Muthoot Finance Limited: Old is Gold

Muthoot Finance Limited is the flagship Business of the Muthoot Group and India’s largest gold NBFC Company.

(A) About Muthoot Finance

The Company originally incorporated as a Private Limited Company on March 14, 1997 with the name “The Muthoot Finance Private Limited” by Mr. M. George Muthoot in Kochi, Kerala. Later, on 18 November, 2008, the Company converted into a Public Limited Company with the name “Muthoot Finance Limited”.

In May 2018, Muthoot Finance is registered as a ‘Systemically Important Non-Deposit-Taking Non-Banking Financial Company (NBFC-ND-SI)’ with the Reserve Bank of India (RBI). Today, in addition to Financing Gold Transactions, the Company also offers Foreign Exchange Services, Money Transfers, Wealth Management Services, Travel and Tourism Services, and Sells Gold Coins and the 2nd and 3rd Generation of Muthoot Family is involved in the Business.

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(B) Journey Since Inception

muthoot finance stock research
muthoot finance stock research

(C) Family Structure

muthoot finance stock research with detail of family structure

(D) Executive Board – Muthoot Finance Ltd

(i) Late Mr. M. G. George Muthoot (Group Chairman, Till 5 March 2021)

Mr. M.G. Muthoot was the Chairman of Muthoot Finance Limited as well as of The Muthoot Group of Companies. M. G. George Muthoot, a graduate in Mechanical Engineering from Manipal Institute of Technology, attended various Executive Management Courses at the Harvard Business School. Then, he joined the family business, Muthoot Group, at a young age and became its Managing Director in 1979. Later, he took over as the Chairman of the Group in 1993.

Under his able leadership, Muthoot Finance Limited, the Group’s flagship Company became India’s largest gold financing company amongst NBFCs and also the first-ever NBFC to join the ‘Rs. 1000 Crore Net Profit Club’.

He was also conferred with numerous National and International awards, including the ‘AIMA Emerging Business Leader of the Year Award’ by the Honourable Union Minister of Home Affairs – Shri Rajnath Singh and the ‘Distinguished and Outstanding Alumnus of the Year Award’ by the Manipal University to name a few. 

M.G. George Muthoot died on 5 March, 2021 at the age of 71 after falling from the fourth floor of his house. In the F.Y. 2019-20, Mr. Muthoot received Remuneration of INR 15.418 Crores i.e. 0.16% of Total Revenue and 0.49% of Net Profit.

(ii) Mr. George Alexander Muthoot (Managing Director)

Mr. George Alexander Muthoot is the Current Managing Director of Muthoot Finance Limited. He is the Brother of Late Mr. M. G. George Muthoot. He holds a Bachelor’s degree in Commerce with a Gold Medal from Kerala University. He is also a Qualified Chartered Accountant; ranked first in Kerala and 20th in India in 1978.

Mr. Alexander Muthoot holds 39+ years’ experience in managing Businesses in the field of Financial Services. He also served as the Chairman of the Kerala Non-Banking Finance Companies Welfare Association from 2004 to 2007. His age is 65 years. He received INR 15.418 Crores as Remuneration for F.Y. 2019-20 i.e. 0.16% of Total Revenue and 0.49% of Net Profit.

(iii) Mr. George Jacob Muthoot (Whole Time Director)

Mr. George Jacob Muthoot is the Whole Time Director of Muthoot Finance. He is the brother of Late Mr. M. G. George Muthoot and Mr. G. Alexander Muthoot. He did graduation in civil engineering from Manipal University.

Mr. Jacob has 42+ years’ experience in managing businesses in the field of Financial Services. In the F.Y. 2019-20, he received Remuneration of INR 15.418 Crores i.e. 0.16% of Total Revenue and 0.49% of Net Profit.

(iv) Mr. George Thomas Muthoot (Whole Time Director)

Mr. George Thomas Muthoot is the Whole Time Director Muthoot Finance Limited. He is also the brother of Late Mr. M. G. George Muthoot, Mr. Jacob Muthoot and Mr. George Alexander Muthoot.

