Muthoot Finance Ltd is an Indian financial corporation. It is known as the largest gold financing company in the world. In addition to financing gold transactions, the company offers foreign exchange services, insurance service, home finance service, micro finance service, money transfers, wealth management services, travel and tourism services, and sells gold coins at Muthoot Finance branches. The company’s headquarters is located in Kerala, India, and it operates over 4,500 branches throughout the country. Outside India, Muthoot Finance is established in the UK, the US, and the United Arab Emirates. The company provides gold loan on extremely easy terms and conditions to people of each segment of the society. The gold loan range begins from Rs 1500 and there is no maximum limit. Company has around 25,000 employees and around 6 million customers. It has experience of around 132 years. The company has around 169 tonnes of gold jewellery kept as security. Company has around Rs 342.46 billion loan assets under management. Company provides services to around 2 lakh customers per day. Company has its presence in around 29 states. Segment wise performance:
1) Gold:
• Loan assets portfolio crossed Rs 342.00 Billions
• Listed debentures portfolio raised through the public issue of Rs 37.09 Billions
• Net owned funds crossed Rs 97.69 Billions
• Gross annual income touched Rs 68.81 Billions
• Profit after tax for the year touched Rs 19.72 Billions
• Branch network crossed 4,400+
2) Housing Finance:
• Crossed gross disbursements of Rs 2,000 Crores since the Company’s inception
• Received capital infusion of Rs 150 Crores from MFIN
• CRISIL upgraded the Company’s long-term bank loan ratings by one notch from AA-/(stable) to AA/(Stable)
• Raised Rs 284 Crores through a maiden public issue of NCD
i) Loan assets under management: Rs 19,075 million
ii) Divisional revenue: Rs 2,257 million
iii) Profit for the year: Rs 363 million
iv) Branches: 97
3) Sri Lanka business:
• Net interest income grew by 7%
• Total asset base increased by 19% to LKR13.9 Billion
• Total loans and advances enhanced by 21% to LKR11.5 Billion
• Total shareholders’ funds increased by 5% to LKR1.95 Billions
• Introduced a new system for its services of forex, Fixed Deposits (FD) and gold loans
• Opened six branches in the year under review
• Consolidated operations expanded the gold loan portfolio up to LKR2.7 Billions
• Leasing portfolio reached a milestone figure of LKR4 Billions
i) Loan assets under management: Rs 4,974 million
ii) Revenue: Rs 1,166 million
iii) Profit for the year: Rs 41 million
iv) Branches: 24
4) Microfinance:
• Belstar grew significantly from 155 branches to 400 and its Gross Loan Portfolio Assets Under Management (AUM) increased from Rs 11,381 Crores to Rs 18,419 Crores
• People count increased from 1,783 to 2,876
i) Revenue: Rs 3,681 million
ii) Profit: Rs 729 million
iv) Branches: 400
5) Insurance:
• The total premium collection for the financial year grew by 58% vis-à-vis the previous year
• During the year under review, MIBPL insured 22,10,000+ lives with a first-year premium collection of Rs 174 Crores
i) First year premium collection: Rs 1,738 million
ii) Profit for the year: Rs 150 million
iii) Policies: 22,40,560
6) Muthoot Money Limited
Muthoot Money Limited (MML) is a 100% subsidiary of Muthoot Finance Limited. MML commenced its vehicle and equipment finance operations in June 2018. It has its Corporate Office at Hyderabad and is registered with the RBI as an NBFC.
