2012

COMPANY RESEARCH REPORT October 28, 2010

COMPANY RESEARCH REPORT

INITIATING COVERAGE

MUTHOOT FINANCE LIMITED

RECOMMENDATION: BUY CMP: Rs. 165 BUY PRICE: < Rs.149 TARGET: Rs. 197 (SEE ANALYST NOTES) HOLDING PERIOD: 1-1.5 Years RISK PROFILE: AGGRESSIVE

INITIATING COVERAGE- BUY : MUTHOOT FINANCE LIMITED

Business Summary
Muthoot Finance Limited (MFL) is Indias largest gold loan financing company (in terms of loan portfolio with an AUM of Rs.22694 crores) and a market share of 19.5% of the total gold loan market in India. At the end of 9MFY12, MFL had branch network and employee strength of 3480 and 23219 respectively.

NSE Code: MUTHOOTFIN BSE Code: 533398 ISIN Code: INE414G01012 Reuters Code: NA Bloomberg Code: MUTH IN Website: www.muthootfinance.com

Investment Rationale
The gold loan market is generating a lot of goodwill with the fast changing perception of gold loans. Besides only 10% of the total gold loan stock in the country has found its way into the gold loan market thereby offering plenty of scope for its growth potential. MFL is a consummate proxy on the burgeoning gold loan market in India. It has generated ample experience and goodwill for over 7 decades, has a branch network of 3480 branches that is becoming of a large PSU bank and is the market leader with an AUM of Rs. 22694 crores and a market share of 19-20%. MFL has a host of customer engagement practices that generate strong goodwill. In addition to that it has also been diversifying its product offerings and geographical presenc. We have employed a weighted average valuation approach of determining our share target price of Rs.197. We have assigned 40% weights to our DCF and PBV targets with a 20% weight for the PE target. Our buying level of <Rs.149 is a weighted average buying price (equal weights for excess return on book value buying levels and DCF 30% margin of safety buying level).

Sector: EPS (TTM): PE (TTM): Industry PE: Mkt. Cap (In crores): 52 Wk high: 52 Wk low: Latest Book Value: P/BV: Beta: Yield (%): Face Value: Institutional Holding:

NBFC Rs. 13.29 12.30 13.65 Rs.6079 cr. Rs. 198 Rs.148.55 Rs. 77.03 2.12 0.69 0.00 10 10.02%

MFL vs SENSEX
25000.00 20000.00 15000.00 10000.00 5000.00 0.00 250.00 200.00 150.00 100.00 50.00 0.00

Risks
MFLs loan book (loan book growth of 110% and 122% in the last two years) and branch expansion (run rate of 800 to 900 branches a year) in the last couple of years has taken place at meteoric rates and this may not be sustainable going forward. MFL runs the risk of growing too soon. It has been reported that the RBI is concerned with the pace of growth of gold loan companies and is looking to implement measures (higher margin ratios, restrictions on branch expansion) that could curb their growth. The success of MFLs business model is founded on the fascination associated with the gold metal. Were gold prices to crash MFL would be adversely affected by dwindling sales and higher margin requirements. If MFLs due diligence and recruitment and training of HR in certain branches is not up to the mark, they could suffer at the hands of fraudulent employees who can misuse their positions.

SENSEX

MFL

Shareholding Pattern (%) Total of Promoter and Promoter Group Public Shareholding: Institutions Non-Institutions Total Public Shareholding 10.02% 9.87% 19.89% 80.12%

Source: Multiple sources

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Contents BRIEF PROFILE .............................................................................................................................................................................. 1 BUSINESS ...................................................................................................................................................................................... 2 OUTLOOK AND SCOPE.................................................................................................................................................................. 5 SECTOR ......................................................................................................................................................................................... 7 GOLD LOAN SECTOR................................................................................................................................................................... 11 FINANCIALS ................................................................................................................................................................................ 13 HISTORICAL FINANCIALS ........................................................................................................................................................ 13 FINANCIAL OUTLOOK ............................................................................................................................................................. 16 FINANCIAL TABLE AND VALUATIONS ................................................................................................................................. 18 RISKS........................................................................................................................................................................................... 19 INVESTMENT RATIONALE........................................................................................................................................................... 21 Financial Highlights-Standalone- [INR-Crore] ............................................................................................................................ 23 Financial Ratios .......................................................................................................................................................................... 24 FINANCIALS GRAPH AND PEER GROUP COMPARISON .............................................................................................................. 25 ANALYST NOTES AND COMPANY NEWS .................................................................................................................................... 26

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BRIEF PROFILE
TOP MANAGEMENT
Chairman: M G George Muthoot MD: George Alexander Muthoot Director: George Thomas Muthoot Director: George Jacob Muthoot Director: George Joseph Director: George Varghese Director: John Paul Director: John Mathew

Muthoot Finance Limted (MFL) is a systematically important nondeposit taking NBFC that is involved in the busines s of providing loans against gold and is today, considered to be the largest company in India (in terms of loan portfolio, with a gold loan portfolio of Rs.22694 crores provided to over 5.5 million accounts) to be offering this service. It is the flagship company of the Kerala based Muthoot Group. MFL has an operating history of over seven decades having first started the gold loan business in 1939. However it was only in 2001 that the company secured an NBFC license from the RBI. In addition to the gold loan business, MFL also provides money transfer services through their various branches by acting as sub-agents of various registered money transfer agencies. Recently MFL has also got into the collection agency services. In addition to all of that the company also operates three windmills in the state of Tamil Nadu. Currently MFL has a branch network of 3480 brances (at the end of 9MFY12) with 64% of the branches located in the Southern territories of the country. At the end of FY11 the company had an employee strength of 16668 employees.

INDICES IN WHICH THE MFL STOCK IS LISTED -BSE 500 -BSE MIDCAP -BSE IPO

ADDRESS Muthoot Chambers, 2nd Floor, Muthoot Chambers, Opposite Saritha Theatre Complex, Banerji Road, Ernakulam-682018

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INITIATING COVERAGE- BUY : MUTHOOT FINANCE LIMITED

BUSINESS - MFL understands its business and the gold loan market very well as it has been in this business for over seven decades and today enjoys a market share of around 19.5%. - MFLs business is poised to flourish due to the tremendous appetite for gold and the growing acceptance of pledging gold and sourcing finance in an expedient and less cumbersome manner. - MFLs customer base of over 5.5 million accounts mainly includes the lower and middle income segment such as small businessmen, traders, famers and salaried individuals. - The principal loan amounts disbursed by the company vary from Rs.2000 to Rs.100000 while the interest rates vary from 12-30% p.a. All the gold loans of the company have a time period of 12 months but it is generally seen that most customers pay back the loans in 3-6 months. - To facilitate a strong degree of professionalism and standardization in their process, MFL runs 2 staff training colleges in New Delhi and Cochin and 3 regional learning centres in Chennai, Bangalore and Hyderabad. - At the end of 9M FY12, MFLs branch network stood at 3480 branches.