Mr. Thomas has 42+ years’ experience in managing businesses in the field of Financial Services. He received INR 15.418 Crores as Remuneration for F.Y. 2019-20 i.e. 0.16% of Total Revenue and 0.49% of Net Profit.

(v) Mr. Alexander M. George (Whole Time Director)

Alexander George Muthoot is the youngest son of Late Mr. M. G. George Muthoot and is the Whole Time Director Muthoot Finance Limited. He is an MBA Graduate from Thunderbird University (USA). Mr. Alexander is also an Advanced diploma holder in Business Administration from Florida International University, Miami (USA).

Additionally, he has an experience of managing the entire business operations of North, East and West India of Muthoot Finance. In the F.Y. 2019-20, he received Remuneration of INR 1.708 Crores i.e. 0.02% of Total Revenue and 0.05% of Net Profit.

(E) Shareholding Pattern

muthoot finance stock research with detail analysis of shareholding pattern
muthoot finance stock research with detail of major shareholding
muthoot finance stock research with mutual fund holding as on 31 march 21

(F) Product Categorization

The company is the largest Gold Financing Company in India in terms of loan portfolio. It provides Personal and Business Loans secured by Gold Jewellery,  or Gold Loans,  primarily to individuals who possess Gold Jewellery but could not access formal credit within a reasonable time, or to whom credit may not be available at all, to meet unanticipated or other short-term liquidity requirements.

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(G) AUM Break-up

Muthoot Finance’s gold loan portfolio is the largest in India as well as around the globe. Out of the company’s Total Loan Assets Under Management, Gold Loan Assets Under Management contribute 87% in F.Y. 2019-20.

The contribution of Other Loan Assets in F.Y. 2019-20 is 13% to the Total Loan Assets Under Management.

muthoot finance stock research loan segments with AUM breakup

(H) Group Structure Of Muthoot Finance

As of 31.Dec.2021, Muthoot Finance Limited has 7 Subsidiaries.

(i) Asia Asset Finance Plc

Asia Asset Finance Plc, Colombo, Sri Lanka became a foreign subsidiary of Muthoot Finance on December 31. It is a fully licensed, deposit-taking institution registered with the Central Bank of Sri Lanka and listed in the Colombo Stock Exchange and has been in the lending business since 1970. Muthoot Finance holding in AAF is 72.92%. As on 31 March 2020, Company’s Loan Assets Under Management is INR 5380 Mn.

(ii) Belstar Microfinance Limited

Belstar Microfinance Limited incorporated in January 1988 in Bengaluru and registered with the RBI in March 2001 as an NBFC. This Subsidiary of Muthoot Finance provides Micro Enterprise Loan, Small and Medium Enterprise Loan, Consumer Gold Loan, Education Loan and Sanitation Loan. Company holds 70.01% Stakes in this Subsidiary. As on 31 March 2020, Company’s Loan Assets Under Management is INR 26,310 Mn.

(iii) Muthoot Homefin (India) Limited

Muthoot Homefin (India) Limited is a housing finance company registered with the National Housing Bank NHB. Incorporated in 2011, it became a wholly-owned subsidiary of Muthoot Finance in August 2017.

The company focuses on extending affordable housing finance and targets customers in Economically Weaker Sections (EWS) and Lower Income Groups (LIG) in Tier II and Tier III locations. As on 31-03-2020, Company’s Loan Assets Under Management is INR 19,769 Mn.

(iv) Muthoot Insurance Brokers Private Limited

Muthoot Insurance Brokers Private Limited became a wholly-owned subsidiary of Muthoot Finance in September It is an unlisted private limited company holding a licence to act as Direct Broker from the Insurance Regulatory and Development Authority since 2013. It is actively distributing both life and non-life insurance products of various insurance companies.

(v) Muthoot Money Limited

Muthoot Money Limited became a wholly-owned subsidiary of Muthoot Finance in October 2018. The company is an RBI registered NBFC engaged mainly in the financing of used and new commercial as well as other asset finance solutions. As on 31-03-2020, Company’s Loan Assets Under Management is INR 5,090 Mn.

(vi) Muthoot Trustee Private Limited

Company incorporated a wholly owned subsidiary M/s. Muthoot Trustee Private Limited (“MTPL”) which is yet to commence commercial operations.