i) Total loan portfolio: Rs 3,107 million
ii) Loans disbursed: 3,193
iii) Profit for the year: Rs 3 million
iv) Credit rating: AA-
India is one of the largest consumer of gold. Traditionally, gold played a prominent role in Indian households as a store of value and a hedge against inflation. Buying gold is also considered auspicious during several Indian festivals, such as diwali, akshaya tritiya, pongal, baisakhi, among others. The gold demand reached Rs 4,345.1 tonnes, up from 4,159.9 tonnes and in line with the five year average of 4,347.5 tonnes, driven by robust central bank buying (651.5 tonnes) and gold ETF inflows. Investment in bars and coins was up 4% to 1,090.2 tonnes. Jewellery demand is steady at 2,200 tonnes. In India, gold has been a liquid asset and a universally accepted commodity with a continuous value appreciation over decades. India’s gold loan market has started attracting large investors in the past decade. Taking loans by pledging gold as collaterals is not new with local informal moneylenders dominating the market and charging usurious interest rates. However, emergence of NBFCs with a focus of addressing the credit needs of the unbanked segment, along with banks offering gold loan products, is driving a rapid shift of the gold loan market towards formal financing channels. The organized Indian gold loan industry is dominated by gold loan NBFCs. Though bank offer gold loan at relatively low interest rates, factors such as exclusive focus on gold loans, lower turnaround time, flexible schemes, wider branch network and relatively long work hours place NBFCs at an advantageous position to attract customers. The value of organized gold loan market will grow to Rs 3,10,100 crore by 2021 at a three year compounded annual growth rate of 13.7% . India is one of the largest consumer of gold with an estimated stock of around 27,000 tonnes . About 40% of the gold loan market is in south India. Muthoot finance controls nearly 51% of the organized gold loan market. Informal players in the sector like pawn brokers and money lends, which are unregulated, controls 40-60% of the gold loan transactions. Gold loan demand drivers:
i) Income correlation: A 1% increase in income leads to an increase in demand of gold by 1%. Rising incomes are implying that gold stock and people will tend to utilize the same to meet their credit needs.
ii) Exclusion from mainstream personal and retail loans by scheduled banks: traditional banking products are nor accessible to rural and lower income groups such as farmers. Gold loans offers a viable solution for the customers of this strata. The relative ease of obtaining gold loans for these customers has boosted the popularity of these products.
iii) Changing attitudes: it is not only the rural communities who are willing to put household jewellery in the market. There is an increasing acceptance in the relatively untapped urban markets as well to use gold to meet household contingencies.
iv) Availability of gold loans in extremely flexible terms: gold loan products are designed in a way that specially meet the unique situation of each customer. The disbursements are quick, and most loans do not have a fixed equated monthly installment period.
v) Existing gold held by rural communities. About 65% of the gold in India is held by rural communities who are the biggest purchasers of gold loans. Majority of these consumers are farmers and unfavourable monsoons leading to unpredictability of the harvest season lead to them becoming cash trapped frequently causing them to resort gold loan.
vi) one of the easiest ways to avail money is gold loan: This is because it is a secured asset and there is no requirement of any collateral. To avail home loans & personal loans, one needs to show income certificates, bank statements & income tax returns.
vii) High loan to value: One of the most important question in consumer’s mind is how much of the asset value can be financed? Here, in case of gold loan, banks consider 75% of the gold value as the loan, NBFCs go upto 90%.
viii) Provision of both small and large amounts: A person can avail the loan for gold as less as Rs 3,000 per month.
ix) The requirement of only basic identity documents: with basic identity documents like ID and address proof, one can apply for gold loans
x) Safety of Gold: the pledge gold is safe and secured with the lender.
The organized gold loan market has grown at a CAGR of more than 30% from 2010 to 2019. NBFCs has been a major driving force behind this growth given their extensive network, faster turnaround time, higher loan to value ratios and the ability to serve non bankable customer. NBFCs in gold loan, SME and microfinance segments have been relatively less affected by the liquidity crisis in the sector. For the companies that give loans against gold, the asset liability maturity levels are positive. They also have low leverage, pricing power and a highly liquid collateral, which would ensure easy access to bond markets as well as bank funding. Low default rates have been one of the primary factors contributing to increased comfort in the gold loan space. Default rates typically vary within 1-2% which is much lower compared to other traditional products offered by financial institutions. This comfort, when combined with higher return on assets, makes gold loan an attractive product. Gold loan NBFCs