BUSINESS
Muthoot Finance Limited (MFL) is a non-deposit taking NBFC primarily involved in financing personal and business loans secured by gold as collateral. The company has been in this business for over seven decades and today enjoys market leadership in the gold market estimated to be around 19.5%. The companys business model is well poised to flourish in an era where peoples appetite for gold (and the ensuing sentimentality associated with possessing the metal) is increasing by the day MFLS LOAN PROCEDURE

1) CUSTOMER SELECTS SCHEME 8) CUSTOMER OFFERED THE CHANCE TO TAKE ANOTHER LOAN 2) PROOF OF INDENTITY IS SECURED

7) LOAN REPAID AND GOLD HANDED BACK

3) APPRAISAL OF GOLD BY MFL

6)LOAN DISBURSED AT PRESRIBED RATE 5) GOLD TRANSFERRED TO SECURITY VAULT

4) COMPUTERIZED RECORDS MAINTAINED

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Customer profile GOLD LOAN PROCEDURE MFLs customer profile mainly includes the middle and lower income class of people such as small businessmen, vendors, traders, farmers and salaried individuals who tap the gold loan financing platform for reasons of convenience, accessibility and necessity by pledging their gold jewellery. A gold loan company such as MFL with the expertise and goodwill of over seven decades is well positioned to cater to the needs of these people as procuring loans from banks tends to be quite a cumbersome process with lengthy documentation and procedures and various other constraints in complying with the eligibility norms ( MFL disburses an average loan ticket size of Rs.20000 within five minutes from the time the gold is tendered to the appraiser). On the other hand, the local moneylenders tend to charge usurious rates of interest and also lack a degree of structure and standardization to their lending process. Products MFLs products which mainly include loans provided against gold are structured in different forms (gold loan products with varying loan amounts, advance rates (per gram of gold) and interest rates). The principal loan amounts disbursed by the company vary from Rs.2000 to Rs.100000 while the interest rates vary from 12-30% p.a. All the gold loans of the company have a time period of 12 months but it is generally seen that most customers pay back the loans in 3-6 months. Customers are encouraged to pay back the loan early as interest is then levied on a lower rate. For ex.- If the standard 12 month loan is taken for a interest rate of 30% and the client pays back the principal amount in 3 months, he will have to pay a much lower interest rate of perhaps only 21% rather than the original 30%. In addition to the incentive provided by paying off the loan in time, the average gold loan customer also possesses a deep sense of sentimentality to his gold and this serves as an added incentive. Consequently NPA ratios are very low. In addition to the standard loans against gold which are the main revenue driver ( accounts for more than 98% of revenue) the company also provides loans against other items (loans against ETF, loans against NCD, loans against jewellery). In fact the company has a
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The prospective gold loan customer is first explained the different gold loan schemes available.

- After selecting a certain scheme, proof

of identity is procured from the customer even as the resident gold appraiser , appraises the ornaments using a calibrated weighing machines. Other preliminary and additional tests are done without damaging the ornaments.

The rate per gram is fixed by the corporate office and this is used to determine the final loan amount though the branch manager also has the discretion to approve higher rates of upto Rs.10 per gram.

- Computerized records of the applicant

are maintained and the gold is taken to the in-house safety vaults even as the loan is prescribed at a particular rate.

The loans which are of a standard period of 12 months are usually repaid within three to six months after which the ornaments are handed back. Loans that are repaid in less than 12 months are usually charged a lower rate of interest than initially prescribed.

- If the loans are not repaid back within

12 months, MFL informs the customer through registered letters or legal notices. If the loan is still not repaid after 18 months, the gold is liquidized and the account is classified as NPA.

INITIATING COVERAGE- BUY : MUTHOOT FINANCE LIMITED

tie-up with a rural and semi urban based jewellery chain Goldplus from the TATA group, finance will be provided to potential jewellery buyers from Goldplus. The customers will only be required to pay 15% of the value of the jewellery and the rest will be funded by MFL. The repayment period for this service is two years with a rate of interest of 11.5%. Initially this service will only be offered in Tamil Nadu and will later be extended to Andhra Pradesh. Employees MFLs in-house personnel are of utmost importance in the success of its business model as they should be competent enough to appraise the quality of gold and disburse the appropriate amount based on standardized practices. Also a great deal of integrity is required on the employees part as he/she is responsible for ensuring that the gold is well protected in the in-house vaults and safely returned without any damage. To facilitate a strong degree of professionalism and standardization in their process, MFL runs 2 staff training colleges in New Delhi and Cochin and 3 regional learning centres in Chennai, Bangalore and Hyderabad. Employees are trained in the areas of loan appraisal, customer service and communication skills. In addition to in-house employees, the company also has 900 customer services employees who are in charge of carrying out customer loyalty and customer relations programmes. At the end of 9MFY12, the company had a total employee strength of 23219 employees. Branches MFLs branch network is quite huge and well spread out though there is quite a obvious bias towards the Southern territories (65% of branch network) where the company is originally based and enjoys strong brand value. Over the last few years, armed with a strong advertising campaign (that includes sponsorship deals with the IPL team-Delhi Daredevils) the company has made impressive strides to successfully expand towards the Northern and Western regions of the country where the average customers mindset is significantly different from their Southern counterparts. At the end of 9M FY12, MFLs branch network stood at 3480 branches.
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Source: MFL, Hedge Research

Source: MFL, Hedge Research

INITIATING COVERAGE- BUY : MUTHOOT FINANCE LIMITED

OUTLOOK AND SCOPE

OUTLOOK AND SCOPE MFL is looking to continue its expansion into areas other than the Southern Zone. It is looking to target the Hindi speaking markets such as Haryana, Punjab and Delhi and build scale. Branch network which stood at 1300 units in the Hindi speaking states is poised to reach 1500 units by the end of the fiscal. MFL has broadened its product offerings to include items such as loan against ETFs and loan against jewellery. In addition to that it has also got into a tie-up with Western Union to offer money transfer services. The MFL has been actively resorting to the NCD (Non Convertible Debenture) route to procure funds. While the purpose of the loans is for working capital and general purposes, it is been resorting to NCDs to broaden its borrowing profile. If the company is targeting an ROA of greater than 4 it is likely to need more funds. There is a chance of a QIP or a follow-on offer within the next one year as the promoters have to reduce their stake from 80% to the mandated 75%. Expansion into Hindi-speaking States MFL has over the years, developed a very strong customer base and brand equity (having been around in this business for over seven decades), but this has largely been limited to the Southern territories which accounts for 65%. In keeping with its tag of being the largest gold loan company in the country, the company has sought to reduce its exposure to the Southern territories and broaden its reach towards the Northern and Western areas. This change in strategy has worked well for the company with the dependence on Southern territories coming down from 85% in FY08 to 65% in FY12. The company is now looking to continue this strategy with a sizeable portion of its incremental branch additions coming from regions other than the Southern areas. MFL is seeing good business opportunities in markets such as Haryana, Punjab and Delhi and is looking to replicate this success in other similar markets. Armed with an aggressive advertising and promotional campaign that included sponsoring the IPL cricket team- Delhi Daredevils the company which had a branch network of 1300 branches is looking to get to more than 1500 branches by the end of the fiscal. According to the management, earlier while the gold loan financing mechanism was viewed with a lot of skepticism, things have changed for the better. According to the management lately people have been pledging their gold to take a loan to purchase vehicles. Diversifying product offerings While loans against gold continues to be the largest contributor to MFLs revenue at more than 98% of total revenue, the company has been gradually introducing a range of new products such as loans given against gold ETFs and jewellery loans. Under the loan against gold ETF scheme, customers who own gold ETF units (mutual fund units issued by an AMC against 995 purity physical gold which is deposited with a custodian that is registered with SEBI) but dont want to sell these units, can pledge these units with MFL and take a loan. Another recent initiative of the company was to tie-up with the TATA group jewellery company-Goldplus to set up a scheme titled
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Swarna Samridhi whereby customers can buy jewellery from Goldplus by only paying 15% of the amount with the rest being financed by MFL. The repayment period for this loan is 2 years at a rate of interest of 11.5%. Going forward the MFL management has spoken of their need to target members of the upper middle income and upper income class (historically MFLs target market has mainly been the lower and middle income groups) and thereby position the business as a lifestyle product. In addition to its traditional loan products, MFL has also recently entered the money transfer business through a tie-up with Western Union. MFL is well positioned to carry out this business due to its large-scale branch network of around 3400 units. This will be linked with Western Unions network of branches across 40,000 locations across the world. There is tremendous scope for this business as India is the largest remittance receiving country in the world. According to the World Bank, India received an estimated $55 billion as remittances in 2010. Fund raising and divesting stake In the fiscal so far MFL has been actively raising funds through the NCD (Non Convertible Debentures ) route. The company has been tapping this route to diversify its borrowing profile. Historically most of its funds come through privately placed Gold bonds, bank loans and securitization. In August 2011 the company had raised Rs.693 crores through NCDs and resorted to this route once again in December raising a further Rs.452crore. The funds are estimated to be used for working capital and general purposes. The management recently announced a new NCD issue of Rs.250 crore due to take place in March. Going forward the management is targeting an ROA (Return on Assets) of 4% as against the historical level of more than 5%. The management feels that if they can generate an ROA of 4% they will not be in need of external funds but anything more than that might warrant the need for external funds. In addition to that, there is also a good chance that one could see a QIP (Qualified Institutional Placement) as the promoters will have to bring down their stake from the existing 80% to the mandated level of 75%.

