Muthoot Microfin IPO unveiled: An in-depth look into development, risks and valuation
Hello readers! In today's blog, we embark on a journey to explore the upcoming IPO of Muthoot Microfin, a company that has demonstrated an impressive compound annual revenue growth of 123% over the last decade. Be patient as you analyze the history, family structure, and growth path of this intriguing financial entity.
Roots: Muthoot Group's diverse beginnings
About 125 years ago, Muthoot Ninan Mathai laid the foundation of Muthoot Group by selling grains in Kochery, Kerala. Seeing the financial struggles of farmers, he started a chit fund in his village, providing a solution for savings. This venture flourished, leading to the expansion of the Muthoot Group across the districts and villages of Kerala. After the demise of Muthoot Ninan Mathai, the family business split into two major groups: the Muthoot Group (with the red logo) and the Muthoot Papa Chan Group (with the blue logo).
Muthoot Papa Chan Group's Microfinance Leap
Fast forward to the present, Muthoot Papa Chain Group has experienced a substantial growth rate of 88.9% compounded annually over the last four years. However, facing slower growth than its elder brother Muthoot Group, the company strategically entered the microfinance sector a few years ago. The move proved fruitful, with the microfinance arm now becoming the fourth largest NBFC microfinance institution in India.
Microfinance Success Story of Muthoot Microfin
A part of the Muthoot Papa Chain Group, Muthoot Microfin focuses on providing small loans in rural India. From a modest revenue of Rs 50 lakh in 2014, the company has witnessed phenomenal growth, reaching Rs 696 crore by 2023, representing a compound annual growth of 123% over the last decade. Notably, the microfinance sector is experiencing strong growth, with Muthoot Microfin disbursing loans worth Rs 9208 crore.
Highlighting the dynamics of the microfinance sector
Microfinance, being a high-risk sector, involves lending to individuals without established credit history. The success of Muthoot Microfin lies in creating an ecosystem where small loans act as an entry point. Once customers establish creditworthiness, they become eligible for larger loans, creating a broader credit cycle within the Muthoot Papa Chan Group.
Valuation and Risk: A Balancing Act
Although the growth story is fascinating, it is important to address the potential risks associated with the microfinance sector. The rapid expansion of the industry has attracted many players, raising concerns about the formation of a bubble. Increased competition may lead to loosening of lending standards, similar to the subprime mortgage crisis in the US in 2008.
Muthoot Microfin's gross NPA, which stood at 7% two years ago, reflects the inherent risks of lending in the sector. Diligent risk management and constant monitoring of NPAs is essential to prevent any catastrophic downturn.
IPO valuation and listing prospects
As Muthoot Microfin gears up for its IPO, valuation has become an important consideration. The company has a P/E ratio of 25, which is slightly higher than the industry average of 16.34. The price band of the IPO has been fixed at Rs 277-291, with the gray market premium currently at Rs 10. While the prospects for listing gains are favourable, the high valuation warrants careful consideration for long-term investors.
Concluding thoughts and future exploration
In conclusion, Muthoot Microfin's journey from a humble beginning to becoming a major player in the microfinance sector is commendable. As potential investors, it is paramount to remain alert about sector risks and closely monitor the company's performance post-listing.
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Thank you for joining me in uncovering the story of Muthoot Microfin. Until next time, happy investing!