were able to successfully tide over NBFC liquidity crisis without much impact on their business. The industry changed its strategy to mitigate the gold price risk by giving preference to loans at lower LTV, periodical collection of interest and relatively shorter tenure loans. Major players adopted the strategy of focusing on relatively shorter tenure loans like three/six/nine months loans to ensure that the value of the underlying security is higher than the outstanding obligation of the borrower at any point in time so that losses on under-recovery are minimized. Also, the periodical collection of interest helps gold loan NBFCs to ensure that the outstanding loans are in money. This short term lending made sure that gold loan NBFCs had good liquidity and did not face any asset-liability mismatch. The gold prices have started to firm up in the last few months primarily on the back of change in US federal reserve stance from interest rate hike cycle to interest rate pause/ reduction cycle. The hope of fall in interest rate and fears of recession have increased the demand in gold thereby increase in its prices. The NBFC sector has faced severe liquidity crisis in recent months post the IL&FS default in September 2018. After the default, most of the NBFCs have been facing difficulty in raising money thereby affecting their lending. Also, the credit quality of SME sector has deteriorated in recent months making it difficult for promoters to avail cash flow based credit. Thus companies may resort to collateral based borrowing like gold loan, loan against property to meet their business needs. This shift to collateral based lending will be a trigger for gold loan NBFCs in FY 21. Of the estimated 25,000 to 30,000 tonnes of household gold in India, the formal sector has been able to monetize only about 500 tonnes. There is a massive opportunity for gold loan NBFCs to grow the business significantly. Some decades back, the gold loan was a high cost affair, something around 30-50% but now organized players ( banks and NBFCs) offer the loan at 15-20% per annum. The microfinance industry’s gross loan portfolio stood at Rs 1,87,386 up 38% Y-o-Y. The total number of microfinance accounts was 9.33 crore, showing a growth of 21.9%. NBFC microfinance institutions hold the largest share of portfolio in micro credit with the total loan outstanding of Rs 68,868 crore, which is 36.8% of total micro credit universe. Apart from growth in loan size and loan accounts, the growth of the staff of NBFC microfinance was also at 34%, now totaling to 1,04,973 people. India microfinance market is projected to grow at a double digit CAGR during 2019-2024 owing to growing number of small and medium enterprises in the country, lower interest rates and government initiatives to improve the credit lines for people from lower income groups. Government launched micro units development & refinance agency limited (MUDRA) and pradhan mantra MUDRA Yojana (PMMY) to lend money to small and medium enterprises and lower income population with a target of more than Rs 1 lakh crores. Moreover growing technological advancements and government’s initiatives for digital innovations like broadband for all which aims to cover over 2 lakh villages in India, will reduce the barrier for the adoption of Microfinance will further boost the India Microfinancing market over the next 5 years. The overall insurance industry is expected to reach US$ 280 billion by 2021. Gross premiums written in India reached US$ 94.48 billion, with US$ 23.38 billion from life insurance and US$23.38 billion from non-life insurance. In FY19, a premium from new life insurance business in India increased 3.66% Y-o-Y to US$ 15.46 billion. The Indian insurance market is a huge business opportunity waiting to be harnessed. India currently accounts for less than 1.5% of the world’s total insurance premiums and about 2% of the world’s life insurance premiums despite being the second most populous nation. India is fifteenth largest insurance market in the world in the terms of premium volume. India’s insurance market is expected to quadruple in size over the next ten years. India’s life insurance sector is biggest in the world with about 360 million policies which are expected to increase between 12-15% over the next five years. India currently has 605 million people below the age of 25, and 225 million in the age group of 10-19 years. The insurable population is expected to touch 750 million by 2021 and life expectancy at birth to be 74 years. The average Indian age by 2021 will be 29 years as against 40 years in the US, 46 years in Europe and 47 Years in Japan. The proportion of population above the age of 65 years is expected to constitute 9% of the population by 2035 and 15% of the population by 2055, compared to 6% in 2015. As compared to other developed economies, India remains vastly underinsured, both in terms of penetration and density. The penetration of life insurance has increased from 1.5% in the year FY2000 to 2.8% in FY2018; with a high of 4.6% during FY2010. This presents a huge opportunity to penetrate the underserviced segments. The national housing bank is infusing around Rs 10,000 crore in NBFCs with a view to improve flow of funds for housing loans. To further ease flow of funds to housing sector, the national housing bank is making additional liquidity of Rs 10,000 