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HISTORY OF INDIAN NBFCs

SECTOR
The Indian NBFC sector can broadly be segregated into the 1) Infrastructure NBFC segment, 2) the Housing Finance NBFC segment and 3) the Retail or Consumer Finance NBFC segment. The Indian Non Banking Finance Companies (NBFCs) accounts for a critical part of the countrys overall financial system. It is estimated that the NBFCs as a whole account for 9.1% or Rs. 4 trillion of assets of the entire financial system in India. As with most growing industries the NBFC industry in India has undergone various structural changes (change in business models, change in the broader market dynamics and change in the regulatory regime) since the start of the decade and is today a more mature and developed industry, particularly after having come tackled, arguably one of the most difficult phases in its history- the global economic crisis of 2008-2009. History of Indian NBFCs At the beginning of the decade NBFCs in India faced considerable challenges ranging from high cost of funds, limited borrowing sources and limited diversification, low asset profile, intense competition from not just NBFCs but banks as well, difficulties in positioning themselves between the banks and the money lenders, tepid economic and industrial growth and a high degree of nonperforming assets. With time however those foibles began to get washed away as a fresh wave of changes began to envelop the sector. The NBFCs were able to broaden their funding avenues and ensure greater diversification. The NBFCs borrowing profile extended beyond banks to include mutual funds, insurance companies and also using the rather innovative mode of securitizing their loans. One also began to see greater provisioning and an improvement on the asset quality and overheads. People also began to look at NBFCs in a better light and they were able to position themselves in between the banks (a lot of borrowers were not bank worthy and couldnt meet the norms prescribed by the banks) and the moneylenders (who used to charge usurious rates of interest).
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The beginning of the last decade was very challenging for NBFC as they had to starve off issues such as high cost of funds, low asset profile, intense competition, positioning difficulties, slow economic and industrial growth and a high degree of NPAs. However with time NBFC s were able to rectify much of these issues before the credit crisis of 2008 stuck sending them back into the doldrums. The largely institutionally funded NBFC industry struggled in an era of where credit confidence was ebbing away. Loss of employment, deterioration in asset quality and lack of liquidity were some of the standout characteristics of NBFCs during that phase. The RBI came to the rescue of the NBFCs by providing a range of measures such as opening up a special repo window under the Liquidity Adjustment Facility, creation of an SPV for liquidity support, deffering higher CAR norms for NBFCs and reducing risk weights on banks exposure to NBFCs. NBFCs with a strong parentage such as Mahindra Finance and Shriram Transport Finance Company were able to cope and rebound quicker than most others.

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Nonetheless the financial crisis from 2008-2010 caused a significant dent to the NBFC industry Since the NBFC business is essentially an institutional funded business, during the post-Lehmann crisis, credit disappeared off the table, as the purse strings were tightened and confidence evaporated. With money becoming scarce it began to affect NBFCs from both the asset and liability sides. The dearth of liquidity and credit also resulted in a loss of confidence in the financial system with the banks unwilling to give out credit. Not just banks, sourcing from mutual funds too became a no-show as the mutual fund industry saw widespread redemption pressures with investors opting for investment in safer havens or just holding plain cash. With the NBFCs key credit lines being asphyxiated, it caused a severe dearth of liquidity. Their problems were further compounded at the other end, with the dissipation in liquidity, confidence and demand, resulting in lower income available with the borrowers, thereby stunting their ability to pay off the loans taken during the preLehmann phase. Loss of employment due to cost cutting measures was another factor that contributed to the inability to pay off loans. This consequently resulted in large scale defaults and an increase in the Non Performing Assets (NPAs) of the NBFCs. Another problem that NBFCs faced was that more than half of their borrowings had a maturity period of less than a year while their loans had tenures of more than three years. This asset liability mismatch caused severe strains on their financials. NBFCs that had provided a high degree of unsecured loans (personal loans, unsecured SME loans), came under particular strain during this period. However picking up on the woes of the NBFCs and realizing their importance to the financial system as a whole, the RBI (Reserve Bank of India) came up with a slew of measures to boost up the NBFC industry. Banks were permitted to avail the liquidity support under the LAF (Liquidity Adjustment Facility) in order to meet the funding needs of the NBFCs, a special repo window under the Liquidity Adjustment Facility (LAF) was provided for the NBFCs, an existing Special Purpose Vehicle (SPV) was used as a platform to provide liquidity support to NBFCs, non-deposit taking NBFCs (NBFC-ND-SI) were allowed to raise short-term foreign currency borrowings, the risk