(vii) Muthoot Asset Management Private Limited

Company also incorporated a wholly owned subsidiary M/s. Muthoot Asset Management Private Limited (“MAMPL”), which is yet to commence commercial operations.

(I) Interest

(i) Interest Income on Average Loan Assets

Muthoot Finance’s Interest Income includes Interest on Gold Loan, Personal Loan, Corporate Loan, Business Loan, Loan to Subsidiaries, Other Loans, Interest income from investments and Interest on deposits with Bank.

muthoot finance stock research with detail of interest

Company’s Interest Income on Average Loan Assets has shown a consistent growth over last 8 Years. Muthoot Finance’s Interest Income on Average Loan Assets in F.Y. 2019-20 stands at 23.03%, increase by 6% from Previous Fiscal Year.

For 9 Months ended Dec 2020 (FY21), Company’s Interest Income stands at 22.30%, decreased from 22.97% for corresponding period in FY20.

(ii) Interest Expense on Average Loan Assets

Company’s Interest Expense include Interest On Deposits, Interest on borrowing, Interest on debt securities, Interest on subordinate liabilities, Interest on lease liabilities and other Interest Expenses.

muthoot finance stock research with interest income on average loan assets

Company’s Interest Expense on Average Loan Assets reduced by 36% From 11.8 in the year 2013 to 7.51 in the year 2020. In addition, Muthoot Finance’s Interest Expenses On Average Loan Assets for the 9 Months period ended Dec 20 (FY21) , stands at 8.11% against 7.47% for 9 months ended Dec 19 (FY20).

(iii) Interest Expense on Average Outside Liabilities

Interest Expense on Outside Liabilities also decreased by 28% from 12.42 in the Fiscal Year 2013 to 8.99 in the F.Y. 2020.

For 9 Months ended Dec 20 (FY21), Company’s Interest Expense on Average Outside Liabilities stands at 8.79%, decreased from 9.16% for 9 months ended Dec 19 (FY20).

muthoot finance stock research with interest on average outside liabilities

(iv) Interest Spread

The Net Interest Spread is the difference between the Interest  pays by the Company and the Interest it receives from Loans to Consumers.

Interest Spread = Interest Income on Average Loan Assets – Interest Expense on Average Outside Liabilities

muthoot finance stock research with detail of year on year interest spread income

Muthoot Finance’s Interest Spread has shown an consistent growth over last 8 Years. It increased from 9.24% in the year 2013 to 14.04% in the F.Y. 2020. For 9 Months ended Dec 20 (FY21), Company’s Interest Spread stands at 13.50%, decreased from13.81% for 9 Months ended Dec 19 (FY20).

(v) NIM(%)

Net Interest margin of the company increased by 51% from F.Y. 2013 to F.Y. 2020 i.e. From 10.27 to 15.52. Muthoot Finance’s Net Interest Margin (%) for 9 Months ended Dec 20 (FY21), stands at 14.19%, decreased from 15.50% for 9 months ended Dec 19 (FY20).

The Company’s NIM(%) has shown a consistent growth over the years.

muthoot finance stock research with detail of year on year Net Interest Income

(J) Gold Loan Assets

Historically, there remains strong co-relation between growth in Gold Loans and movement in gold prices. Gold price momentum is one of the key factors for gold lending traction.

muthoot finance stock research with year on year growth of gold loan assets

Muhtoot Finance’s Gold Loan Assets have shown a Robust Growth from 260 Billions in 2013 to 408 Billions in F.Y. 2019-20. Company’s Gold Loan Assets grew at a CAGR of 7% over last 7 Fiscal Years. As on 31 December 2020, Gold Loan Assets stand at 496 Billions.

Key Points for a Gold Loan NBFC:

  • Singular focus on gold loan products that helps in capabilities across faster loan processing, accurate gold valuation, safekeeping and auctioning.
  • Most importantly, small ticket size of loans, secure nature of business and wide variety of products, lead to minimal credit cost and stable growth.
  • Also, Deeper penetration into semi-urban and rural areas, bringing more of the underserved into the formal banking fold.
  • Moreover, Flexible repayment options that suit different borrower requirements.
  • In addition, Proactive marketing, branding and geographic expansion that help capture new-to-market customers.

