Gold Finance Sector

28 November 2022 Gold Finance NBFCs
Contents
Story in charts .................................................................................................................................................................... 5
India biggest market for gold loan financiers....................................................................................................................... 6
Huge untapped potential; organised penetration at mere ~7%............................................................................................ 7
Banks are dominant players in the organised segment ........................................................................................................ 8
NBFCs lose share to banks, despite growth in gold loan market........................................................................................... 9
Short-term pain but long-term story intact for gold-loan NBFCs .........................................................................................10
Banks’ market expansion focus to benefit NBFCs long term ...............................................................................................10
Stable regulation and firm domestic gold prices spell healthy growth for NBFCs in the long term ........................................11
Key conclusions of the 2013 RBI report on gold-loan NBFCs................................................................................................12
Valuations and view ..........................................................................................................................................................13
Companies Section ............................................................................................................................................................14
Companies section
Muthoot Finance ................................................................................................................................................................ 15
Manappuram Finance......................................................................................................................................................... 28
IIFL Finance ........................................................................................................................................................................ 46
Systematix Research is also available on Bloomberg SSSL <Go>, Thomson & Reuters Systematix Shares and Stocks (India) Limited 2
28 November 2022
Systematix
Gold Finance NBFCs
Institutional Equities
Gold Finance NBFCs 28 November 2022
Disruption inevitable, but long term story intact

SECTOR REPORT Indian households hold a mammoth 14% share of global gold at 27,000 tonnes, only ~20%
of which is pledged. The unorganised sector holds a grip on the chunk 65%, with
organised players like banks and NBFCs toying with the remaining 35% share. In value
Industry NBFCs terms, India’s share translates into Rs 130trn (Rs85trn Jewellery share), which at 75% LTV,
presents a potential Rs 63trn market opportunity; currently, the organised market
operates at mere ~ Rs 6trn. Specialised gold finance NBFCs like Muthoot Finance (MUTH,
BUY) and Manappuram Finance (MGFL, BUY) are the undisputed leaders in India’s gold
BSE Sensex v/s Nifty Financial Services
financing business since last ~15 years, but the two now find themselves in the eye of a
150
storm, as banks/ fintechs and other NBFCs like IIFL Finance (IIFL, BUY) have turned
125
aggressive in the space. What attracts this large spectrum of organised financial players
100
75
into the arena is safety from an asset quality perspective and the huge untapped
50 potential. Their sudden attention to gold financing could disrupt the market near term,
25 especially for the two specialised players. But over the next 5 years, we estimate the total
0 pledge ratio to surge to 25%, with the share of organised rising to 45%, driving 13% CAGR
Dec-21
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in the gold loan market. MUTH’s and MGFL’s valuations have turned attractive post 40-
Sensex Nifty Financial Services
50% correction in their stock prices. We initiate coverage on MGFL, MUTH and IIFL with a
BUY rating, as their valuations are favourable, product pricing is stabilising (they have
Source: Bloomberg, Systematix Institutional Research
discontinued teaser rate schemes) and growth is expected to revive. Key risks stem from
sharp correction in gold prices and/or competition intensifying.
India biggest market for gold-loan financiers: India is one of the largest gold loan
Initiating Coverage
markets in the world, with Indian households owning more than 27,000 metric tonnes of
Mkt Cap TP Upside
Company
(Rs bn) (Rs) (%)
Rating gold (~14 share). This translates into potential Rs 65trn market opportunity at current
gold prices vs mere ~Rs 6trn tapped by the organised market. This spells huge potential
MUTH 437 1,500 38 BUY for focused/ large gold financiers like MUTH, MGFL and IIFL. While heightened
competition from banks/ fintechs may continue to impact the growth for gold loan NBFCs
MGFL 96 155 36 BUY
in the near term, we believe there is ample space and opportunity for all players
IIFL Finance 183 775 61 BUY including banks, NBFCs and fintechs to co-exist and expand over the long term.
Source: Systematix Institutional Research Huge untapped potential: India’s organised gold loan market is grossly underpenetrated
at mere ~7%. Considering the large gold holdings with Indian households, we see
significant scope for organised gold-loan financiers, as even 1% additional penetration
could drive ~15% growth for the entire organised segment. Moreover, with banks and
NBFCs increasingly focusing on gold loans, the shift to the organised segment could
outpace past trends. We expect the organised segment to touch 45% share over the next
5 years from 35% currently, contributing additional 5% CAGR to the organised gold loan
industry growth. A combination of the two factors (at current gold prices) could drive
13% CAGR in the gold loan industry over the next five years.
Short-term pain for gold loan NBFCs; long term growth story intact: After almost a year of
intense price war, sanity on pricing is returning, as most NBFC players have discontinued
their teaser rate (<10% yield) schemes. Even though NBFCs run the risk of further losing
their high-ticket customers to banks and fintechs, primarily due to interest differential, we
expect growth in new customer addition (small-ticket customers) to offset the losses
caused by big-ticket customers in the long run, thanks to the huge untapped market.
Valuation and view: Emerging trends in the gold loan NBFC business point to competition
Pradeep Agrawal intensifying and likely translating into relatively lower return ratios and growth. But
pradeepagrawal@systematixgroup.in significant under penetration of the formal sector, and increased focus on low-ticket
+91 22 6704 8024 customers, should restore the growth of gold-loan finance NBFCs to normalised levels by
FY24/25, in our view, though their RoE profile could stabilise at 17-20%. We initiate
Hena Vora
henavora@systematixgroup.in coverage on MGFL, MUTH and IIFL, with a BUY rating, considering their valuations are
+91 22 6704 8045 favorable, product pricing behaviour is improving, and growth is likely reviving.
Investors are advised to refer disclosures made at the end of the research report.
Exhibit 1: Peer Comparison - Consolidated
MCAP RoA (%) RoE (%) BV (Rs) P/BV (x)
CMP Reco TP (Rs)
(Rs bn) FY23E FY24E FY25E FY23E FY24E FY25E FY23E FY24E FY25E FY23E FY24E FY25E
Muthoot Finance 1,089 BUY 1,500 431 4.7 5.1 5.5 18.1 18.2 18.9 551 637 741 2.0 1.7 1.5
Manappuram 114 BUY 155 95 4.6 4.5 4.6 18.1 17.3 17.5 115 133 154 1.0 0.9 0.7
IIFL Finance 481 BUY 775 180 3.3 3.6 3.8 20.8 20.6 21.1 224 271 328 2.1 1.8 1.4
Source: Company, Systematix Institutional Research
Exhibit 2: MUTH RoA/ RoE Exhibit 3: …MUTH P/BV band

(%) (x)
35 4
28.3 27.8
30
22.4 23.5 3
25
17.8 17.8 18.0 2
20
15 1
10 5.7 6.8 6.5 5.9 5.3 5.7
4.9
0
5
Dec-20
Dec-19
Nov-21
Nov-22
Mar-14
Mar-15
Apr-13
Feb-17
Apr-12
Feb-16
May-11
Jan-19
Jan-18
0
FY19 FY20 FY21 FY22 FY23E FY24E FY25E
RoA RoE P/B Avg Max Min +1SD
Source: RBI, Systematix Institutional Research Source: RBI, Systematix Institutional Research
Exhibit 4: MGFL RoA/ RoE Exhibit 5: …MGFL P/BV band

(%) (x)
35 4
28.5
30 26.2
22.5 3
25
16.9 18.1 17.3 17.5
20 2
15
1
10 5.1 5.9 5.7 4.6 4.5 4.6
4.1
5 0
Dec-18
Dec-19
Dec-20
Nov-21
Nov-22
Jan-17
Jan-18
Apr-10
Apr-11
Feb-15
Feb-16
May-09
Mar-12
Mar-13
Mar-14
0
ROA ROE P/B Avg Max Min +1SD
Source: Manappuram, KPMG, Systematix Institutional Research Source: KPMG, Systematix Institutional Research
Exhibit 6: IIFL RoA/ RoE Exhibit 7: IIFL P/BV band

(%) (x)
25 20.8 21.1 2
20.0 20.6
20 15.9 15.0
15 11.0 1
10
2.7 3.3 3.6 3.8
5 2.1 1.5 2.0
0
Nov-20
Nov-21
Nov-22
Jun-21
Jun-22
Dec-19
Feb-20
Jul-19
Jul-20
Apr-19
Sep-19
Apr-20
Sep-20
Feb-21
Apr-21
Sep-21
Apr-22
Sep-22
Jan-22
0
RoAA RoAE P/B Avg Max Min +1SD
Source: Company, Systematix Institutional Research Source: Company, Systematix Institutional Research
Story in charts
Exhibit 8: Gold holding growth: India outpaces global stock… Exhibit 9: …propelling India’s household share in the global market
('000 tonnes) (%) ('000 tonnes) India share in global gold holdings (%)
250 7 13.6
250 13.4 13.4 15
12.7
6
200 11.1
5 200
9.3
150 4 8.2 10
150
171
169
167
164
162
159
156
154 3
152
150
148
100
146
144
143
100
2 5
50
1 50
FY22 27
FY21 26
FY20 26
FY19 25
FY18 24
FY17 23
FY16 23
FY15 22
FY14 21
FY13 21
FY12 20
FY11 19
FY10 18
FY09 17
0 0 140 150 162 177 192 195 198

0 0
FY01 FY05 FY10 FY15 FY20 FY21 FY22
India gold holding RoW gold holdings World gold holding India share (RHS)
RoW YoY growth (RHS) India YoY growth (RHS)
Exhibit 10: Declining share of the unorganised segment… Exhibit 11: …has driven higher growth for organised players
76% 76% 75% 74% 73% 19%
73% 72% 71% 70% 20% 18% 17%
80% 68% 67% 65%
70% 14%
14%
60% 15%
11% 10%
50%
9%
40% 32% 34% 35% 10% 13% 12% 12%
25% 25% 26% 27% 28% 28% 29% 31% 11%
30% 24%
5% 9%
20% 5% 3% 8% 7%
6%
10% 2%
0% 0% 0%
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22
Organised players Unorganised players Organised players AUM growth Overall gold loan AUM growth
Exhibit 12: Gold loan AUM: Healthy pace of growth over FY20-22… Exhibit 13: …but NBFCs lost market share to banks in last 2 years
(trn) (%) 100%
7 50 23 21 20
6 43 80%
39 40
5
30 60%
4 28
3 17 20 40% 80
77 79
2 15
10
1 9 20%
0 0
FY20 FY21 FY22 0%
FY20 FY21 FY22
Bank NBFC Bank YoY (RHS)
Banks NBFCs
NBFC YoY (RHS) Overall YoY (RHS)
Exhibit 14: Rising penetration of organised players