crore for HFCs for individual housing loans, for affordable housing. The mutual fund industry AUM rose 7.4% in October 2019 to Rs 26.3 lakh crore from Rs 24.5 lakh crore in September 2019 on the back of inflows across equity, debt and liquid schemes. The AUM of the Indian MF industry has grown from Rs 7.75 trillion as on 31st October 2009 to Rs 26.33 trillion as on 31st October 2019 about 3.5 fold increase in span of 10 years. The total number of accounts as on October 31, 2019 stood at 8.63 crore, while the number of folios under equity, hybrid and solution oriented schemes, wherein the maximum investment is from retail segment stood at Rs 7.71 crore. This is 65th consecutive month witnessing rise in the number of folios. The mutual fund industry is eyeing a four fold rise in AUM to Rs 100 lakh crore from existing 26 lakh crore and increase in investor base to 10 crore from current 2 crore over the next decade. Muthoot Finance has entered into an agreement to acquire IDBI bank’s mutual fund unit for Rs 215 crore, marking its entry into mutual fund asset management space. The transaction is expected to be completed by end of February 2020. IDBI mutual fund is one of the profit making asset management company in the mutual fund space with an assets under management of over Rs 5,300 crore. The NBFC crisis has impacted overall confidence of NBFCs primarily because lending to NBFCs became tight. But in last 8 months management demonstrated that the liquidity crisis didn’t affect Muthoot finance. Muthoot Finance average gold loan loan tenure is 4-5 months maximum so company have good receivables. To practically demonstrate this company went slow on its advances & reduced its loan-to-value ratio. Every month company received Rs 5,000 crores and disburse loans worth Rs 5,000 crore. So far a month company reduced its loan-to-value ratios and advances came down to Rs 4,000 crore only. But the receivables stood at Rs 5,000 crore. So Muthoot Finance got an accretion of Rs 100 crore which was kept in the bank to demonstrate it can get its loan back in time bound manner. The company foresee the AUM to cross Rs 50,000 crore by the end of FY21. Company’s target for loan growth is 15% for this year. Company plan to venture in newer geographies in northen and western region through branch expansions. The average business business per branch is Rs 7.5 crore in FY19, which company expect to increase to average Rs 15 crore per branch in coming years. Company is also keen for opportunities for diversifying its product portfolio and looking into other type of financing like vehicle loan and others. Company will also focuss on ensuring that all its other financial products also gain prominence in their respective markets in India especially insurance, domestic money transfer, microfinance, international money transfers, foreign exchange, housing finance, pan card issuance. Company will likely to grow its overall non gold business portfolio currently from 12% to 15% of its overall AUM by hunting new opportunities. Company is likely to grow its subsidiaries like home finance portfolio from Rs 1,900 crore to Rs 2,800 crore in FY21, the microfinance portfolio from Rs 2,100 crore to Rs 2,900 crore and vehicle finance portfolio from Rs 350 crore to Rs 850 crore. Company also plans to scale up its home finance business by aggressively pursuing its plans for affordable housing in newer geographies. Everyday company have Rs 150-200 crore of loan being repaid at its branches and the similar amount of loan disbursal. So its asset liability mismatch does not exist. Company has no NPAs in Gold loans. The company plans to raise Rs 790 crore through non convertible debentures for on-lending. The company plans to expand its personal loan operations taking the tally to 50 locations across the country by the end of the year. The company forayed into the personal loans segment in 2018 and plans to expand its business portfolio, with its latest target the salaried personal loan category in Delhi and NCR. Currently such loans are offered across 16 cities. The personal loan book target for the current financial year 2019-2020 is Rs 750 crore. Under the scheme, Muthoot finanace will disburse loans amounting Rs 1-10 lakh at an interest rates between 13.5% and 23% per annum to the salaried class. Company’s gross loan portfolio increased to Rs 3,42,461 million during the year, an increase of 18% from Rs 2,91,420 million in FY 2017-2018. Company’s average gold loan outstanding per branch increased from Rs 66.70 million in FY 2017-2018 to Rs 74.97 million in FY 2018-2019 due to increase in gold loan portfolio. Company’s revenue grew by 9% from Rs 63,331 million in FY 2017-2018 to Rs 68,806 million in FY 2018-2019. Its profit before tax rose by 8% from Rs 28,447 million in FY 2017-2018 to Rs 30,768 million in FY 2018-2019. Its profit after tax increased by 11% and stood at Rs 19,721 million in FY 2018-2019 from Rs 17,776 million in FY 2017-2018. Earning per share increased to Rs 49.27 in FY 2018-2019 from Rs 44.48 in FY 2017-2018. Company’s total income from operation grew to Rs 6,878.21 crore in March 2019 from Rs 142.83 crore in March 2006. Its net profit grew to Rs 1,972.14 crore in March 2019 from Rs 26.89 crore in March 2006. Between this period company has never posted a loss. By all this I prefer buy call on Muthoot Finance at CMP of Rs 680.85 .