COVID-19 Impact On Industry

Since the outbreak of the pandemic, gold loans became an easy way of accessing capital and both banks and NBFCs reported higher disbursements and increasing revenue numbers from their gold loans portfolio. Preliminary research suggests that small- and medium-sized companies are turning to gold to raise funds, rebuild their business and manage working capital requirements.

Gold loan processing is perceived to be faster and more convenient, compared to personal loans. Higher gold prices are also incentivizing people to unlock the value in their stored gold. Another reason is the stable rural demand owing to the good rabi crop and robust kharif sowing.

muthoot finance stock research with average gold loan per branch over 10 years

Over the years, Gold Loan Assets per Branch have shown a good growth.

(K) Liability Mix

Muthoot Finance has Diversified Funding Profile. In terms of funding, while a large proportion of borrowing has been sourced from banks and Financial Institutions (42%), the Co.’s resource profile remains diversified across avenues like Secured Non-convertible Debentures and Subordinated Debt (28%), Commercial Paper (10%), External Commercial Borrowing (16%) and other Loan Sources (2%) as of Q-3,FY21.

muthoot finance stock research with detail of diversified liability mix till Dec 2020

(L) Branches

Muthoot Finance operates through an extensive pan-India branch network of 4,632 as on December 31, 2020. Out of this, 60% of its Branches locate in South India, where it has an established Franchise. Company has 17% branches in the North Region. Moreover, 16% and 7% Branches of the Company are in West and East Region respectively.

muthoot finance stock research with region wise distribution network

Moreover, Outside India, Muthoot Finance is established in UK, US, and the United Arab Emirates.

(M) Disbursement & Collection

Since the outbreak of the Pandemic, Gold Loans have become an easy way of accessing Capital and both Banks and NBFCs reported higher Disbursements and increasing Revenue numbers from their Gold Loans Portfolio.

Muthoot Finance recorded a healthy 18% CAGR in Average Monthly Disbursements over past 5 years.

muthoot finance stock research with detail of loans disbursement and collection

Regular Interest collections enabled Muthoot Finance to tackle periods of falling Gold Price maintaining steady Loan traction.

Other Non-Gold Assets Under Management

(I) Microfinance

From F.Y. 2018 to F.Y. 2020, Assets Under Management of Microfinance grew at a CAGR of 54%.

muthoot finance stock research with microfinance AUM

(II) Home Finance

From F.Y. 2018 to F.Y. 2020, Assets Under Management of Company’s Home Finance Segment grew at a CAGR of 15%.

muthoot finance stock research with Home Finance AUM

The company grew other loan assets also, but its core focus remains to increase gold loans.

(N) Financial Parameters

(i) Net Sales

From F.Y. 2015 to F.Y. 2020, Company’s Net Sales growth is good. Muthoot Finance’s Net Sales grew at a CAGR of 18% over past 5 years.

muthoot finance stock research with growth of net sales over last 10 years

In F.Y. 2020, Company’s Total Revenue increased by 28% on the back of robust Gold Loan demand from both existing and new Customers.

(ii) Profit After Tax

Company’s Profit After Tax has shown a significant growth. Muthoot Finance’s PATs grew at a CAGR of 30% over past 5 Fiscal years.

muthoot finance stock research with growth of PAT over last 10 years

Profit after tax achieved a year-on-year increase of 51% and stands at INR 3168.68 Crores in F.Y. 2019-20.

(iii) PBIDTM (%)

muthoot finance stock research with detail of EBITDA margin

(iv) PATM (%)

muthoot finance stock research with 10 years PAT growth

(v) ROA (%)

muthoot finance stock research with 10 year ROA growth

(vi) ROE (%)

muthoot finance stock research with 10 years ROE performance

(vii) Dividend Pay Out Ratio (%)

muthoot finance stock research with dividend payout record

Muthoot Finance has delivered substantial PAT Margin growth over last 5 years. Also, the Company has a healthy Return on Equity (ROE) and Return on Assets (ROA) track record.