CAGR CAGR
(%) FY20 FY22 FY27E
FY20-22 FY22-27E
India household gold (as % of Global gold) 12.9 13.6 14.1 2.7 2.2
Pledged Gold (as % of India gold holdings) 18.0 19.5 25.0 6.7 7.4
Organised share (Banks+ NBFCs) 32.0 35.0 45.0 11.6 13.0
Unorganised share (Pawn brokers) 68.0 65.0 55.0 4.4 3.9
Penetration (Organised segment) 5.8 6.8 11.3
Source: Manappuram, Systematix Institutional Research
India biggest market for gold loan financiers

India has the largest gold stock in the world, with more than 27,000 metric tonnes of
gold held by Indian households, which is ~14% of the world’s total gold stock. The
gold stock with Indian households surged at a CAGR of 3%/4% as against global stock
at 1.7%/1.7% over last 10/20 years, respectively. As a result, India’s share in global
gold stock holdings has increased to 14% from 8%/11% in 2000/2010. In value terms,
this translates into Rs 130trn worth of gold holdings at the current price, 65% of
which is in the form of jewellery. Hence, at 75% LTV the potential market
opportunity stands at Rs 63trn vs just Rs 6trn that the organised market operates at
currently.
In 2010, only ~3.5% of the entire household gold holdings in India was pledged with
organised players (banks +NBFCs), which has doubled to ~7% in FY22 (though still
lower), recording a CAGR of ~10%.
India is one of the largest gold loan markets in the world, thanks to the enormous
gold holding in its households, which spells huge potential for focused/ large gold
financiers like MUTH, MGFL and IIFL. While heightened competition from banks/
fintechs may continue to impact the growth for gold loan NBFCs in the near term, we
believe there is ample space and opportunity for all players including banks, NBFCs
and fintechs to co-exist and expand over the long term.
Exhibit 15: Gold holding growth: India outpaces global stock… Exhibit 16: …propelling India’s household share in the global
market
('000 tonnes) (%) ('000 tonnes) (%)
India share in global gold holdings
250 7 250 16
13.4 13.4 13.6
6 12.7 14
200 200 11.1
5 12
9.3
150 4 8.2 10
150
171
169
167
164
8
162
159
3
156
154
152
150
100
148
146
144
143
100 6
2
50 4
1 50
FY22 27
FY21 26
FY20 26
FY19 25
FY18 24
FY17 23
FY16 23
FY15 22
FY14 21
FY13 21
FY12 20
FY11 19
2
FY10 18
FY09 17
0 0 140 150 162 177 192 195 198

0 0
FY01 FY05 FY10 FY15 FY20 FY21 FY22
India gold holding RoW gold holdings
World gold holding India share (RHS)
RoW YoY growth (RHS) India YoY growth (RHS)
Exhibit 17: Rising penetration of organised players

CAGR CAGR
(%) FY20 FY22 FY27E
FY20-22 FY22-27E
India household gold (as % of Global gold) 12.9 13.6 14.1 2.7 2.2
Pledged Gold (as % of India gold holdings) 18.0 19.5 25.0 6.7 7.4
Organised share (Banks+ NBFCs) 32.0 35.0 45.0 11.6 13.0
Unorganised share (Pawn brokers) 68.0 65.0 55.0 4.4 3.9
Penetration (Organised segment) 5.8 6.8 11.3
Huge untapped potential; organised penetration at mere ~7%

Indian households own more than 27,000 tonnes of gold, of which, around ~5,300
tonnes is pledged. Unorganised players possess a large 65% chunk (~13% of
household gold in India) of the pledged gold market, with organised players like
banks and NBFCs retaining a smaller 35% share (7% of the household gold in India). A
decade ago, organised market share was even lower at just 24%, which has increased
rapidly since, given the increased focus on gold loans by organised gold-loan NBFCs
and banks. While the overall gold loan market (including unorganised) has seen 8%
CAGR in last 10 years, the organised market has risen a tad higher at 12% CAGR,
aided by the shift from the unorganised to the organised segment.
The demand for gold loans has picked up well in last 8-10 years due to the lower rate
of interest charged by organised players (compared to that taken by moneylenders
and pawn brokers), quick disbursement, flexible terms, and perceived safety of the
ornaments. Moreover, high rural indebtedness, ineligibility to get loans from banks,
and customers’ changing attitudes to gold loans too have contributed to the sharp
spurt in gold loans. With just 7% penetration, India’s gold loan market is grossly
underpenetrated, considering the large gold holdings with households. This presents
significant scope for growth to organised gold-loan financiers. Every 1% additional
penetration could drive about ~15% growth for the entire organised segment. We
believe with banks and NBFCs increasingly focusing on gold loans, the shift to the
organised segment should be faster than in the past. We believe it would take just 5
years for the organised market share to increase by another 10%, as against the 10
years it took for this market to achieve the last 10% gain. We estimate the organised
segment to achieve 45% share over the next 5 years from 35% currently, thereby
supporting healthy growth for the industry.
Exhibit 18: Declining share of the unorganised segment… Exhibit 19: …has driven higher growth for organised players
76% 76% 75% 74% 73% 20% 19%

80% 73% 72% 71% 18% 17%
70% 68% 18%
67% 65%
70%
16% 14% 14%
60% 14%
11% 10%
50% 12%
9% 13%
40% 34% 35% 10% 12% 12%
31% 32% 11%
25% 26% 27% 28% 28% 29% 8%
30% 24% 25% 9%
5%
6% 8% 7%
20% 3%
4% 6%
10% 2%
2%
0%
0% 0%
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22
Organised players Unorganised players Organised players AUM growth Overall gold loan AUM growth
Banks are dominant players in the organised segment

Organised gold loan finance is an estimated Rs 6trn+ industry, 80% of which is
managed by banks and 20% by NBFCs. While banks hold a larger market share,
agriculture (agri) gold loans constitute 72% of their gold loan portfolio (i.e., 56%
market share ex-agri gold loans), where yields are relatively lower. Historically, banks
have been active in agri gold loans, as it not only helps them meet their priority
sector targets, but are also considered as a safer means to meet these targets. But
agri gold loans typically offer low returns with high defaults. Even in the non-agri
gold loan segment, the organised segment is their target clientele, as they are unable
to offer the level of flexibility and rapid disbursals compared to organised NBFCs.
Moreover, banks and NBFCs operate on different dynamics – organised NBFCs focus
on customer convenience, quick disbursement, and flexibility, while banks largely
focus on lower interest rates and higher ticket sizes. While NBFCs charge higher
interest rate of 11-22%, banks charge 7-15%. Even though banks offer lesser interest
rate, small-ticket customers prefer NBFCs, as 1) the process is much faster at NBFCs
than in banks 2) there is no lock-in period for NBFCs vs 6 months for most banks.
Exhibit 20: Comparison among various market players
Parameter Gold loan NBFCs Banks Moneylenders
LTV Up to 75% Lower LTV than NBFCs Higher than 75%
Nil for small loans, nominal fees for

Processing fees Nil / Minimal Nil
big-ticket loans
Interest charges ~11% to 24% p.a ~7% to 15% p.a 25-50% p.a
Penetration High Low High
Cash/cheque (disbursals more than

Mode of disbursal Account transfer Cash
Rs 20,000 in cheque)
Working hours Open beyond banking hours Typical banking hours Open beyond banking hours
Regulated Regulated by RBI Regulated by RBI Not regulated
Fixed office place for conducting Proper branch with dedicated staff No fixed place for conducting
Proper branch
transactions for gold loans business
Customer service High – gold loan is a core focus Non-core Core focus
Documentation requirement Minimal documentation, ID proof Entire KYC compliance Minimal documentation
Monthly interest, end of tenure

Repayment Structure / Flexibility Largely on monthly interest Flexible options
lump sum, EMIs
Turnaround Time 10 minutes 1-2 hours 10 minutes

NBFCs lose share to banks, despite growth in gold loan market

Market shares of NBFCs surged rapidly from 13% in FY08 to ~28% in FY12, once they
increased focus on gold loans. However, over FY13-FY20, their market shares
stabilised at 25-35%, as banks continued to view it as a non-focus area. However,
COVID-led economic distress since 2020 has forced a captive market and sustained
the demand for gold loans, to the extent that large public sector banks like SBI/BOB/
Canara Bank began refocusing on the product and in fact, have been expanding their
gold loan books aggressively. The share of gold loans in banks’ portfolios has
increased to 5% currently from 3.3% in FY20. This has caused NBFCs’ market shares
to slide to 20% from ~23% over the last two years.
Exhibit 21: Gold loan AUM: Healthy pace of growth over FY20-22… Exhibit 22: …but NBFCs lost market share to banks in last 2 years
(trn) (%) 100%
7 50 90% 21 20
23
6 43 80%
39 40
5 70%
30 60%
4 28
50%
3 17 20 40% 77 79 80
2 15 30%
10
1 9 20%
0 0 10%
FY20 FY21 FY22 0%
Bank NBFC Bank YoY (RHS) FY20 FY21 FY22
Banks NBFCs
NBFC YoY (RHS) Overall YoY (RHS)
Short-term pain but long-term story intact for gold-loan NBFCs

The gold loan market has turned into a battlefield in last two years, where players
across the spectrum, be it banks, NBFCs or fintechs have turned aggressive and
started undercutting each other on interest rates. As banks/ fintechs got aggressive
into this space, NBFCs began offering teaser rates of 6-7%, denting their NIMs
seriously. Sanity in terms of pricing is now getting restored, almost after a year of
price war, as most NBFC players in the space have discontinued their teaser rate
schemes. Nonetheless, we believe NBFCs run the risk of further losing high-ticket
customers to banks and fintechs, due to the interest differential. However, we
expect growth in new customer addition (small-ticket customers) to offset the loss of
big-ticket customers in the long run.
Banks’ market expansion focus to benefit NBFCs long term

While the entry of banks in the gold loan segment is causing some high-value NBFC
customers to shift to banks, at the same time, increased promotions by banks is
attracting new customers to the formal sector. This could benefit all gold loan
players, including NBFCs, in our view. We expect the migration of high-ticket
customers to settle down in a quarter or two, post which gold finance NBFCs would
see their normalised growth restore FY24 onwards.
Exhibit 23: Gold loan customer segments
Credit consumption Primary

categories providers
Housing loan, CD loan,

High Auto loan, Educational Banks, NBFCs
8M (3%) loan, Personal loan

Upper mid Auto loan, Educational
61M (21%) Banks, NBFCs
loan, Personal loan,
Gold loan
Lower mid Auto loan, Educational Co-operative banks,
97M (33%) loan, Personal loan, NBFCs
Gold loan
Co-operative banks, MFIs,