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weights on banks exposures to claims on NBFCs-ND-SI were reduced from 150% to 100%, and higher CAR (Capital Adequacy Ratio) norms for NBFCs-ND-SI were deferred by a year. OUTLOOK FOR NBFCs While the Indian NBFCs will continue to play an important role in financial intermediation and the development of the country, the sector is likely to face pressures through diminishing competitive advantages (weaker barriers to entry) and increasing regulatory costs and constraints. Going forward one is likely to see a greater influx of banking players within the NBFC territories and unless the NBFC players can diversify their product offerings and tap newer markets their competitive advantages will diminish. The RBI is looking to bridge the regulatory gap between banks and NBFCs and non deposit taking NBFCs and deposit taking NBFCs and this increasing cost of regulation will affect profitability and impose constraints on the business model of NBFCs. Aided by those measures and a general pickup in credit and confidence, the fortunes of the NBFC industry began to change with time. Companies with a strong parentage (M&M Finance, Reliance Capital, Shriram Transport Finance) were better positioned to deal with the crisis as they were able to raise further equity and also implemented a re-aligning of their business models in order to preserve their stability. The improvement of confidence in the credit system also saw the asset liability mismatch reducing as banks were willing to lend to NBFCs for a greater time period as opposed to just a maximum time frame of one year. Asset quality too improved with more prudent credit norms, greater provisioning and the reduction in disbursement of unsecured loans. Outlook for NBFCs The Indian NBFC sector plays a very important role in financial intermediation in the country, accounting for around 9-10% of the total financial assets in the system and their fundamental importance to the countrys development is set to continue. However going forward the situation is likely to be a lot more challenging as the NBFC sector seeks to grapple with the twin issues of diminishing competitive advantages (weaker barriers to entry) and greater regulatory pressures. NBFCs have enjoyed tremendous competitive advantages relative to their banking peers for over a decade now (and perhaps even longer), and some of the integral reasons for this occurrence was because they were willing to put their money where their mouth was and seek to finance segments that the traditional banks were wary off. While the banks struggled to understand these risky markets which were predominantly based in rural areas and involved a target market that functioned on variable sources of income and lacked any banking habits, the NBFC players took the plunge and sought to develop their expertise in these segments. Despite facing initial struggles, the NBFC
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RECENT AND POTENTIAL REGULATORY REQUIREMENTS FOR

NBFCs NBFCs to maintain an additional provision of 0.25% on standard assets at all times (as this will serve as a financial buffer during any particular crisis). CAR (Capital Adequacy Ratio) for both deposit taking and non-deposit taking NBFCs on par at 15% (Earlier non deposit taking NBFCs had to maintain a CAR of 15% while their deposit taking counterparts had to maintain a lower CAR of 12%). The RBI has also expressed concerns that the banks have been extending more than necessary loans to the NBFC sector (close to 50%) and are seeking to limit this as these funds provided to the NBFCs tend to reach the capital market and the real estate sector (sectors which the banks are supposed to have limited exposure). There has been talk about increasing the risk weights on loans provided to NBFCs and the RBI has already removed the priority sector lending status of providing funds to NBFCs. One of the most challenging regulations likely to be imposed is the recognition of NPAs on a 90 day basis rather than a 180 day basis. Previously only banks were required to recognize NPAs on a 90 day basis.

players have, with time, developed a solid understanding of their market and this have been able to realign and adjust their business models to cater to the market. With time, these NBFCs have also been able to develop niche characteristics and thereby solid competitive advantages relative to the banking class. However it now seems evident that some of these competitive advantages might be ebbing away. While the NBFCs laid the foundations for an institutional understanding of the traditionally unbanked markets such as the rural financing market, the 2 nd hand vehicle markets, the gold loan market, etc. their banking counterparts (who are now feeling considerably reassured with the success of organized participation in the market) have also realized that they can leverage on these foundations and are hence better positioned to break the rather strong barriers to entry. Thus going forward one is likely to see a greater influx of banking players within the NBFC territories and unless the NBFC players can diversify their product offerings and tap newer markets their competitive advantages will diminish. Another obvious trend that seems to have taken shape is the greater regulatory restrictions that are likely to be imposed on the RBI on the NBFC sector. In the last fiscal the Usha Thorat Committee was set up to look into the workings of the NBFC sector and seek to bridge the regulatory gap between banks and NBFCs and Non Deposit taking NBFCs and Deposit taking NBFCs. The non deposit taking NBFC s are the best placed as they are not required to maintain CRR (Cash Reserve Ratio) and SLR (Statutory Liquidity Ratio) and this has consequently enabled them to enjoy better yields and spreads. While it seems unlikely that non deposit taking NBFCs will have to start maintaining CRR and SLR, various other measures are poised to reduce the laxities that both deposit taking and non deposit taking NBFCs enjoy. This increasing cost of regulation is something that will challenge the profitability of NBFCs in addition to imposing constraints on their business models.

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GOLD LOAN SECTOR

The gold loan stock in India from FY02-FY10 has grown at 35-40% CAGR and the World Gold Council believes going forward the rate coule be at 30%. India is estimated to possess 10% of the total gold stock in the world at 18000- 20000 tonnes. The opportunity for gold loan players lies in the fact that only 10% of this gold stock has been pledged as gold and only 1-2% is captured by the organized segment. Greater professionalism, standardization and the ensuing goodwill and trust can help channel the gold stock to the broader gold loan segment with particular reference to the organized segment. There has been a radical shift in the perception of gold loans and today it is even being used as a bridge loan or loan of convenience. The organized gold loan NBFC segment is better positioned than their organized banking counterparts and the broader unorganized segment as they have a standardized gold loan process, an abundance of gold appraisers, charge optimal rates that are lower than the rates charged by the unorganized segment and possess a strong sense of expediency in the disbursement of loans relative to the banks.

GOLD LOAN SECTOR

Gold- Indias favourite drug The Indian gold market is a market that has grown at an impressive pace and is still currently brimming with opportunities. While since FY02 till FY10 the gold stock in India is estimated to have grown at a CAGR (Compounded Annual Growth Rate) of 3540% (It is estimated that in FY11 alone the country imported 9001000 tonnes of gold) there is every reason to believe that these rates can be sustained or even bettered going forward. The World Gold Council believes that gold demand in the country will continue to grow at 30% in real terms driven by urbanization, rapid GDP growth, burgeoning middle class incomes and a sustained and potentially rising savings rate of 35-40%. Gold loan market- Opportunities galore for the organized segment The reason for the optimism of the Indian gold loan market is essentially founded on the location of the gold loan market itselfIndia- which has an exceptionally strong association with the metal. The country is estimated to be the largest importer of gold and currently owns 10% of the total gold stock in the world at 18000-20000 tonnes. While this mammoth figure only highlights the scope of the gold loan market, the opportunity lies in the fact that only 10% of the gold loan stock in the country has come into the gold loan market. The remaining 90% still remains dormant and herein lies the opportunity for gold loan players. What makes things particularly interesting is that while 10% of the stock has been captured by the total gold loan players only a meagre 1-2 % is estimated to have been captured by the organized players, thereby offering plenty of scope for the organized listed players to gain market share. Customers perception of gold loans is improving due to organized presence While the potential size and the scope of the gold loan market are very admirable, that alone is not enough. There has to be an