(O) Management Discussion Highlights – Dec 2020

Financial Highlights

  • Muthoot Finance (MUTH)’s 3QFY21 PAT grew 22% YoY to INR9.9b, driven by healthy loan growth, stable spreads, and continued cost control.
  • Gold Loans under management as on 31.Dec.2020 stands at INR 496,225 mn.
  • On the other hand, Other loans stands at INR 7,682 mn.
  • Collection efficiency (excluding arrears) in the Non-gold Book – Housing Finance: 88%, Microfinance: 98%, Vehicle Finance: 83.8%.
  • The GNPL ratio was stable at 1.3%. Total provisions on the BS stand at 1.8%.
  • The share of NCDs increased 500bp to 30% over the past two quarters.
  • In addition, Muthoot Finance continues to maintain a tight control on expenses – total Operating Expenses was down 2–3% QoQ and YoY, driven by lower employee expenses and advertising costs. Its expense ratio of 3.6% is the lowest in the past several years.

Other Highlights

  • As per branch expansion plan, 200 branches would be opened in FY22.
  • Moreover, as per the Management, Company would add 150–200 branches every year.
  • Company raised INR20b via retail NCDs in the 3rd quarter.
  • Management also stated that Gold loan growth has been largely uniform across geographies.

(P) Opportunities and Risk/Concerns

Opportunities

(i) Diversified Revenue Model

Though Company lend against the collateral of gold jewellery, its portfolio is spread across geographies as well as across borrowers with varied income profile. Further, the Company have ventured into various non-gold businesses such as Insurance, Foreign Exchange and Money Transfer, among others. Company’s steady focus on Non-gold ventures has allowed it to identify niche operating segments even in otherwise crowded segments like Housing and Microfinance.

(ii) Strong Brand Recognition

Muthoot Finance’s Products have a strong brand recall value which is the result of not only its legacy in financial services, but also its strong Marketing. The high level of salience allows us to charge a premium for its products.

(iii) Leadership Position in Gold Loan Segment

MFL is the largest Gold Loan NBFC. The promoters spent over seven decades in the Business of lending against gold jewellery. Over the years, the group has established a strong reputation and brand in South India, particularly Kerala and Tamil Nadu, and has an appropriate assessment and underwriting methodology, which is being constantly refined.

Muthoot Finance India’s largest Gold Loan focused Non-banking Financial Company (NBFC) with a total Portfolio of INR 50,391 Crore as on December 31, 2020; the portfolio grew by about 31% on a YoY basis.

(iv) Digital Innovation

More than ever before, there is the need to increase adoption of online services. Company leverage the power of digital to serve its Customer better. Embracing Digital has also enabled the company to increase its customer touchpoints and tap into the digitally literate customer segments.

(v) Wide Geographical Footprint

Muthoot Finance with its wide geographic footprint and well established Branch Network is able to maintain a strong Leadership position in the Retail Financial Services Industry.

Risk/Concerns

(i) Geographic Concentration in Portfolio

Muthoot Finance’s operations are largely concentrated in South India, which constituted 60% of its total branch network and 49% of its total loan portfolio as on December 31, 2020. However, the share of over the medium to long term with an improvement in the scale of the gold loan portfolio and the stabilization of the performance of the non-gold asset segments.

(ii) Security Infrastructure and Operating Expenses

Gold, by virtue of its physical value, requires safe handling at every stage of the loan lifecycle. Ensuring safe storage hubs at every branch is capital intensive and hinders operational profits at the branch level. Branch staff also need to be trained on how to recognize theft and other Fraudulent Activities.

Further, there are costs associated with the implementation of stringent electronic surveillance measures and cybersecurity policies to safeguard customer data. Company has to take corrective measures to control this cost, so that it wouldn’t effect the Profit Margins in Future.

(iii) Increased Competition and Alternative Financial Products

Muthoot Finance is not just against other gold loan lenders but also other financial services providers that deal in unsecured loans – providing the customers the option of availing funds without providing any collateral.

At the same time, lenders are partnering with fintech companies or investing in their digital capabilities to onboard unsecured loan customers, particularly salaried professionals with high levels of financial and technological literacy, with relative ease.

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References:  Annual Reports, News Publications, Investor Presentations, Corporate Announcements, Management Discussions, Analyst Meets & Management Interviews, Industry’s Publications.

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