Low MFI/SHG loans,
127M (43%) SHGs, Gold finance
Gold loan
companies
Number of households:
293mn
Source: KPMG, Systematix Institutional Research, Household income per annum prices by income segment -
low< Rs 2.5lakh, lower middle – Rs 2.5-Rs 5.5lakh, upper-middle Rs 5.5-Rs 27.5lakh, high >Rs 27.5lakh
Stable regulation and firm domestic gold prices spell healthy

growth for NBFCs in the long term
Gold financing companies had a phenomenal time until FY12; their balance sheets
grew exponentially with minimal regulation from the RBI during this period.
However, a sharp correction in gold prices in 2012 coupled with RBI’s introduction of
tough regulations hugely impacted their borrowing costs and balance sheet growth.
In 2011, RBI denied priority sector status to banks for loans given to gold-loan NBFCs,
which resulted in borrowing costs increasing for gold-finance NBFCs by ~2%.
Also in 2012, RBI reduced banks’ limit to lend to a single NBFC in the gold-loan
business to 7.5% from 10%. Another major blow came in Mar’12, when RBI capped
maximum LTV at 60% (later increasing it to 75%). Lower LTVs coupled with softening
gold prices significantly eroded the portfolios of MUTH and MGFL, as customers
turned to banks and the unorganised sector, where there were no LTV limits. Market
shares of specialised gold-loan NBFCs fell by 5-8% during FY12-13.
A sharp deterioration in business compelled gold-loan NBFCs to reconsider their
strategies and rework their business plans. They regained some of the lost ground by
FY15, as they clawed back around 2-3% market share. Today, with a stable regulatory
regime and domestic gold prices holding firm, these NBFCs seem poised for healthy
growth in the long run, as the gold loan market continue to expand.
Key conclusions of the 2013 RBI report on gold-loan NBFCs

Banks may expand their gold jewellery loan portfolio to increase gold monetisation
There is great scope for expanding financial inclusion in extending gold jewellery loans If banks continue to increase their gold jewellery loan portfolio,
the reliance of economically weaker sections of the society on money lenders and pawn brokers would reduce considerably. Banks could make gold
jewellery product more flexible and encourage people to avail this fully collateralised loan for all types of productive purposes. This would greatly
facilitate the monetisation of huge stocks of gold in the country.
Rapid growth of Gold loan NBFCs assets, borrowings and branch network needs to be monitored continuously
A key concern in the growth story of gold loan companies is the pace at which their asset sizes have grown in terms of volume as well as branch
network expansion. The rapid growth in their assets, borrowings and branch network needs to be viewed with circumspection, and measures to
moderate such growth to more sustainable levels are desirable.
Unbridled branch growth by large gold-loan NBFCs needs moderation
The rapid pace at which some of these NBFCs have opened branches calls for a careful look. Some of the borrowers unequivocally maintained that
many of these branches lack basic amenities and could possibly endanger the safety of the gold pledged with these NBFCs. All the branches of NBFCs
should conform to a minimum standard in terms of borrower convenience and safety of the gold pledged. There seems some justification in imposing
the need for approval for an NBFC to open new branches in a year, especially for the those that have already expanded beyond say 1,000 branches.
NBFCs who have already expanded should focus on consolidating their existing network. Unbridled growth of these NBFC branches may not be in the
overall interests of the concerned NBFC or the sector. This is because more the number of branches from where safety-related concerns spurt, less
would be the confidence of borrowers to venture to these NBFCs. RBI may take a considered view on this issue on whether prior approval of the RBI
would be made mandatory beyond 1,000 branches. Alternatively, a ceiling on the number of branches an NBFC could open in a year beyond 1,000
could be considered.
Rationalisation of interest rate structure
Majority of the complaints that have come to the notice of the Working Group against the NBFCs relate to the charging of interest more than
intimated to them at the time of loan disbursement. Even if there is a delay of few days, some NBFCs appear to be over charging the interest. As bulk
of the gold loans is small ticket and for short periods, there appears to be a strong justification for imposing an interest cap on the loans disbursed by
them. This would provide a safety net to the illiterate and the lower middle-class borrowers who are unable to defend themselves from the
overcharging of interest by the erring NBFCs. Some NBFCs who maintain that they are an alternative to pawn brokers and money lenders, at times do
resort to unethical practices in charging high interest rates. Therefore, there are sufficient grounds to rationalise the interest rate structure, including
the penalties for default in repayment. Such rationalisation may act as a potential restraint on NBFCs to use their discretion to overcharge borrowers.
In order to arrive at a reasonable pricing of loans, it may be prescribed that gold-loans NBFCs may consider adopting an interest rate linked to a bench
mark rate like SBI’s maximum advance rate. This would bring transparency, and act as a check on over charging from the vulnerable borrowers.
Alternatively, RBI could also consider imposing a cap on the interest rates to be charged on gold loans by the NBFCs.
Banking sector’s existing exposure in the form of their individual gold loans appears small, and may not presently have any
significant repercussion on the stability of the banking sector
Banking sector’s existing exposure in the form of individual gold loans appears small, and hence, any stress in the gold loan portfolio may not have any
serious repercussion on the stability of the banking sector as a whole. Even if we account for the loans given by banks to gold-loan NBFCs, the total
exposure of banks to gold loans still works out to be less than 3% of the total bank credit until end-Mar’12. However, a word of caution is that given
the striking growth in gold loans from banks in recent years, gold loans could emerge as an important constituent of banks’ total loan portfolio that
could raise systemic concerns.
Gold-loan NBFCs are doing a socially useful function, which provides a strong rationale for careful regulation of the NBFCs’ activities
The Working Group believes that gold-loan NBFCs are rendering a socially useful function through their lending operations with the low and middle-
class population, by providing them with timely financial assistance. It is true that lakhs of individuals take recourse to these gold-loan NBFCs for their
immediate financial requirements. This is an important reason for ensuring the financial health of these gold-loan NBFCs, through the strict monitoring
of their operations and regulations. If any of these gold-loan NBFCs fail, it would not only bring gloom to the promoters of these NBFCs, but also drive
the needy borrowers to scramble back at the doors of money lenders and pawn brokers to their utter disadvantage. This reason provides a strong
rationale for carefully monitoring and regulating the activities of these gold-loan NBFCs.
The recent slew of regulatory measures taken by the RBI on the functioning of gold-loan NBFCs may continue to ensure healthy
growth of the sector in the medium and long term
The Working Group recommends, with the exception of a review of the Loan to Value (LTV) ratio, the continuation of the current prudential
stipulations till the growth rate of business expansion of major gold loan NBFCs, both in terms of assets acquired and number of branches opened,
decelerate to more sustainable levels. What is a sustainable level of growth for the gold-loan NBFCs is a company-specific matter, and each gold-loan
NBFC should evaluate its financial performance, sources and uses of funds, its existing overall gearing structure and business volumes to consolidate
its operations. The Working Group believes that a review of the extant regulations would be feasible, once the operations of these NBFCs consolidate
and their rate of growth in borrowings and branch expansion moderate, besides improving their capital funds.
Valuations and view

While emerging trends in the gold loan NBFC business point to competition
intensifying, likely translating into relatively lower return ratios and growth, we
believe significant under penetration of the formal sector, and increased focus on
low-ticket customers, will likely restore growth of gold-loan finance NBFCs towards
normalised levels by FY24/25, though their RoE profiles are likely to stabile at 17-
20%. We initiate coverage on MGFL, MUTH and IIFL, with a BUY rating and target
price of Rs 155/1,500/775, respectively, considering their valuations are favorable,
growth is expected to revive and product pricing is improving.
Exhibit 24: Peer Comparison - Consolidated
MCAP RoA (%) RoE (%) BV (Rs) P/BV (x)
CMP Reco TP (Rs)
(Rs bn) FY23E FY24E FY25E FY23E FY24E FY25E FY23E FY24E FY25E FY23E FY24E FY25E
Muthoot Finance 1,089 BUY 1,500 431 4.7 5.1 5.5 18.1 18.2 18.9 551 637 741 2.0 1.7 1.5
Manappuram 114 BUY 155 95 4.6 4.5 4.6 18.1 17.3 17.5 115 133 154 1.0 0.9 0.7
IIFL Finance 481 BUY 775 180 3.3 3.6 3.8 20.8 20.6 21.1 224 271 328 2.1 1.8 1.4
COMPANIES SECTION
Systematix
Muthoot Finance 28 November 2022
Gold when beaten, shines

INITIATING COVERAGE Muthoot Finance (MUTH) is a leader in India’s gold finance segment, commanding 46%
Sector: NBFCs Rating: BUY market share among NBFCs. Even though the company has built presence in other
business segments like Microfinance, Housing, etc., its portfolio is largely skewed
CMP: Rs 1,089 Target Price: Rs 1,500
towards gold loans, with 90% share. Strong management pedigree, focus on client
Stock Info retention and longer tenure products differentiate the company from peers. With the
Sensex/Nifty 62,505/18,563 highest pan‐India network of 4,641 gold loan branches, it is best placed NBFC to grow in
Bloomberg MUTH IN
a rapidly expanding gold loan market, even as competitive pressure remains elevated.
Equity shares 820mn
Increased focus on high-yielding lower ticket-size loans has caused the pressure on
52-wk High/Low Rs 1,559/950
Face value Rs 10
yields to bottom out. We believe, rollout of additional 125 branches by 3QFY23 and
M-Cap Rs 437bn/ USD 5.3bn upward momentum in gold prices should kickstart a rebound in its AUM growth
3-m Avg volume USD 10.3mn 3QFY23 onwards, which should gain pace over FY24/25E (10% CAGR over FY24-25E),
benefiting from expansion in the gold loan market. As 75‐85% of its operating costs are
Financial Snapshot (Rs mn)
fixed, any rebound in the business would enable MUTH to optimally utilise its existing
Y/E March FY23E FY24E FY25E
NII 66,177 74,808 85,711
infrastructure, drive operational efficiency and improve profitability ratios further. We
PPP 48,205 55,585 64,715 expect its spread to recover and stabilise at ~10% over FY24-25E (9.3% currently),
PAT 35,065 40,457 47,173 boosting RoA to 5.7% by FY25E from 4.9% in FY23E. We initiate coverage on the stock
EPS (Rs) 87.4 100.8 117.5 with a BUY rating, and a target price of Rs 1,500 valuing it at 2.0x FY25E BV. Sharp
EPS Gr. (%) -11.3 15.4 16.6 correction in gold prices and fall in demand for lower ticket-size loans pose key risks.
BV/Sh (Rs) 526 607 700
Ratios Leader in gold loan financing; rapidly expanding market to offset market share loss:
NIM (%) 11.0 11.5 12.0 MUTH, a leader in gold loan financing, commands 46% market share among Indian NBFC
C/I ratio (%) 29.1 27.8 26.8 peers. Although the company has been losing market share since last 4-6 quarters, due to
RoA (%) 4.9 5.3 5.7
intensifying competition, we believe a rapidly expanding gold loan market would enable
RoE (%) 17.8 17.8 18.0
Payout (%) 20.5 20.5 20.5
it to achieve healthy 10% CAGR over FY24-25E. Even though yields have stabilised at
Valuations ~17.4% over last 6 months, the same should improve 100-150bps in the coming quarters.
P/E (x) 12.7 11.0 9.4
Focus on low ticket non-bank customers to alleviate some pressure off yields: We
P/BV (x) 2.1 1.8 1.6
Div. Yield (%) 1.6 1.9 2.2 believe the worst is over for MUTH in terms of margins, as its low-rate teaser portfolio
(<10% yields) has already ebbed. With the company increasing focus on the high-yield
Shareholding pattern (%) low-ticket segment, yields should begin to stabilise upwards of 100-150bps from 17.4%
Sep’22 Jun’22 Mar'22
currently. Based on our estimate of 50bps increase in average cost of funds in FY24,
Promoter 73.6 73.4 73.4
–Pledged spreads should stabilise at 10%+ vs 9.4% currently.
FII 9.9 10.9 12.1 Regulatory LTV cap ensures low LGD: MUTH’s loss‐given default (LGD) is 2‐15bps of loan
DII 11.8 10.5 9.7
book across cycles, due to the secured nature of loans, as the underlying collateral is
Others 4.7 5.2 4.8
highly liquid. Even during FY12‐14, when gold prices corrected 25%, LGD did not surpass
Stock Performance (1-year) 10bps. Unlike Manappuram (MGFL, BUY), which has a short tenure (3 month) loan
150 model, MUTH offers 6-12 month loans, but lays emphasis on monthly interest as against
125 bullet repayments. This makes its business model less susceptible to default risks arising
100 from the sharp correction in gold prices, despite its relatively higher tenure than peers.
75
50 Valuation and outlook: We estimate 10% CAGR in MUTH’s AUM over FY23-25 would
25 help the company in delivering 16% CAGR in earnings over FY23‐25E. Rise in yields and
0 operating leverage could cause its RoA/ RoE to improve to 5.7%/ 18% by FY25E from
Apr-22
Mar-22
May-22
Aug-22
Nov-21
Jan-22
Feb-22
Jul-22
Sep-22
Nov-22
Dec-21
Jun-22
Oct-22
4.9%/ ~17.8% in FY23E, respectively. We value MUTH at 2.0x FY25E consolidated BV to