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MAJOR ORGANIZED PLAYERS GOLD LOAN COMPANY MARKET SHARE

undercurrent of strong demand to lend credence to the scope and even on this count there is much to be optimistic. In fact there has been a radical shift in the perception of gold loans by the average Indian. Earlier while pledging gold for loans was frowned upon and was largely looked upon as a last resort, these days gold loans are being taken even for the most elementary reason (or as bridge loans), such that they have come to be known in common parlance as the loan of convenience. Strong consumerism levels has only contributed to the boom of gold loans. In addition to that while initially the gold loans were only taken by the rural class, these days a broader class of people encompassing office goers in metros and semi urban places, the elderly and the youth have all embraced this product. One only need to look at the whopping gold loan growth rates seen by established players such as Muthoot Finance and Manappuram Finance. From FY07-FY11, aggregate gold loans for Muthoot Finance and Manappuram Finance have grown at CAGRs of 70% and 197% respectively. HDFC Bank which only stepped into the business just 3-4 years before has seen tremendous momentum and actually saw their gold loan portfolio double in the last fiscal. Organized gold loan NBFCs are better positioned than banks and the unorganized sector The gold loan players are broadly divided into the unorganized segment (pawn brokers, fund brokers, money lenders), the organized gold NBFC players and organized banks. It is estimated that 70% of the gold loan market is unorganized with only 30% accounting for the organized segment. The greater influx of the organized sector is responsible for bringing a degree of standardization to the gold loan market and this has helped stoke demand. Of these three segments, the NBFC gold loan players are better placed than the other two. While the unorganized segment charge usurious rates of interest and undervalue the gold in the name of impurity, banks lack a sense of expediency in the disbursal of loans and lack ample gold appraisers. The NBFC gold players recognized these flaws in their competitors and were able to build a suitable business model that eluded these flaws.
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Muthoot Finance Manappuram Finance Indian Bank Muthoot Fincorp Federal Bank South Indian Bank SBT Andhra Bank IOB

FY09 13.40% 4.90% 13.20% 4.80% 4.30% 6.10% 6.40% 3.60% 12.60%

FY10 19.50% 6.80% 10.40% 5.90% 2.30% 6.30% 5.10% 3.70% 13.90%

Source: IMACS Gold Loan Industry Report 2010

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HISTORICAL FINANCIAL HIGHLIGHTS From FY07-11 the balance sheet of MFL has grown at a CAGR of 70% driven by an 82% CAGR in the gold loan portfolio. YTD gold loan portolio growth has come in at 44%. MFLs average LTV (Loan to Value ratio) is around 70%. Asset quality if MFL is quite healthy with Gross NPAs averaging 0.3% to 0.5% while Net NPAs average 0.2% to 0.4%. MFL generally maintains a PCR of 14-15% on its Gross NPAs. MFLs main source of borrowing comes from bank loans which account for 44% of the total liability mix and Muthoot Gold Bonds (privately placed secured NCDs) which accounts for 27% of the total liability mix. Return ratios are very impressive with ROAs of 4.85.1% and ROEs of 48% -51%. MFL has a deliberate strategy of keeping yields on loans below the industry average in order to maintain market share. Net Interest spread for the last two years has averaged 10-11%.

FINANCIALS
HISTORICAL FINANCIALS
Balance sheet, book value and loan book While the gold loan market has always had a strong undercurrent of demand, it is only in the last 5-10 years, that the business has come into prominence buoyed by positive perception changes and publicity, and this has of course translated into intermittent demand for gold loans which in turn has resulted in the robust expansion of the balance sheets of these gold loan players. MFL being the market leader is no exception to this trend and its historical 5 year balance sheet numbers make for some very pleasant reading. From FY07-FY11 the balance sheet of the company has grown at a CAGR of 70% from Rs. 1542 crores to Rs. 13273 crores. This robust balance sheet growth has obviously been driven by a resplendent gold loan portfolio which has grown from Rs. 1420 crores to Rs. 15728 crores at a whopping 82%. Whats of particular relevance is that these gold loan rates have been consistently good in the last five years and havent seen any adverse drop even during the economic crisis of FY08-FY09. In FY08 and FY09 gold loan growth came in at 53%yoy and 51%yoy respectively. The impressive loan growth has continued even in this fiscal- a fiscal where one is seeing an economic slump and where banks are struggling to expand their loan book- with MFLs gold loan YTD (year to date) coming in at 44% (till Dec-11) and a 66% growth rate on a yoy basis resulting in a Rs.22694 loan book figure.

Source: MFL, Hedge Research

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Quality of loans

MFL's ASSET QUALITY (In crores) Dec-11 Sep-11 Jun-11 Mar-11 Gross NPA 130 123 55 41 Provisions 18 17 7 6 Net NPA 112 106 48 35 Gross NPA % 0.57% 0.59% 0.31% 0.30% Net NPA % 0.49% 0.51% 0.26% 0.25%
Source: MFL, Hedge Research

MFLs NPA CLASSIFICATION - MFLs NPA classification is different from banks. - MFLs loans have a time period of 12 months while they are usually repaid within 3-9 months. If the loan is still not repaid within 18 months it is classified as NPA.

Historically MFL has been able to maintain exceptional levels of asset quality and this is largely down to the business model of gold loan companies. MFL on an average disseminates only 70% of the value of gold loan pledged (Loan to Value ratio) with the rest being kept as margin. Besides due to the strong sentimentalism associated with the pledged gold, default rates are very low. Another contributing factor is that the long term trajectory of gold price has largely been upward and MFL hasnt had to deal with any drastic crash in gold prices. This enables them to get on with the business without worrying too much about large-scale margin funding warning calls were the prices of gold to decline. Historically MFLs Gross NPAs have averaged around 0.3-0.5% while Net NPAs have averaged around 0.25%- 0.5%. In addition to the 0.25% provisions made on standard assets, it is also seen that MFL generally maintains an average of 14-15% provisions coverage ratio (PCR) on its Gross NPAs. Funding mix and ALM While MFL does largely enjoy a diversified pool of borrowings two important items standout- borrowings from banks and private placement of secured NCDs (Non Convertible Debentures) or otherwise also known as Muthoot Gold Bonds. Both these items account for 41% and 27% of the total liability mix. Thus the MFL management has spoken of their desire to broaden their borrowing profile and in the current fiscal one has already seen the company come out with two separate listed NCD issues in August and December. Consequently the share of listed NCDs have improved from 1.3% at the end of FY11 to 4% at the end of Q3FY12. In addition to these three sources, MFL used to actively sell a part of its loan portfolio to banks as part of a bilateral assignment (This segment currently accounts for 12%. At the end of FY11 it stood at a much higher 26%). The reason for such a drastic decline is because the RBI took away the status of PSL lending under agriculture for bank loans given to gold loan NBFCs thus increasing the cost of borrowing by 1.5- 2%.
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MFLs BORROWING PROFILE

Source: MFL, Hedge Research

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Since then banks have seemed less enthusiastic about buying the loan portfolios of NBFC companies such as MFL (though the MFL management believes that demand for gold loan buyouts by banks will come back by the month of March). MFL enjoys a favorable ALM (Asset Liability Maturity) pattern as most its loans are paid back in less than 12 months while its liabilities have an average time period of 2-3 years. CAR, Return ratios and leverage MFL enjoys good capital ratios relative to the required norm. MFLs tier 1 ratio at the end of Q3FY12 stood at 18.33% (tier 1 ratio of 13.37%) as against the required norm of 15%. Return ratios as well have been very healthy. Historically the company has generated ROAs (Return of Assets) of 4.8%-5.1% and humungous ROEs (Return on Equity) of 48%-52% generated on an average leverage of 9-10 times. Yields, cost of funds, spread and NIMs Relative to banks, MFLs yield on its loans are rather high but relative to its gold loan NBFC peers, MFLs yield on loans are relatively low and this is a deliberate strategy on the part of management to maintain or capture its market share. Thus even if its cost of funds tend to go up, the company is generally reluctant to pass it on to its customers by way of higher yields- this ensures a rather loyal customer base (It must be noted that 70-80% of the gold loan business consists of repeat sales or repeat customers). In the last two fiscals- yield on loans has stood at 19.8% and 19.6% while the cost of funds has come in at 8.9% and 8.6% respectively. Spreads are very healthy at 10.8% to 11% while the NIMs in the last two fiscals have stood at 11.1% and 10.8% respectively.

