of September 30, 2023, the gross loan portfolio amounted to INR 108,670.66 million. A well-diversified portfolio across 339 districts in 18 states and union territories in India. The gross loan portfolio in our top three states, namely Kerala, Karnataka and Tamil Nadu, together accounted for 51.36% of our total gross loan portfolio.  Collection efficiency was 95.84% and 98.89% for the Financial Year 2023 and the six months ended September 30, 2023, and gross NPA ratio was 2.37% and net NPA ratio was 0.33%, as of September 30, 2023. The capital adequacy ratio of 20.46% as of September 30, 2023, is well above the requirement of 15.00% prescribed by the RBI. The company reported interest income of INR 12906.45 million which grew 77.13% YoY and NIM of 11.60 in FY23. The company’s GNPA and NNPA stood at 2.97% and 0.60% in FY23. At the upper price band, the company’s P/B translates to 1.74x. We recommend subscribing to the issue given the strong long-term potential of growth as well as attractive return ratios and credit costs that the company has managed to maintain over the last few years.

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