MUTH Sensex
arrive at our target price of Rs 1,500. We initiate coverage with a BUY rating. Sharp
correction in gold prices and fall in demand for lower ticket-size loans are key risks.
Pradeep Agrawal
pradeepagrawal@systematixgroup.in
+91 22 6704 8024
Hena Vora
henavora@systematixgroup.in
+91 22 6704 8045
28 November 2022 Muthoot Finance
Story in Charts
Exhibit 1: MUTH – Highest market share amongst NBFCs Exhibit 2: Rising competitive intensity reflected in gold AUM
growth and loan yields
(%) (%)
Market share (FY22)
50 46
30 27.4
45
23.0
40 25 21.2
20.1
35 17.3 17.4
20
30 21.4 22.2
25 15 10.8
16.4
20 16 7.9
15 10
13
15 3.3
5
10
5 0
0 FY19 FY20 FY21 FY22 1QFY23 2QFY23
Muthoot Finance Manappuram Muthoot Fincorp IIFL Finance
Finance Gold AUM growth Gold Loan yields
Exhibit 3: Fresh loan ticket size fell in H1 on teaser rate withdrawal Exhibit 4: Disbursement/ collection ratio bottomed out in 1Q
(Rs) (Rs/Grams) (Rs bn) (x)
1.11
1,40,000 6,000 140 1.05 1.02 1.07 1.02 1.05 1.08 1.05 0.96 1.01 1.2
0.98
1,20,000 5,000 120 1.0
1,00,000 100
4,000 0.8
80,000 80
3,000 0.6
60
60,000
0.4
2,000 40
40,000
0.2
105
108
110
127
132
20
43
45
43
41
42
48
55
54
61
58
81
75
95
88
84
88
87
20,000 1,000
0 0.0
0 0
1QFY23
2QFY23
FY22
FY15
FY16
FY17
FY18
FY19
FY20
FY21
1HFY23
1QFY20
2QFY20
1QFY21
2QFY21
1QFY22
2QFY22
4QFY19
3QFY20
4QFY20
3QFY21
4QFY21
3QFY22
4QFY22
1QFY23
2QFY23
Monthly Disbursement Monthly Collection

Old customer New customer Gold price (RHS)
Disb./Coll. (RHS)
Exhibit 5: Yields bottomed out in 1Q Exhibit 6: Spreads slated to stabilise at ~10% levels
(%) (%)
25 22.6 21.9 16
21.3 13.9
19.8 13.0
18.5 18.8 14 12.0 11.8
20 17.7 17.3 17.4
12 10.0 10.2
9.6 9.4 9.5
15 10
8
10
6
5 4
2
0 0
1QFY23
2QFY23
FY23E
FY24E
FY25E
FY19
FY20
FY21
FY22
FY24E
FY23E
FY25E
1QFY23
2QFY23
FY19
FY20
FY21
FY22
Yields Spreads
Gold finance leader to benefit from rapid market expansion

MUTH is a market leader in gold‐loan financing with ~45% market share among
NBFCs. It is best placed to grow in a rapidly expanding market (organised sector
penetration increased from 5.8% to 6.8% over the last 2 years) despite elevated
competition, given MUTH’s highest pan‐India branch network of 4,641 branches. Last
12 months has been challenging for the company, as stable gold prices and intense
competition have had negative impact on the company’s NIMs and growth. AUMs
grew at a moderate 3.8%yoy, with NIMs declining 240bps YoY to 11% in 2QFY23.
However, yields have stabilised at ~17.4% in last 6 months and is expected to
improve further in the coming quarters as the teaser rate portfolio recedes. With
yields bottoming out, and gold prices surging higher, MUTH is well‐placed to grow its
balance sheet at a healthy pace, which we estimate should expand at 10% CAGR over
FY23-25E. Pick up in the balance sheet growth should also drive benefits on the
operating side. As 75‐85% of the company’s operating costs are fixed, any rebound in
the business would enable the company to optimise the utilisation of its existing
infrastructure, driving operational efficiency and improving profitability ratios.
Exhibit 7: MUTH – Highest market share amongst NBFCs Exhibit 8: MUTH - Gold AUM growth vs gold price movement
(%) (%)
Market share (FY22)
50 46 35
45 29.5
30
40
35 25 21.4
27.4
30 20 16.4
25
15 18.6 10.8
20 16 8.1
15 13 10 6.4 7.6
15
10 5 0.3 7.9 3.3
5 0
0 FY19 FY20 FY21 FY22 1QFY23 2QFY23
Muthoot Finance Manappuram Muthoot Fincorp IIFL Finance
Finance AUM growth Gold price YoY growth
Exhibit 9: DuPont analysis

As % of average assets FY20 FY21 FY22 FY23E FY24E FY25E
Interest Income 19.3 18.1 16.3 14.9 15.6 15.9
Interest Expense 6.3 6.5 5.7 5.6 5.7 5.7
Net Interest Income 13.0 11.6 10.6 9.2 9.8 10.3
Other income total 0.4 0.4 0.2 0.3 0.3 0.3
Net Income total 13.4 12.1 10.8 9.5 10.1 10.6
Operating expenses total 4.0 3.1 2.7 2.8 2.8 2.8
Pre-provision profit 9.4 9.0 8.1 6.7 7.3 7.8
Provisions 0.2 0.2 0.2 0.2 0.2 0.2
Profit before tax 9.2 8.8 7.9 6.6 7.1 7.6
Profit before tax 9.2 8.8 7.9 6.6 7.1 7.6
Tax total 2.3 2.3 2.0 1.7 1.8 1.9
Profit after tax 6.8 6.5 5.9 4.9 5.3 5.7
Tailwinds to AUM growth

Focus on sticky lower ticket-size loans + new branch rollout + rebound in gold prices +
receding redemption pressure = pick up in AUM growth
We expect AUM growth to inch up 3QFY23 onwards and return to its historical
normalised growth of 10% by FY24-25E, as the demand for lower ticket-size loans
improves. Moreover, rollout of additional 125 branches by 3QFY23, rebound in gold
prices in last 1 month (+5%) and reduction in repayment intensity (lowest
disbursement to collection ratio of 0.96x in 1QFY23 (2Q 1.01x) should provide a fillip
to AUM growth.
With the company having ended its teaser rate schemes (of less than 10%) since April
2022, new disbursement growth moderated in 1Q/2QFY23, resulting in low yielding
higher-ticket business to move to competition, abating the disbursement/ collection
ratio to 0.96x in 1Q (peak of 1.11x in FY21), at its lowest level in last 7 years. The
company has been incrementally focusing on the less rate sensitive lower ticket-size
customer segment, consequently the repayment pressure would moderate 3QFY23
onwards. New customer ticket size declined by 18% in 1Q to Rs 80,548 (from
Rs97,956) and further by 8% in 2Q to Rs 73,901.
MUTH’s gold loan AUM grew at a strong 22% CAGR over FY18-21, aided by robust
rise in the gold price and increased demand for gold loan products. However, growth
slowed to 10% in FY21 and further to 4% in 1HFY23 due to heightened competition
from banks and fintechs in the higher ticket category (>0.1mn), which constituted
more than 50% of MUTH’s portfolio. With focus returning to lower ticket size, we
believe the share of lower ticket-size loans would continue to improve over FY24-
25E, enabling customer stickiness.
Exhibit 10: Contributions of gold price, tonnage and LTV in AUM growth
(%)
40
30
20
10
0
-10
-20
-30
Dec-13
Aug-15
Jan-16
Aug-20
Jan-21
Jun-16
Nov-16
Dec-18
Jun-21
Nov-21
Jul-13
Oct-14
Jul-18
Oct-19
Sep-12
Feb-13
Apr-17
Sep-17
Feb-18
Apr-22
Sep-22
Mar-15
Mar-20
May-14
May-19
Gold stock YoY growth Avg gold price YoY growth LTV YoY growth
Exhibit 11: Rising competitive intensity reflected in gold AUM growth and loan yields
(%)
30 27.4
23.0
25 21.2 20.1
20 17.3 17.4
21.4 22.2
15 10.8
16.4 7.9
10
3.3
5
0
FY19 FY20 FY21 FY22 1QFY23 2QFY23
Gold AUM growth Gold Loan yields
Exhibit 12: Fresh loan ticket size declined in last 2 quarters on teaser rate withdrawal
(Rs) (Rs/Grams)
140,000 6,000
120,000 5,000
100,000
4,000
80,000
3,000
60,000
2,000
40,000
20,000 1,000
0 0
1QFY22
2QFY22
1QFY20
2QFY20
1QFY21
2QFY21
3QFY21
4QFY21
3QFY22
4QFY19
3QFY20
4QFY20
4QFY22
1QFY23
2QFY23
Old customer New customer Gold price (RHS)
Exhibit 13: Disbursement/ collection ratio bottomed out in 1Q