Source: MFL, Hedge Research

Source: MFL, Hedge Research

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FINANCIAL OUTLOOK
Gold loans yoy growth for FY12 and FY13 are poised to grow at 60% yoy and 45% yoy. While the management is looking to bring down ROAs from 5.1% to the 4% levels we feel ROAs could be at 4.9% for FY12 before declining to 4% levels thereafter. In addition to that leverage rates are poised to drop from the historical rates of 910 to 7-8 times thereby resulting in lower ROEs of 41% and below as opposed to historical rates of 48%53%. The management is expected to diversify its borrowing profile to include a greater share of listed NCDs and is coming up with a Rs.250 crore NCD issue in March and it will also look to reduce the proportion of sale of gold portfolio in the overall borrowing mix. Cost of funds for FY12 is forecasted to be at 11.7 % before declining to 11% thereafter. We are assuming a constant net interest spread of 11%. PAT growth for the next two years is poised to come in at 84% and 23% respectively while PAT margins are expected to drop to 20% and 18% respectively. Equity dilution may be on the cards as the company seeks to reduce the promoters stake from 80% to 75%.

FINANCIAL OUTLOOK
Balance sheet, loan growth and Return ratios While MFL has indeed grown at quite an astronomical pace in the last 5 years, we believe it would be prudent for the company to go slow in expanding its loan book and balance sheet. In fact in the last two years running the base effect has been huge but yet the company has not showed any signs of slowing down, such is the demand for the product. For FY11 and FY10 loan growth came in at 114% and 122%. So far Y-T-D (Year to date) loan growth is still strong at 44% and on a yoy basis till Deb 2011 it stands at 81%. We are assuming a 60% yoy growth in gold loans for FY12, 45% yoy till FY14 and 30% yoy growth thereafter. The equity book value of MFL is poised to grow at 128% yoy for FY12 and 38% for FY13. The management has also spoke of their target to slow down their ROAs (Return on Assets) from a historical level of 5.1% to the 4% level. We still feel that in FY13 the company will generate an ROA of 4.96% before slowing down further to the target range in the years ahead. Also historically the company has followed a leverage of 9-10 times. We believe this leverage will drop to the 7-8 times level and this will consequently bring down ROEs (Return on Equity) from the exceptionally high levels of 48-52% down to the 41% level and 31% level over the next two years. In fact in our conservative excessivereturn on book value method we have assumed declining ROEs from 41% to 29% from FY12 to FY17. Diversification of funding mix The MFL management has spoken of their desire to broaden their borrowing profile and in the current fiscal one has already seen the company come out with two separate listed NCD issues in August and December for Rs.693 crores and Rs.459 crores respectively. . Consequently the share of listed NCDs in the total borrowing mix have improved from 1.3% at the end of FY11 to 4% at the end of
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SENSITIVITY ANALYSIS

Cost of funds 9.0% 11.0% 13.0% 15.0%

Y-o-Y Gold loan growth 60% 299 296 293 290 45% 244 241 239 237 30% 199 197 196 194 15% 164 163 161 160

Q3FY12. We believe the company will continue to focus on this initiative and the management has recently confirmed their intention to come out with a new NCD issue worth Rs.250 crore within the next month or so. MFL also used to actively sell a part of its loan portfolio to banks as part of a bilateral assignment (This segment currently accounts for 12%. At the end of FY11 it stood at a much higher 26%). The reason for such a drastic decline is because the RBI took away the PSL lending under agriculture for bank loans given to gold loan NBFCs thus increasing the cost of borrowing by 1.5- 2%. We feel the company will continue to reduce its dependence on sale of loan portfolios, though the management believes that banks will renew their appetite by the end of Feb and March as they seek to meet their PSL targets. While yield on loans and cost of funds poised to increase spread expected to be constant In the current fiscal one has seen a hike in the cost of funds for MFL as it has been paying high rates of interest on its NCD issues and also it has been adversely affected by the PSL status that was taken away by the RBI for bank loans given to gold loan NBFCs. Consequently cost of funds which were around 9% at the end of FY11 have crossed the 11% mark and are likely to end the year at 11.7%. In FY13 we are assuming an average cost of funds of 11% and based on a constant net interest spread of 11% a yield on loans of 22%. PAT growth PAT growth for the next two years is forecasted to grow at 84% for FY12 and 23% for FY13. We believe PAT margins will declined from 22% in FY11 to 20% in FY12 and 18% in FY13.

Cost of funds 9% 11% 13% 15%

Net Interest Spread 7% 129 127 125 123 9% 164 162 160 158 11% 199 197 195 193 13% 235 233 231 229

Net Interest spread 7.0% 9.0% 11.0% 13.0%

Y-o-Y Gold loan growth 60% 45% 30% 15% 186 153 127 106 241 296 351 197 241 285 162 197 233 134 163 191

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FINANCIAL TABLE AND VALUATIONS

MFL's FINANCIAL TABLE

(In crores)

FY10 603.72 227.57 19.41 8.44

FY11 1265.70 494.18 41.67 3.93 DCF VALUATION

FY12E 2220.90 891.67 80 2.05

FY13E 2830.99 1092.94 109.40 1.49

NII P/BV VALUATION PAT Book value PBV

FY12E Book value Multiple PBV Target Price EPS Multiple PE Target Price 80

FY13E 109.40

Target price Margin of safety*

Rs.197 30% <Rs.152

2.4 192

2.2 241

Purchase price

To sum up23.99 8.5 204 29.40 8 235

MFLs Target price (weighted valuation of DCF, PBV and PE with DCF and PBV price targets receiving weights of 40% each with PE price target accounting for 20%) = Rs.197. MFL Buying price (Equal weights on DCF margin of safety price of Rs.152 and excess return on book value price of Rs.146) = Rs.149.
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RISKS
MFLs growth rates in the last two years are astronomically high with loan growth at more than 110% and ROEs of 51% plus. These levels are not sustainable. Besides the company has been adding 800900 branches every year and unless they can sustain solid business, some of these branches could struggle operationally. Much of MFLs business id dependent on the favourable perception of gold. Were gold prices to crash it could affect demand for gold loans and jeopardize the margin ratios of the company. There is a lot of talk about the RBI potentially taking a lot of measures to curb the rapid growth seen in gold loan companies. Regulatory measures that have been mooted include higher margin ratios and a cap on branch expansion. MFLs ability to retain its market share of 19-20% is in threat due to the recent influx of banks and NBFCs into the gold loan market. MFL places a great deal of importance on the integrity of its employees who are in a position to take advantage of their position by accepting fraudulent gold or stealing the gold. Besides unless security measures are up to the mark, the MFL branches run the risk of being burgled.

