Muthoot Finance Ltd- Analysis

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Muthoot Group has a very long history, being founded in 1887 in Kerala. The group pioneered gold loan financing in 1939.

As of 2019, Muthoot Finance Ltd is India’s largest gold financing company in terms of loan portfolio. They have a market share of close to 18% in the Gold loan Financing followed by Indian Bank, IOB and Manappuram Finance Ltd as in FY18.

The company lends out loan to customers that are primarily those individuals who do not have access to formal credit sources or can’t access formal credit within a reasonable time but possess gold jewelry. In the last 5 years, the company has been trying to diversify into other lending businesses such as microfinance, housing finance, vehicle & equipment finance. These businesses contributed 12% of Asset of management in 2019 while gold business still contribute the lion’s share of 88%. 

Muthoot Finance Ltd had 4480 branches as of 31st March 2019.(61% in South India, 17% in North, 16% in west & remaining 6% in East India).North India and West India collectively possess 45% of India’s gold stock with minimal credit penetration. This market provides a high potential for the rise in gold loans in future.

Post the 2012-14 period, the growth of the business slowed down significantly because of the curbs put up by RBI. The AUM(Asset Under Management) growth slowed down from 70%+ to below 10%. In order to continue the growth momentum, the company focused to venturing into other forms of financing such as home finance, Micro finance & vehicle finance. I assume the idea is to focus more on the new business ventures for rapid growth whereas target moderate growth for the core gold loan business coupled with higher profitability. That is why the new branch addition has slowed significantly but Gold loan AUM per branch has grown impressively.

Muthoot Finance had 173T of gold jewelry kept as security as compared to RBI’s reserve of  618.2T.

Promoters of the company held 73.6% stake as of Dec 31st 2019. The company has consistent dividend payout ratio of more than 20%.

Higher credit rating helps firms in raising funds at competitive rates. Given the solid fundamentals of the company, the company has been waiting for an upgrade for quite sometime now.

NPA(Non Performing Assets)– The management maintains that the NPA is more of a just technical term to them as they would anyway recover the loan amount by auctioning the security kept with them. But anyway they are trying to keep the NPA % numbers low by improving the collection efficiency.

Net NPA: 2.35%(2019) | 3.76%(2018) | 1.69%(2017)

Both Manappuram & Muthoot have introduced an interesting new product where a person can pledge gold as collateral with their network branch and can withdraw available loan amount and renew eligible loans without visiting the branch again.

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Increase in gold value bodes well for the company as it increases the value of collateral(improving ratios) and greater amount of loan can be given out per gram of gold.

Given the quantum of gold stored in Indian household and the Gold loan penetration being just 4%, offers lot of opportunity of growth.

Although, Gold financing have been able to snatch some market share from Banks post the difficult 2012-14 period, as of 2018, the market share in the organized space is still in favor of Banks at 56% and that of NBFC at 34%.

Indian organized Gold loan industry size is estimated to be  around ₹3.1lakh crore by 2020. Unorganized sector is assumed to be twice of organized one and there is a fast shift happening from unorganized to organized.

Muthoot Finance Ltd- Financials

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Shekhar Yadav

Shekhar Yadav

It was only during the third semester in Engineering that Shekhar overheard a Gujarati guy in his class discussing stocks. After a few discussions with him, he realized that this was what he wanted to do in his life.
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