(Rs bn) (x)
1.07 1.08 1.11
140 1.05 1.02 1.02 1.05 1.05 0.96 1.01 1.2
0.98
120 1.0
100
0.8
80
0.6
60
0.4
40
0.2
127
105
108
110
132
20
43
58
43
41
42
48
45
55
54
61
81
75
95
88
84
88
87
0 0.0
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY22
1QFY23
2QFY23
1HFY23
Monthly Disbursement Monthly Collection Disb./Coll. (RHS)
Higher presence in rural and semi-urban markets ensures larger market share in
the low ticket gold segment
More than ~70% of MUTH’s branches are in rural and semi-urban regions vs. less
than 50% for MGFL. With almost 65% of the domestic gold holdings in rural areas,
MUTH is expected to garner larger market share from these regions, especially in the
low ticket-size segment. As per few estimates, unorganised players hoard about
3,450 tonnes of gold. We believe MUTH is advantageously placed to cannibalise a
large portion of this from the unorganised players, supported by its deep rural
penetration, coupled with lower interest rate versus big NBFC peers.
Rising competition impacts yields; focus on low ticket non-bank

customers to alleviate some pressure off yields
We believe the worst is behind for MUTH in terms of margins, as a large part of its
low-rate teaser portfolio (<10% yield) has already ebbed. With the company’s
increased focus on high-yielding low-ticket segment, yields should stabilise upwards
of 100-150bps from 17.4% currently. Moreover, after estimating a 50bps rise in the
cost of funds for FY24, we expect spreads to stabilise at 10% vs 9.4% currently (12.5%
during pre-COVID period).
Exhibit 14: Yields bottomed out in 1Q Exhibit 15: Cost of funds managed well
(%) (%)
25 22.6 21.9 9 7.8
21.3
19.8 8 7.1 7.4
18.5 18.8 6.9 6.7 6.8 6.6
20 17.7 17.3 17.4 6.6 6.3
7
6
15
5
10 4
3
5 2
1
0 0
1QFY23
2QFY23
FY23E
FY24E
FY25E
FY19
FY20
FY21
FY22
FY23E
1QFY23
2QFY23
FY24E
FY25E
FY19
FY20
FY21
FY22
Yields Cost of funds
Exhibit 16: Spreads slated to stabilise at ~10% levels

(%)
16 13.9
13.0
14 12.0 11.8
12 10.0 10.2
9.6 9.4 9.5
10
8
6
4
2
0
FY19 FY20 FY21 FY22 FY23E FY24E FY25E 1QFY23 2QFY23
Spreads
Operating leverage to enhance opex ratios

While MUTH has been historically offering lower interest rates (200-300bps lower)
than MGFL on gold loans, cost efficiency has enabled it to generate better
profitability ratios. Its average net yield stood lower at 21.1% vs. 23.6% for MGFL
over FY21-22, which is more than compensated by its lower operating cost ratio,
which stood at 2.9% of assets vs. 4.8% for MGFL. This explains why MUTH recorded
slightly higher RoA at 6.2% (FY20‐21) vs. 5.9% by MGFL.
We attribute MUTH’s lower costs largely to higher branch utilisation. While its AUM
per branch is almost double that of MGFL (64mn) at Rs 123mn, its cost per branch is
just slightly higher at Rs 3.9mn (vs Rs 3.5mn for Manappuram).
In our view, a pick‐up in growth could lead to some benefit on operating leverage, as
most of the costs are fixed in nature. We expect the opex/ AUM ratio to improve to
2.8% over FY24-25E from an average of 3.6% in FY20-21.
Exhibit 17: MUTH yields have been lower by 200-300bps vs MGFL
(%)
30
25.0 25.4
24.2
25 21.5 21.5 21.5 22.1
20.7 19.7
20 22.6
21.3 21.9
19.8 18.8
15 17.7 18.5
17.3 17.4
10
0
FY19 FY20 FY21 FY22 FY23E FY24E FY25E 1QFY23 2QFY23
Muthoot yields Manappuram yields
Exhibit 18: MUTH AUM/ branch has grown at a healthy pace Exhibit 19: Opex per branch moved at a slower pace
(Rs mn) (Rs mn)
4.7
140 126 123 123 5.0
114 4.5 3.9 4.0 3.9
120 3.8
4.0 3.4
100 91
3.5
76
80 3.0
2.5
60 2.0
40 1.5
1.0
20
0.5
0 0.0
FY19 FY20 FY21 FY22 1QFY23 2QFY23 FY19 FY20 FY21 FY22 1QFY23 2QFY23
AUM/branch Opex/branch
Exhibit 20: Cost/ Income ratio has fallen over the years Exhibit 21: …so has opex/AUM ratio
(%) (%)
40 34.7 6
33.2 4.9
35 30.0 4.7
29.1 27.8 28.2 5
30 25.9 25.1 26.8 3.8 3.8
4 3.3 3.3 3.3 3.3 3.2
25
20 3
15 2
10
1
5
0 0
FY19
FY20
FY21
FY22
1QFY23
2QFY23
FY23E
FY24E
FY25E
1QFY23
2QFY23
FY23E
FY24E
FY25E
FY19
FY20
FY21
FY22
Cost/ Income Opex/ AUM
Diversified funding profile skewed towards bank loans

MUTH’s borrowing profile remains largely skewed towards bank borrowings at
almost 56% share, followed by 25% share of NCDs, and 17% ECBs. Once the money
market rates began tightening, the company reduced the share of its NCDs and
commercial paper borrowings from 38% in 1QFY22 to 25% currently, and replaced it
with bank borrowings due to cost advantage.
Exhibit 22: Borrowing profile
2.0 3.0 2.0 2.0 2.0
100%
10.0 8.0 0.5 0.3
18.0 0.2 1.0 15.0 0.2 0.2
80% 16.0
20.0
1.0
60%
49.0 43.0 55.0 0.5 0.6
39.0
40%
20%
28.0 2.0 26.0 29.0 25.0 0.3 0.2
1.0 1.0
0%
Secured Non-convertible Debentures (Muthoot Gold bonds) Secured Non-convertible Debentures - Listed
Borrowing from banks/FIs External commercial borrowings
Subordinated debt Subordinated debt - listed
Commercial papers Other loans
Regulatory LTV cap ensures low LGD; focus on monthly

interest collection keeps the default risk low
MUTH’s LGD across cycles stands at 2‐15bps of loan book, due to the secured nature
of loans, as the underlying collateral is being highly liquid. Even during FY12‐14,
when gold prices corrected by 25%, LGD did not surpass 10bps. Unlike MGFL, which
has a short‐tenure (3 month) loan model, MUTH offers 6-12 month loans, but lays
much emphasis on monthly interest rather than bullet repayments. This makes its
business model less susceptible to default risk from sharp correction in gold prices,
despite having relatively higher tenure than MGFL.
Exhibit 23: LGD remains low (bad debt as % of loan)
(%)
0.16 0.14
0.14
0.12
0.10 0.08
0.08
0.05
0.06
0.03
0.04 0.02 0.03
0.02
0.00
% of Bad Debts written off to gross loan assets
Exhibit 24: GNPA/ NNPA moving in a narrow range Exhibit 25: Stage wise bucketing of gross assets
(%) 2.0 0.9 3.0 2.1 1.7
100%
3.5 1.5 0.6 3.1 0.8 1.5
3.0
3.0 2.7 2.7 80%
2.5 2.2 2.1 60%

1.9
2.0 1.7 98.6 97.1
1.5 96.5 93.9 96.8
1.5 40%
0.8 0.8 0.9 0.8
1.0
20%
0.5
0.0 0%
FY19 FY20 FY21 FY22 1QFY23 2QFY23 FY20 FY21 FY22 1QFY23 2QFY23
GNPA NNPA Stage 1 Stage 2 Stage 3
Pan India branch network, with dominance in South India

MUTH has pan India presence, with a network of 4,641 branches. It predominantly
operates in South India (60% of branches), followed by the North (17%), West (16%)
and the East (7%). The company has not been able to expand its branch network
since few years, as RBI did not approve additional branches to larger gold finance
NBFCs. However, MUTH recently received RBI approval to open 150 new branches,
which is a welcome move.
Exhibit 26: Strong branch network… Exhibit 27: …supported by adequate employees
(Nos) (Nos)
5,000 4,567 4,632 4,617 4,617 4,641 30,000 26,716 26,618 27,000
4,480 25,554 25,911
24,224
25,000
4,000
20,000
3,000 15,000
10,000
2,000
5,000
1,000 0
Branch Employee
Exhibit 28: Pan India branch presence with dominance in south (%) Exhibit 29: Branch geographical distribution (numbers)
100% (Nos)
90% 5,000
80%
70% 4,000
61.0 60.0 60.0 61.8 60.0 60.0
60% 2,740 2,779 2,770 2,770 2,785
3,000 2,733
50%
40%
2,000
30% 17.0 17.0 17.0 17.5 17.0 17.0
762 776 787 785 785 789
20% 1,000
16.0 16.0 16.0 16.5 16.0 16.0 731 741 739 739 743
10% 717
0% 6.0 7.0 7.0 7.2 7.0 7.0 269 320 324 323 323 325
0
East West North South East West North South
Key risks
• Lower than expected pick-up in demand for lower ticket gold loans can impact
the growth.
• No more approvals from RBI to open branches could impact the business growth.
• Heightened competition could result in higher attrition, and likely swell employee
costs, resulting in lower-than-expected profitability.
Valuation & Recommendation

We estimate MUTH to register 10% CAGR in AUM, and deliver 16% CAGR in earnings
over FY23‐25E. Rebound in yields and operating leverage could cause its RoA/ RoE to
improve to 5.7%/ 18% by FY25E from 4.9%/ ~18% in FY23E, respectively. We value
MUTH at 2.0x FY25E consolidated BV to arrive at our target price of Rs 1,500. We
initiate coverage with a BUY rating. Any sharp correction in gold prices and lower-
than-expected pick-up in demand for lower ticket gold loans are key risks.
Exhibit 30: One year forward P/B band Exhibit 31: One year forward P/E band
(x) (x)
4 20
16
3
12
2
8
1
4
0 0
Dec-20
Dec-19
Nov-21
Nov-22
Feb-17
Apr-13
Feb-16
Apr-12
May-11
Mar-14
Mar-15
Jan-19
Jan-18
May-11
Nov-21
Dec-19
Dec-20
Nov-22
Apr-13
Apr-12
Feb-16
Feb-17
Mar-14
Mar-15
Jan-18
Jan-19
P/B Avg Max Min +1SD P/E Avg Max Min +1SD
Exhibit 32: RoA Exhibit 33: RoE

(%) (%)
8 6.8 35
6.5 28.3 27.8
7 5.9 30
5.7 5.7 23.5
6 5.3 5.2 22.4
4.9 4.7 25
5 17.8 17.8 18.0 17.5 18.5
20
4
15
3
10
2
5
1
0 0
FY19
FY22
1QFY23
2QFY23
FY23E
FY24E
FY25E
FY20
FY21
FY25E
1QFY23
2QFY23
FY23E
FY24E
FY19
FY20
FY21
FY22
RoA RoE
Company background
MUTH incorporated in 1997, is a leading player in gold finance, and is present across
29 states. It operates through 5500+ branches across India through its 27,000+
employee strength as of 3QFY23. Its key subsidiaries are a) Muthoot Homefin;
b) Belstar Microfinance; c) Muthoot Money; d) Muthoot Insurance Brokers, and
e) Asia Asset Finance.
Exhibit 34: Subsidiaries: Key data

