Muthoot Microfin Makes Lackluster Debut, Lists at 5.5% Discount to Issue Price

Ajit Kushwaha

Muthoot Microfin, the microfinance arm of the prominent Muthoot Pappachan Group, made a disappointing debut on the bourses on December 26th, 2023. The stock listed at ₹275.30, a 5.5% discount to its IPO issue price of ₹291 per share.

IPO Details & Subscription Numbers

The company’s initial public offering (IPO) saw a decent response, getting subscribed 11.52 times overall. However, the tepid listing indicates investors are concerned about the company’s high valuations.

The IPO received strong interest from institutional investors. The qualified institutional buyers category was subscribed 17.47 times. High net-worth individuals also put in bids worth 13.2 times the reserved portion. Retail investors bid for 7.61 times the retail portion.

Company Overview

Muthoot Microfin is the fifth largest NBFC-MFI (microfinance institution) in India in terms of gross loan portfolio. As of March 2023, it had a loan portfolio of ₹7,902 crore serving over 26 lakh women customers across 16 states.

The company focuses on providing microloans to women customers in rural India. Nearly 100% of its customers are women and 88% are based in rural areas.

Financial Performance

Muthoot Microfin has shown robust growth in recent years. For FY2023, it reported a net profit of ₹163.9 crore, a massive 246% YoY growth. Total revenue grew 71.6% to ₹1,428.8 crore.

As of September 2023, the company had a healthy capital ratio (CRAR) of 20.46%. This provides an adequate cushion against loan losses.

Key Concerns for Investors

## High Valuations

At the upper end of the IPO price band, Muthoot Microfin demanded a P/E multiple of 30.3x. This is higher than peers like Equitas, Ujjivan, Bandhan Bank, and Fusion Microfinance. Only CreditAccess Grameen trades at a richer valuation in the sector.

The expensive pricing limited listing gains and raises concerns about the stock’s near-term performance.

Asset Quality Worries

A key risk for microfinance companies is asset quality, especially repayment capability. Muthoot Microfin’s borrowers generally have limited income sources and credit histories. This makes credit evaluation difficult.

The company’s gross NPA stood at 1.17% and net NPA at 0.51% as of March 2023. Any deterioration in collection efficiency can quickly escalate bad loans for such lenders.

Intense Competition

India’s microfinance sector is seeing rising competition with the entry of small finance banks. These banks are flush with low-cost deposits, allowing them to offer loans at cheaper rates.

Retaining and acquiring customers will be a challenge for NBFC-MFIs like Muthoot Microfin in coming years amid the rising competition.

Summing Up

Muthoot Microfin has shown strong growth, but investors are clearly concerned about rich valuations and rising competitive pressures. The stock’s trajectory in near-term will depend on how well it navigates industry challenges and maintains asset quality.

With a good parentage and focus on underpenetrated rural markets, the company has long-term potential. However, factors like asset quality and retention of customers will need close monitoring in coming quarters.

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By Ajit Kushwaha Writer
Ajit Kushwaha is a stock market investor and business owner of a chips manufacturing company in Hazaribagh, Jharkhand. He holds a Bsc. from Vinobha Bhave University and leverages over 5 years of share market experience in managing investments and his snack food business.
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