RISKS
Rapid expansion plans and pace of loan growth could haunt MFL Buoyed by the exceptionally robust demand for gold loans in the country, MFL has seen its loan book and balance sheet expand at a rapid pace. From FY07-FY11 the balance sheet has grown at a CAGR of 70% while the the gold loan portfolio has grown at a CAGR of 82%. In the last two years (FY10 and FY11) this pace of growth has been even more profound with the loan growth coming in at whopping 122% Yoy and 114% yoy respectively. YTD loan growth stands at 45% while 81% on a yoy basis at the end of Dec-11. In keeping with the astronomical loan growth levels there has been a rapid expansion in the number of branches. For the last two years alone the company has added an average of 800-900 branches in a year (in the month of January 2012 alone the company has added 50 branches). While there is a fundamental logic to this rapid expansion, in that there is an innate demand for the product, we feel MFL would do well to slow down its pace of growth and hence employ a degree of prudence, lest they face the curse of having growing too soon. These strong expansion rates have resulted in exceptionally high ROEs (Return on Equity) ratios of 51% plus. We dont think these numbers are sustainable. Significant correction in the price of gold could adversely affect MFLs business model On some level, there is a degree of trepidation as ultimately MFLs mass expansion of its books and offices are all tied down to peoples fascination for the gold metal and were that to fade in the future or if, due to economic factors, the value of gold were to diminish, one could see a significant correction in the price of gold, thereby stunting demand of gold loans even as MFLs risk management practices get severely tested (as Loan to Value ratios will have to be substantially adjusted).

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Threat of greater RBI regulation There have been rumours in the media that the RBI is concerned with the pace of growth exhibited by the gold loan NBFCs and are hence seeking to stunt their growth by placing restrictions with regard to the Loan to value ratios (margin) and restricting the pace of growth in the number of branches added (Unlike banks, NBFCs dont need the RBIs approval for setting up new branches). Potentially new regulations of this sort could inconvenience MFL and jeopardize the operations of MFL. Increasing competition While previously there was a dearth of organized institutional participation in the gold loan segment there seems to have been a change in the mindset of these players in the last few years. Over the last three years a number of banking entities and a few other NBFC players have announced their entry into the gold loan business. While they lack the infrastructure and goodwill of core gold NBFC players there is no doubt that in a new few years time this segment will become an intensely competitive arena and MFLs quest to maintain its market share of 19-20% could prove to be very challenging. Considerable dependence on the integrity of employees and top notch security measures An important facet of MFLs success is down to integrity of its employees and the due diligence conducted in their recruitment and training. If due diligence practices are not up to the mark in certain branches MFL could suffer as they have access to the gold and can also give out loans by accepting fraudulent gold. In addition to that if security measures are not upto the mark, MFL branches run the risk of being burgled easily.

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INVESTMENT RATIONALE - The gold loan market in India has a

lot of prospects due to the favourable impression that is being generated. Besides it is estimated that only 10% of the stock in the country has come into the gold loan market in India thereby offering plenty of scope for the gold loan players to strive to extend the figure beyond 10%. - MFL is an ideal proxy on the gold loan market as has over seven decades of experience, is the market leader by gold AUM (market share of 19.5%) and has a branch network (3480 branches) that is becoming of large PSU banks. - MFL deliberately keeps yields below market average in order to ensure customer loyalty. Besides it is generally quite flexible in extending the repayment period of the loan and will resists from selling the pledged security after 18 months unless it is highly warranted. - MFL has diversified its product portfolio to include items such as loan against gold ETF, loan against NCD, loan against jewellery, etc. Geographical dependence on Southern areas has come down from 85% in FY08 to 64% in Dec-11. - MFLs historical financials are very impressive with strong growth rates, good asset quality and exceptional return ratios.

INVESTMENT RATIONALE
Resplendent Gold Loan market The gold loan market in India has been booming for a while now as the price of gold continues its upward trajectory and peoples perception of gold loan continues to change for the better. Earlier while gold loans were largely limited to the rural areas and were generally taken as the loan of last resort. However with time, even the semi urban and middle class segments of society have realized the benefits of the gold loan which are also popularly known as the loan of convenience. These days gold loans are also being taken as bridge loans. Going forward there is a huge opportunity for the gold loan market. While the current gold loan stock in the country is estimated to be 18000-20000 tonnes (10% of the worlds gold stock) only 10% of that figure has found its way into the gold loan market (with the organized players only garnering 1% of that figure). Greater word-ofmouth, perception changes and the increasing share of the organized segment in the total gold loan market can help bring the idle old gold stock to the gold loan market. MFL enjoys considerable experience and is the market leader MFL is the consummate proxy on the rising gold loan market. The company has been involved in the gold loan business for over seven decades and has developed a degree of standardization to its practices. It runs four staff training institutes across the country and has a deep pool of qualified and specialized gold loan personnel. In addition to that it is the biggest player in the gold loan market with a gold AUM (Assets Under Management) figure of Rs. 22694 crores (market share of 19.5%) and an admirable branch network of 3480 branches that is becoming of some of the largest PSU banks. MFL employs deep customer retention practices and enjoys tremendous goodwill MFL undertakes a number of measures to build healthy relationships with its clients. By way of strategy MFLs yield on loans are generally lower than the industry average as MFL does not want to burden the
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customer and will only pass on rates if it is highly imperative. This ensures that MFL is well positioned to maintain its market share. In addition to that, even though loans are technically classified as NPA after 18 months the company refrains from selling the gold pledged as security and will generally give the customer another 2 months to pay his loan back before the pledged gold is sold. The company also employs over 900 executives who are responsible for customer service alone. All these factors ensure a strong degree of engagement with the customer and ensures that brand loyalty can be maintained in an otherwise highly competitive gold loan market. Diversifying product concentration portfolio and reducing geographical

While MFLs core product is loan against gold, it has recently been broadening its loan portfolio to include other items such as loan against NCDs, loan against Gold ETFs, loan against jewellery and customized loans given to farmers. The management has spoken of their desire to position the gold loan as a lifestyle product and is looking to target the upper middle class. In addition to that the company has also got into a jv with Western Union to provide money transfer business. From a geographical perspective as well, the company is looking to reduce its dependence on the Southern territories by growin in the Nortern and Western markets and once has seen the companys exposure to Southern regions coming down from 85% in FY08 to 64% at the end of December 2011. Impressive historical financials MFLs historical financials are very impressive. From FY07-FY11 its loan book, book value, NII and profits have grown at CAGRs of 82%, 70%,79% and 86% respectively. NPA rations are very negiligble with Gross NPAs of 0.3-0.57% and Net NPAs of 0.25-0.5%. Asset Liability Match ( ALM) positioned are very favourable with loans having a standard period of 12 months (loans are usually paid off in 3-9 months) while the maturity of borrowings averaging around 2-3 years. Return ratios as well are top class with ROEs of 51% plus and ROAs of 4.8-5.1%.