AUM PAT GNPA (%)
Particulars (Rs mn)
Mar’21 Mar’22 Mar’21 Mar’22 Mar’21 Mar’22
Muthoot Finance Limited 526,223 580,532 37,222.0 39,543.0 0.9 3.0
Muthoot Homefin (India) Limited 17,042 14,699 126.0 84.0 4.0 2.1
Belstar Microfinance Limited 32,999 43,658 467.0 451.0 2.4 5.7
Muthoot Money Limited 3,668 2,071 37.0 (66.0) 8.6 6.6
Asia Asset Finance Plc 5,150 4,459 18.0 43.0
Muthoot Insurance Brokers Pvt. Limited - - 316.0 276.0
Muthoot Asset Management Private Limited - - 19.0 23.0
Muthoot Trustee Private Limited - - (0.1) 0.2
Less: Intra-Group Loan Assets (2,280) (480)
Total 582,802 644,939 38,205 40,354
Exhibit 35: Management team

Name Designation
George Alexander Muthoot Managing Director
George Thomas Muthoot Joint Managing Director
Alexander George Muthoot Joint Managing Director
George Muthoot George Deputy Managing Director
George Muthoot Jacob Deputy Managing Director
George Muthoot Alexander Deputy Managing Director
Exhibit 36: MUTH corporate structure
Muthoot Finance
Belstar Investment Muthoot Asset

Asia Asset Finance Muthoot Homefin Muthoot Insurance Muthoot Money Muthoot Trustee
and Finance Management
PLC, Sri Lanka (India) Ltd. Brokers Pvt. Ltd. Pvt. Ltd. Private Ltd.
Pvt. Ltd. Pvt. Ltd.
(72.9% stake) (100% stake) (100% stake) (100% stake) (100% Stake)
(57% stake) (100% stake)
Exhibit 37: Shareholding pattern

Name of the Shareholders Shareholding (%)
Promoter and Promoter Group 73.4
Mutual Funds 10.4
SBI Focused Equity fund 5.8
ICICI Prudential Banking and Financial Services Fund 1.9
Mirae Asset Large Cap Fund 1.6
Foreign Portfolio investors category II 9.9
Others (Public) 4.9
Source: BSE, Company, Systematix Institutional Research
FINANCIALS (STANDALONE)
Profit & Loss Statement Balance Sheet

YE: Mar (Rs mn) FY21 FY22 FY23E FY24E FY25E YE: Mar (Rs mn) FY21 FY22 FY23E FY24E FY25E
Net interest income 66,361 71,203 66,177 74,808 85,711 Equity 4,012 4,013 4,013 4,013 4,013
Other income 847 942 1,199 1,427 1,792 Reserves 1,48,377 1,79,432 2,07,294 2,39,441 2,76,924
Net Income 68,819 72,626 67,989 76,991 88,371 Net worth 1,52,389 1,83,446 2,11,308 2,43,454 2,80,937
Operating expenses 17,804 18,262 19,783 21,406 23,655 Borrowings 4,59,463 4,98,113 5,00,801 5,29,651 5,67,743
Pre provision profit 51,015 54,364 48,205 55,585 64,715 Others 22,798 23,989 18,289 20,534 26,440
Provisions 950 1,270 1,124 1,264 1,377 Total liabilities 6,34,649 7,05,547 7,30,398 7,93,639 8,75,120
Profit before tax 50,065 53,094 47,081 54,321 63,339 Cash 71,898 92,429 95,867 95,041 98,130
Tax 12,843 13,551 12,016 13,864 16,165 Investments 15,903 13,205 17,009 20,366 22,645
Tax rate 25.7 25.5 25.5 25.5 25.5 Loans 5,40,634 5,93,842 6,11,054 6,71,133 7,46,451
Reported Profit after tax 37,222 39,543 35,065 40,457 47,173 Others 3,360 2,940 3,132 3,438 3,823
Source: Company, Systematix Institutional Research Total assets 6,34,649 7,05,547 7,30,398 7,93,639 8,75,120
Dupont (as % of Average Assets) Key Ratios

YE: Mar FY21 FY22 FY23E FY24E FY25E YE: Mar FY21 FY22 FY23E FY24E FY25E
Interest Income 18.1 16.3 14.9 15.6 15.9 Yield on portfolio 21.9 19.8 17.7 18.5 18.8
Interest Expense 6.5 5.7 5.6 5.7 5.7 Cost of borrowings 8.9 8.0 8.1 8.5 8.6
Net Interest Income 11.6 10.6 9.2 9.8 10.3 Spread 13.0 11.8 9.6 10.0 10.2
Other income total 0.4 0.2 0.3 0.3 0.3 NIM (on AUM) 14.1 12.9 11.0 11.5 12.0
Net Income total 12.1 10.8 9.5 10.1 10.6 Cost/ Income (%) 25.9 25.1 29.1 27.8 26.8
Operating expenses total 3.1 2.7 2.8 2.8 2.8 Credit cost (%) 0.2 0.2 0.2 0.2 0.2
Pre provision profit 9.0 8.1 6.7 7.3 7.8 RoA (%) 6.5 5.9 4.9 5.3 5.7
Provisions 0.2 0.2 0.2 0.2 0.2 RoE (%) 27.8 23.5 17.8 17.8 18.0
Profit before tax and exce. items 8.8 7.9 6.6 7.1 7.6 Leverage (x) 4.2 4.0 3.6 3.4 3.2
Profit before tax 8.8 7.9 6.6 7.1 7.6 Tier I (%) 26.3 29.1 32.1 33.6 34.8
Tax total 2.3 2.0 1.7 1.8 1.9 CAR (%) 27.4 30.0 32.9 34.4 35.5
Profit after tax 6.5 5.9 4.9 5.3 5.7 Gross NPA (%) 0.9 3.0 2.5 2.3 2.0
Source: Company, Systematix Institutional Research Net NPA (%) 0.8 2.7 2.2 2.0 1.8
Provision coverage (%) 13.0 10.6 11.0 11.2 11.2
Growth Valuation ratios

YE: Mar (%) FY21 FY22 FY23E FY24E FY25E YE: Mar FY21 FY22 FY23E FY24E FY25E
Net interest income 14.9 7.3 -7.1 13.0 14.6 FDEPS (Rs) 93 99 87 101 118
Net Income total 16.0 5.5 -6.4 13.2 14.8 PER (x) 12 11 13 11 9
Pre provision profit 22.8 6.6 -11.3 15.3 16.4 Book value (Rs) 380 457 526 607 700
Profit before tax 23.4 6.0 -11.3 15.4 16.6 P/BV (Rs) 2.9 2.4 2.1 1.8 1.6
Profit after tax 23.3 6.2 -11.3 15.4 16.6 Adjusted book value (Rs) 370 418 492 573 667
Loan 26.9 9.8 2.9 9.8 11.2 P/ABV (Rs) 3.0 2.7 2.3 1.9 1.7
AUM 26.5 10.3 6.5 9.8 11.2 P/PPP (x) 8.7 8.2 9.2 8.0 6.9
Source: Company, Systematix Institutional Research Dividend yield (%) 1.8 1.8 1.6 1.9 2.2
Systematix
Manappuram Finance 28 November 2022
Diversification strategy to play out

INITIATING COVERAGE Manappuram’s (MGFL) ~16% market share renders it as the second-largest gold
Sector: NBFCs Rating: BUY finance NBFC company, with a PAN-India network of 5,000+ branches. Gauging the
CMP: Rs 114 Target Price: Rs 155 risk of becoming a monoline player, the company embarked on a diversification
strategy in FY15, and ventured into microfinance, home loan, and vehicle loan
Stock Info
businesses (non-gold portfolio). The strategy played out well until FY20, post
Sensex/Nifty 62,505/18,563
Bloomberg MGFL IN which, COVID struck, denting its profitability in this portfolio (37% of AUM). We
Equity shares 820mn expect profitability to bounce back over FY23-25E, and estimate it to contribute
52-wk High/Low Rs 180.20 /81.50 ~24% to its overall earnings, with collection efficiency stabilising and revival in
Face value Rs 2 growth. We forecast 17% CAGR in consolidated earnings over FY22-25E, with RoA/
M-Cap Rs 96bn/ USD 1.2bn RoE at 4.6%/ 17.5%, respectively. MGFL trades at 0.7x FY25E BV, and we initiate
3-m Avg volume USD 12mn coverage with a BUY rating, and FY24E sum-of-the-parts (SOTP) target price of
Financial Snapshot (Rs mn) Rs 155. Key risk emerges from a sharp correction in gold price.
Y/E March FY23E FY24E FY25E
NII 41,688 45,633 51,600
Diversification strategy to bear fruit, as MGFL’s gold loan business takes a breather:
PPP 24,995 27,463 31,470 MGFL’s diversification strategy should bear fruit over FY23-25, as we expect the
PAT 16,390 18,112 21,247 share of consolidated profit from its non-gold subsidiary to revert to pre-COVID level
EPS (Rs) 19.4 21.4 25.1 of ~24% (from less than 5% in FY21/22), as credit cost in microfinance normalises.
EPS Gr. (%) 23.4 10.5 17.3
With almost 16% cumulative provisioning done so far on FY20 microfinance book (in
BV/Sh (Rs) 115 133 154
Ratios line with industry peers), and collection efficiency back to normal, credit costs over
NIM (%) 13.1 12.8 12.7 FY23-25 should fall back to pre-COVID levels of 1.5-2.5%, and aid overall profitability.
C/I ratio (%) 44.4 44.6 44.2
RoA (%) 4.6 4.5 4.6 NIMs bounce back, as price-led competition wanes: Yields in the gold loan segment
RoE (%) 18.1 17.3 17.5 have been moving south since 2QFY22, and these began to bounce back since the
Payout (%) 16.7 15.6 14.8 company stopped its teaser schemes (<10% yield loans) over last 2 quarters, in line
Valuations with competition. Although the company enjoyed higher yields at 24-25% over FY18-
P/E (x) 5.8 5.2 4.5
P/BV (x) 1.0 0.9 0.7
1HFY22, during 2HFY22 its gold loan yield slipped to 19-20%, as it launched teaser
Div. Yield (%) 2.9 3.0 3.3 rate schemes in response to rising competition from banks/ fintechs/ other NBFCs,
who offered gold loans at 7-9% rates then. Now, most big players (NBFCs + fintechs)
Shareholding pattern (%)
Sep’22 Jun’22 Mar'22
in this segment have either stopped their teaser rate schemes or rationalised them.
Promoter 35.2 35.2 35.1 As a result, MGFL’s 1Q/2QFY23 yields bounced back to ~19.5/22% from 18.8% in
–Pledged 4QFY22 and are likely to stabilise at the current 21-22% levels.
FII 28.4 28.9 29.8
DII 12.2 13.5 15.8 Asset quality pain in microfinance peaked out; fall in credit cost to normalise: The
Others 24.3 22.4 19.3 credit cost of MGFL’s microfinance subsidiary, Asirvad, increased sharply in FY21/22
Stock Performance (1-year) (during COVID) to 6% from an average 1.4% in the preceding 2 years. With collection
150
efficiency getting restored to normal levels, we expect credit cost to moderate to
125 1.5-2.5% during FY23-25E, and aid overall profitability.
100
75
Valuation and outlook: Margins have bounced back from the bottom and are likely
50 to stabilise at ~12.7% (280bps lower than pre-COVID high of 15.4% in FY20). But
25 lower cost/ AUM ratio (-50bps vs FY20) and lower credit cost (-40bps vs FY20) should
0
absorb a significant portion of the NIM compression, and limit the impact on RoA to
May-22
Dec-21
Feb-22
Sep-22
Oct-22
Mar-22
Jun-22
Nov-21
Nov-22
Jan-22
Aug-22
Jul-22
Apr-22
~130bps to 4.6%. We estimate consolidated earnings to expand at 17% CAGR over

MGFL Sensex FY22-25E, with RoA/ RoE at 4.6%/ 17.5%, respectively. MGFL trades at 0.9x/ 0.7x
FY24E/ FY25E BV. We initiate coverage with a BUY rating, and a Mar’24 sum-of-the-
Pradeep Agrawal parts (SOTP) target price of Rs 155. We value the standalone book at Rs 127/share,
pradeepagrawal@systematixgroup.in based on 1.0x FY25E BV and Asirvad MFI at Rs 28/share, based on 1.5x FY25E BV
+91 22 6704 8024 after factoring in a holding company discount of 20%.
Hena Vora
+91 22 6704 8045
28 November 2022 Manappuram Finance
Story in Charts
Exhibit 1: Discontinued teaser schemes support gold loan yields Exhibit 2: MFI yields improve post deregulation on spreads
(%) (%)
30 25 23.3 23.1 23.1 23.1 23.1
25.9 21.9
25.1 21.0
23.6 24.0
25 21.7 21.5 21.5 18.5
21.1 20
20
15
15
10
10
5
5
0 0
FY18 FY19 FY20 FY21 FY22 FY23E FY24E FY25E FY18 FY19 FY20 FY21 FY22 FY23E FY24E FY25E
Yield on gold AUM Micro finance Yield
Exhibit 3: Microfinance AUM likely to grow at 26% CAGR… Exhibit 4: …taking its share in consolidated AUM/ PAT higher
(Rs bn) (%) (%)
160 70 35 31.9
139 30.2
57.6 27.6
140 60 30
114 22.0 23.1 23.3
120 25 21.8
43.3 50 19.8 19.4
100 92 20
35.7 15.5
31.6 40 13.8
80 70 15 19.6
55 60 23.4 22.5 30 16.0
60 10
38 17.0
20 5 1.0 1.0
40 24 8.8
20 10 0
-5 -1.4
0 0
FY18 FY19 FY20 FY21 FY22 FY23E FY24E FY25E
MFI AUM YoY growth (RHS) MFI AUM as a % of total AUM MFI PAT as a % of total PAT
Exhibit 5: Non-gold AUM share on the rise… Exhibit 6: …so is non-gold PAT share in consolidated earnings
100% 100% 2 2
19 16 20 15 20
26 24
33 33 30 34 80%
80% 40 43 46
60%
60% 102 98 98
40% 83 83 85 80 76
40% 81
74 70
67 67 66 20%
60 57 54
20% 0%
-2
0% -20%
FY17 FY18 FY19 FY20 FY21 FY22 FY23E FY24E FY25E FY18 FY19 FY20 FY21 FY22 FY23E FY24E FY25E
Gold AUM Non-Gold AUM Gold PAT Non Gold PAT
Diversification to bear fruit, as gold loan takes a breather

Diversification strategy to smooth out the volatility in gold portfolio
Historically, MGFL’s balance sheet growth has shown high correlation to gold price
movements (correlation coefficient as high as 0.97x). As the company derived most
of its business from gold loans until FY12, such high correlation made its business
model highly vulnerable to downcycles. In the last downcycle of FY12‐14, MGFL
underperformed the 10% degrowth in compounded gold prices, with its AUM
plummeting by 16%. This made the company reconsider its model and hence
diversify into other product segments over FY15‐16 such as housing, microfinance,
SME, and commercial vehicle finance. Its non‐gold finance book constituted 37% of
its overall AUM as of 2QFY23. We expect the rising share of its non‐gold loan book to
smooth out any adverse impact arising from the sharp volatility in its gold portfolio.
Exhibit 7: 0.97x correlation between average gold price and MGFL AUM
(Rs) (Rs mn)
60,000 2,50,000
50,605
46,370 47,367
50,000 2,00,000
40,000 34,855 2,01,679
1,90,821
29,567 29,184 29,400 28,965 30,613 1,50,000
28,138 26,305 1,69,671
30,000 23,900
18,260 1,29,615 1,00,000
20,000 12,224
15,208 1,15,327 1,11,245 1,17,350
9,321 99,458 92,245 1,00,810
26,176 75,492 81,631 50,000
10,000 8,000 12,000
5,404
0 0
FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22
Avg. Gold price / 10 gm MGFL AUM (RHS)
Exhibit 8: Non‐gold loans to comprise 46% of AUM by FY25E

100%
90% 19
26 30
33 33 34
80% 40 43 46
70%
60%
50%
40% 81
74 70
67 67 66
30% 60 57 54
20%
10%
0%
FY17 FY18 FY19 FY20 FY21 FY22 FY23E FY24E FY25E
Gold AUM Non-Gold AUM
Non-gold portfolio should drive growth and profitability
The company’s diversification strategy should bear fruit over FY23-25, as we expect
the share of MGFL’s non-gold subsidiary in consolidated profit to bounce back to
~24% level (from less than 5% in FY21/22), with credit cost in microfinance reverting
to normalised levels. Even though the company began diversifying into other product
segments FY15/16 onwards, by FY20, it had garnered almost 20% share in overall
AUM and profit from the non-gold book. However, a significant spike in the credit
cost of its microfinance subsidiary due to COVID erased almost the entire profit from
its non-gold book. With almost 16% cumulative provisioning done so far on FY20
microfinance book (in line with industry peers) and collection efficiency back to
normal, we expect credit cost to revert to pre-COVID levels of 1.5-2.5% during FY23-
25, and aid overall profitability. We expect the PAT share of its non-gold segment to
rise to ~24% from less than 2.0% in FY22.
Exhibit 9: Higher growth in non-gold makes up for slower growth in gold portfolio
(Rs bn) (%)
500 87.3 100
400 80
59.1 60.7
60
300
30.9 27.6 28.3 40
23.0 22.2
200 12.5
20
27.5
100 0
10.4 10.5 6.6 10.5
5.5 4.1 0.7
0 -1.4 -20
FY17 FY18 FY19 FY20 FY21 FY22 FY23E FY24E FY25E
Gold Non-Gold AUM
Gold AUM YoY growth (RHS) Non-Gold AUM YoY growth (RHS)
Exhibit 10: Non-gold AUM share on the rise… Exhibit 11: …so is non-gold PAT share in consolidated earnings
100% 100% 2 2
19 16 20 15 20
26 24
33 33 30 34 80%
80% 40 43 46
60%
60% 102 98 98
40% 83 83 85 80 76
40% 81
74 70
67 67 66 20%
60 57 54
20% 0%
-2
0% -20%
FY17 FY18 FY19 FY20 FY21 FY22 FY23E FY24E FY25E FY18 FY19 FY20 FY21 FY22 FY23E FY24E FY25E
Gold AUM Non-Gold AUM Gold PAT Non Gold PAT
Microfinance business to contribute significantly to overall profitability

The company’s microfinance portfolio expanded ~22x over FY15-FY22. COVID did
impact the disbursements and credit costs of its subsidiary, Asirvad MFI, as
customers faced cashflow constraints. However, given Asirvad’s diverse geographical
book and borrowing mix, and 23% CAR, we expect its loan book to expand at 26%
CAGR over FY22-25E.
Exhibit 12: Microfinance AUM likely to grow at 26% CAGR… Exhibit 13: … taking its share in consolidated AUM/ PAT higher
(Rs bn) (%) (%)
160 70 35 31.9
139 30.2
57.6 27.6
140 60 30
114 22.0 23.1 23.3
120 25 21.8
43.3 50 19.8 19.4
100 92 20
35.7 15.5
31.6 40 13.8
80 70 15 19.6
55 60 23.4 22.5 30 16.0
60 10
38 17.0
20 5 1.0 1.0
40 24 8.8
20 10 0
-5 -1.4
0 0
MFI AUM YoY growth (RHS) MFI AUM as a % of total AUM MFI PAT as a % of total PAT
Vehicle finance and SME gaining scale

MGFL undertakes vehicle finance/ SME through its existing gold finance branches,
which sits in its standalone book and contributes 8.5% to overall AUM. We envisage
this business along with SME finance and on-lending to NBFCs would register ~20%
CAGR in loan book over FY22-FY25E, taking the business share to 10.1% by FY25E.
Exhibit 14: Vehicle finance to expand at 20% CAGR... Exhibit 15: …taking the share in overall AUM higher
(Rs bn) (%) (%)
30 160 7 6.3 6.5
135.7
140 5.7 5.9
25 6 5.3 5.4
104.5 120
78.2 100 5
20 4.0 3.9
56.1 80 4
15 60
3 2.2
20.6 20.0 20.0 20.0 40
10 20 2
5 -21.7 0 1
3 6 11 13 11 16 20 24 28 -20
0 -40 0
FY17 FY18 FY19 FY20 FY21 FY22 FY23E FY24E FY25E FY17 FY18 FY19 FY20 FY21 FY22 FY23E FY24E FY25E
Vehicle finance AUM YoY growth (RHS) Vehicle finance AUM as% of the total AUM
Exhibit 16: SME finance to grow at 20% CAGR… Exhibit 17: ..taking the share in overall AUM higher
(Rs bn) (%) (%)
18 392 450 6
400 5.2
16
350 5
14
300 3.8
12 4 3.4 3.6
250 3.1 3.2
10 3.0
200
105 3
8 150
69
6 100 2 1.6
20 20 20
-22 50 0.9
4 -44 0 1
2 1 6 10 8 4 9 11 13 16 -50
0 -100 0
FY17 FY18 FY19 FY20 FY21 FY22 FY23E FY24E FY25E FY17 FY18 FY19 FY20 FY21 FY22 FY23E FY24E FY25E
MSME AUM YoY growth (RHS) MSME AUM as a % of AUM
Gold loan business: Near-term pain, but long-term growth story intact
Although the company could lose some market share to heightened competition
from banks, fintechs and peer NBFCs, we believe consistent expansion in the gold
loan market should soften the blow. Despite the intense tussle between banks and
NBFCs in last 1 year, we expect gold loan NBFCs to revert to their growth path FY24
onwards, as the company rebuilds focus on lower ticket-size segment. We estimate
7%/ 10% growth in MGFL’s gold AUM over FY24E/ FY25E, respectively.
Exhibit 18: Gold loan portfolio to grow at a moderate pace… Exhibit 19: …causing its share in overall AUM/ PAT to moderate
(Rs bn) (%) (%)
250 236 35
30.9 120
213 101.9 98.4 98.2
199 200 30
191 100
200 83.3 83.1 85.7 82.3
170 78.6
25
80
150 130 20 82.2
117 77.6 75.7 75.6
60 74.1
12.5 69.2 66.2
100 10.5 10.5 15 64.1
40
5.5 6.6 10
50 4.1
5 20
0.7
0 0 0
Gold AUM YoY growth (RHS) Gold AUM % of the total AUM Gold PAT % of the total PAT
NIMs on upward trajectory, as teaser schemes rolled back