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Financial Highlights-Standalone- [INR-Crore]

DESCRIPTION Gross Sales Total Income Total Expenditure PBIDT PBT PAT Cash Profit Equity Paid Up Reserves and Surplus Net Worth Total Debt Capital Employed Application of Funds Gross Block Investments Cash and Bank balance Net Current Assets Total Current Liabilities Total Assets Mar-11 Mar-10 Mar-09 Mar-08 Mar-07 Inc / Exp Performance 2298.34 1077.45 606.24 357.94 226.37 2315.87 1089.38 620.40 368.64 233.97 496.77 249.91 145.64 81.90 60.02 1819.10 839.47 474.76 286.74 173.95 761.21 345.55 148.17 96.98 66.96 494.18 227.57 97.72 63.60 43.98 512.14 242.46 107.60 71.01 51.08 Sources of Funds 320.21 301.00 49.00 5.00 5.00 1014.20 283.55 322.17 218.45 154.29 1334.19 584.19 362.39 214.20 159.20 11938.59 5280.52 3165.59 1915.31 1382.65 13272.78 5864.72 3527.98 2129.50 1541.86 246.33 169.11 7.50 7.50 1375.49 575.99 13033.66 5706.42 690.97 575.42 13273.00 5865.07 Cash Flow -6029.75 2385.64 -84.50 -35.83 6913.75 2114.93 7004.57 2843.78 Key Ratios 8.95 9.04 19.86 10.92 18.82 17.56 51.52 48.08 21.50 21.12 Market Cues 15.43 7.56 10563.09 4704.53 0.00 0.00 148.27 121.53 64.64 7.53 5.53 24.22 882.53 258.04 56.32 3394.93 2018.36 1459.14 233.00 161.53 67.35 3536.76 2138.75 1541.95 Mar-06 143.21 148.06 38.52 109.54 41.34 27.13 30.51 4.00 86.44 90.43 805.88 896.31 58.23 12.29 36.93 835.76 44.21 896.31

Cash Flow from Operations Cash Flow from Investing activities Cash Flow from Finance activities Free Cash flow Debt to Equity(x) Current Ratio(x) ROCE(%) RONW(%) PATM(%) Adjusted EPS Enterprise Value Dividend Yield %

-648.54 -27.25 1300.29 829.54 8.74 15.57 16.43 33.90 16.12

-268.92 -62.02 532.65 346.96 8.94 13.50 15.22 34.06 17.77

-553.56 -28.83 601.78 648.04 8.68 22.66 13.69 35.23 19.43

-70.94 -35.46 123.92 109.91 8.91 19.90 0.00 0.00 18.94 1.38 768.95 0.00

3.25 2.59 1.79 2283.06 1657.27 1326.33 0.00 0.00 0.00

Source: Ace Equity

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Financial Ratios
DESCRIPTION Earnings Per Share (Rs) Adjusted EPS (Rs.) CEPS(Rs) DPS(Rs) Book Value (Rs) Adjusted Book Value (Rs) Tax Rate(%) Dividend Pay Out Ratio(%) PBIDTM (%) EBITM (%) Pre Tax Margin(%) PATM (%) CPM(%) ROA (%) ROE (%) ROCE (%) Net Sales Growth(%) Core EBITDA Growth(%) EBIT Growth(%) PAT Growth(%) EPS Growth(%) Total Debt/Equity(x) Current Ratio(x) Quick Ratio(x) Interest Cover(x) Mar-11 15.43 15.43 15.99 0.00 41.67 41.67 35.08 0.00 79.15 78.37 33.12 21.50 22.28 5.16 51.52 18.82 113.31 116.70 118.43 117.15 104.12 8.95 19.86 19.86 1.73 Mar-10 7.56 7.56 8.06 0.00 19.41 19.41 34.14 0.00 77.91 76.53 32.07 21.12 22.50 4.84 48.08 17.56 77.73 76.82 77.37 132.88 -62.09 9.04 10.92 10.92 1.72 Mar-09 19.94 3.25 0.58 0.00 73.96 12.04 34.05 0.00 78.31 76.68 24.44 16.12 17.75 3.44 33.90 16.43 69.37 65.57 66.43 53.66 -84.32 8.74 15.57 15.57 1.47 Mar-08 127.19 2.59 0.06 0.00 428.40 8.72 34.42 0.00 80.11 78.04 27.09 17.77 19.84 3.46 34.06 15.22 58.12 64.84 67.41 44.61 44.61 8.94 13.50 13.50 1.53 Mar-07 87.96 1.79 0.04 0.00 318.41 6.48 34.32 0.00 76.84 73.71 29.58 19.43 22.56 3.61 35.23 13.69 58.07 58.80 57.18 62.12 29.60 8.68 22.66 22.66 1.67 8.91 19.90 19.90 1.64 0.00 0.00 Mar-06 67.87 1.38 0.03 0.00 226.25 4.60 34.37 0.00 76.49 74.13 28.86 18.94 21.31 Operational & Financial Ratios

Margin Ratios

Performance Ratios

Growth RatioS

Financial Stability Ratios

Source: Ace Equity

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FINANCIALS GRAPH AND PEER GROUP COMPARISON

MFL's 4 YEAR PERFORMANCE

3000.00 2500.00 2000.00 1500.00 1000.00 500.00 0.00 FY10 NII FY11 PAT Book value FY12E PBV FY13E

Source: MFL, Hedge Research

Peer Group Comparison (Standalone) (In crores) Book Company Name Net Sales PAT value PAT % MAHINDRA FINANCE 1973.93 463.11 262.28 13.39% SHRIRAM TRANSPORT 5230.15 1229.88 243.66 17.53% MUTHOOT FINANCE 2298.34 494.18 70.28 18.82% MANAPPURAM FIN. 1165.42 282.66 25.78 15.08% SHRIRAM CITY UNION 5230.15 1229.88 286.57 23.52%

ROE% 21.97% 28.40% 51.50% 22.31% 28.40%

Year End 201103 201103 201103 201103 201103

Source: Ace Equity

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ANALYST NOTES AND COMPANY NEWS

15-2-11 Aggressive investors are advised to buy the MFL stock at <Rs.149 levels as this is our weighted average buying range (50% weight on excess return on book value price and 50% weight on the 30% margin of safety DCF buying price) with a price target of Rs.197 (as this is our weighted average price target with 40% weights on both the DCF and PBV targets and a 20% weight on our PE target).

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Researched and prepared by: Amar Chandramohan Sr. Fundamental Analyst Email: amar.c@hedgeequities.com Ph: (0484) 3040400, 3040419 In collaboration with Muhammed Aslam E Fundamental Analyst Email: muhammedaslam.e@hedgeequities.com Krishnan Thampi K Head of Research and Strategies Email: krishnanthampi.k@hedgeequities.com

HEDGE RESEARCH & STRATEGIES GROUP Head of Research: Krishnan Thampi K Sr. Fundamental Analyst: Amar Chandramohan Fundamental Analyst: Muhammed Aslam E Economic and Commodity Analyst: Vignesh SBK Sr. Equity Technical Analyst: Renjith K Sr. Equity Technical Analyst: Kesavamoorthy B Futures & Options Analyst: Yunus Ismail Access all our research reports online at www.HedgeEquities.com

DIRECT ALL RESEARCH QUERIES TO:

Hedge Research & Strategies Group Hedge Equities Ltd 12 Floor, -Mini Muthoot Tech Towers Kaloor, Kochi 682017, Kerala, India Phone: (0484) 3040400 Email: research@HedgeEquities.com

Disclaimer The information contained in our report does not constitute an offer to sell securities or the solicitation of an offer to buy, any security. This report is prepared for private circulation only. The information in our report is not intended as financial advice. Hedge Equities Ltd does not undertake the responsibility for any investment decision taken by the readers based on this report. Moreover, none of the information in the research report is intended as a prospectus within the meaning of the applicable laws of any jurisdiction. The information and opinions contained in our research reports have been compiled or arrived at from sources believed to be reliable in good faith, but no representation or warranty, express or implied, is made by Hedge Equities Ltd, to their accuracy. Moreover, you should be aware of the fact that investments in securities or other financial instruments involve risks. Past results do not guarantee future performance.

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