Yields in the gold loan segment have started to bounce back after coming under
pressure during 2HFY22, as the company discontinued its teaser schemes (<10% yield
products), in line with general industry response. While the company used to enjoy
higher yields of 24-25% over FY18-1HFY22 (on strong demand for gold loans and
moderate competition from banks/ fintechs), over 2HFY22, gold loan yields came off
to 18.8% on intensifying competition from banks/ fintechs/ NBFCs, who offered gold
loans at 7-9%. Over the last two quarters, most big players (NBFCs + fintechs) in the
segment have either stopped teaser rate schemes or rationalised it. This has caused
yields to improve to ~22.1% in 2QFY23 from 18.8% in 4QFY22.
Exhibit 20: Discontinued teaser schemes support gold loan yields Exhibit 21: MFI yields improve post deregulation on spreads
(%) (%)
30 25 23.3 23.1 23.1 23.1 23.1
25.9 21.9
25.1 21.0
23.6 24.0
25 21.7 21.5 21.5 18.5
21.1 20
20
15
15
10
10
5
5
0 0
Yield on gold AUM Micro finance Yield
Exhibit 22: Cost of borrowings (consolidated) set to rise… Exhibit 23: …driving some compression in NIMs (consolidated)
(%) (%)
10 9.8 20 17.7
9.6 9.7
10 9.6 18 15.8 15.3 15.4 15.1
10 9.3 16
9.3 13.3 13.1 12.8
9 14 12.7
9 9.0
12
9
10
9 8.6
9 8
8 6
8 4
8 2
8 0
FY18 FY19 FY20 FY21 FY22 FY23E FY24E FY25E FY17 FY18 FY19 FY20 FY21 FY22 FY23E FY24E FY25E
Cost of borrowings (Cons.) NIM (Cons)
High opex ratios to remain elevated, with non-gold business

expanding
We expect MGFL’s opex/ AUM ratio to remain high at 6.1-6.3% over FY23-25, as the
company’s non-gold business gets into the expansionary phase. Similarly cost/
income ratio is also likely to remain range bound at 44-45% levels.
Exhibit 24: Cost/Income ratio to remain elevated… Exhibit 25: …so is cost/AUM ratio
(%) (%)
60 9 8.4
7.9
50.4 8
47.8
50 44.8 44.4 44.6 44.2 6.6
7 6.4 6.3 6.2 6.1
39.6
40 6 5.3
33.7
5
30
4
20 3
2
10 1
0 0
Cost to Income (Cons) Cost/AUM (Cons)
Exhibit 26: Breakup of opex

100% 6 5 11 12 11 12 12 12
90%
80%
44 43 33 28 28 29 28 27
70%
60%
50%
40%
30% 56 60 61 60 60 61
51 52
20%
10%
0%
Employee benefits expenses Other expenses Depreciation, amortization and impairment
Lower credit cost in microfinance to lower overall credit cost

Microfinance spread and credit cost to normalise over FY23E-25E
The credit cost of MGFL’s microfinance subsidiary, Asirvad increased sharply in
FY21/22 to 6% (during COVID) from an average of 1.4% in the preceding 2 years.
However, with collection efficiency back to normal, credit cost should revert to pre-
COVID levels of 1.5-2.5% during FY23-25E, aiding overall profitability.
Exhibit 27: Microfinance collection efficiency again healthy… Exhibit 28: …driving MFI PAT share higher in consolidated earnings
(%) (%)
23.3
120 102.0 103.0 25
100.0 96.0 99.0
95.0 93.0 19.6 19.4
100 20
78.0 74.0 16.0
80 13.8
15
60
10
40 25.0
5 1.0 1.0
20
0
0
1QFY22
1QFY21
2QFY21
3QFY21
4QFY21
2QFY22
3QFY22
4QFY22
1QFY23
2QFY23
-5 -1.4
Collection effeciency MFI PAT as a % of total PAT
Exhibit 29: Microfinance credit cost cools off post COVID… Exhibit 30: …driving overall credit costs lower
(%) (%)
7 1.8 1.7 1.7
6.1
6 1.6
5.1 5.2
1.4 1.2
5
1.2 1.1
4 1.0 0.9
0.8
3 2.5 0.8 0.7
2.0 2.0 0.6
2 1.5
0.4 0.3
0.9
1 0.2
0 0.0
MFI Credit cost % of AUM Credit cost as a % of AUM
Business segments
Microfinance business
In its bid to diversify into complimentary businesses, MGFL bought ~90% stake in
Asirvad Microfinance (MFI) in two tranches over FY15-FY16. In FY21 MGFL increased
its stake to ~95% in Asirvad MFI. It acquired the residual stake and upped its holding
to ~98% in the subsidiary, as its founder, Mr. Raja Vaidyanathan, exited the business
in July 2021. Since its acquisition in FY15, Asirvad has been striving to diversify its
base by entering multiple states and reducing its dependence on its home market,
Tamil Nadu (the company operated in Tamil Nadu, Kerala and Karnataka during this
period). As of FY22, the company had operations in 24 states through ~225,000
centres, with an active member base of 2.7mn.
The MFI arm has a separate branch structure and works independently from MGFL’s
gold finance business. However, as microfinance caters to the bottom of the pyramid
through income-generation credit products, MGFL should find synergy with Asirvad’s
client base in its next leg of growth.
Exhibit 31: Derisking dependence on Tamil Nadu Exhibit 32: Microfinance portfolio up ~22x since FY15 acquisition
(%) (Rs bn) (%)
85.0
90 160 70
57.6 139
80 140 60
70 114
52.5 120 43.3
60 50
100 92
50 39.8 35.7
31.6 40
40 30.0 80 70
24.2 55 60 23.4 22.5 30
30 21.2 21.0
17.0 15.0 15.0 60 17.0
20 38 20
40 24 8.8
10
20 10
0
1QFY23
2QFY23
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY22
0 0
Tamil Nadu (% of AUM) MFI AUM YoY growth (RHS)
Exhibit 33: Active members have grown ~8.5x since acquisition Exhibit 34: Disbursement per centre bouncing back post COVID
(Nos) (mn) (Rs '000) (Nos)
30 2.7 3.0 350 11 11.5

2.4 2.5 2.5
2.4
25 2.5 300
11 11.0
1.8
20 2.0 250
1.5 10 10 10.5
15 1.2 1.5 200
150 10
10 0.6 1.0 10.0
0.3 100
5 0.5
5 13 17 20 22 22 22 23 24 24 9.5
0 0.0 50
198 244 223 160 333
1QFY23
2QFY23
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY22
0 9.0
FY18 FY19 FY20 FY21 FY22
States covered Active members (RHS) Disbursement per center ('000) Active member per center (RHS)
Gold business
With 16% market share, MGFL is the second largest gold finance NBFC after Muthoot
Finance with an AUM of Rs 191.9bn and a 2.5mn gold loan customer base. The
company focuses largely on less than Rs 1 lakh ticket-size customers (average ticket
size of Rs 54,700 as on Sep’22), as this constitutes ~45% of its portfolio.
Rising share of online gold loans (OGL) at 47% in 2QFY23 vs. 12% in FY17, expansion
into non-South markets and higher branch productivity should aid 5% CAGR in gold
loan AUM, in our view over FY22-25.
Here, online transaction and operational costs are significantly lower than offline
loans, with bulk of the discounts being passed on to customers. Consequently, the
service has proven to be immensely popular, and attracted both, new and repeat
businesses, with online transactions accounting for 47% of the company’s gold loans.
Exhibit 35: OGL helps churn existing customers at lower opex
Decreases transaction cost as Increases customer stickiness

Decreases opex to assay the
Decreases opex to source loan is disbursed directly to bank as they do not have to visit the
gold ornament as it is a one-
customer account and repayment can branch for disbursal or interest
time activity
occur from anywhere payment
Exhibit 36: Customer base expanded at 3.3% CAGR over FY17-22 Exhibit 37: Average ticket size grew at 15% CAGR over FY17-22
(Nos) (%) (Rs)
60,000 56,600 56,300 54,700
3.0 15
2.5 10 50,000 44,600

12.1
10.5 9.5 38,500
2.0 5 40,000 33,600 32,600 32,900
4.3 30,000
1.5 0
1.1
0.0 0.0
1.0 -5 20,000
-9.2
0.5 -10 10,000
2.1 2.3 2.4 2.7 2.7 2.5 2.5 2.4
0.0 -15 0
FY17 FY18 FY19 FY20 FY21 FY22 1QFY23 2QFY23 FY17 FY18 FY19 FY20 FY21 FY22 1QFY23 2QFY23
Customer base YoY growth (RHS) Avg. ticket size
Exhibit 38: Non south region constitute 37% to AUM Exhibit 39: Semi-urban share in the AUM on the rise
(%) (%)
100 100
10 10 10 10
90 90 23 22 22 21 20 20 20
10 10 10 10
80 80
70 17 17 17 17 70
60 60 34 35 35 34 34 34 34
50 50
40 40
30 63 63 63 63 30 34 35 35 35
32 32 32
20 20
10 10
11 11 11 11 11 11 11
0 0
FY21 FY22 1QFY23 2QY23 FY18 FY19 FY20 FY21 FY22 1QFY23 2QY23
South North West East Rural Semi-Urban Urban Metro
Vehicle business
MGFL curbed its dependence on gold finance by deploying the incremental capital
from gold business into related credit businesses to serve a similar clientele. Through
this, the company diversified its loan book across product cycles. The company
undertakes vehicle finance through its existing gold finance branches, which sits in its
standalone book. We expect this segment to start contributing to growth, and
envisage this business along with SME finance and on-lending to NBFCs to register
20% CAGR in loan book over FY22-FY25E.
As part of its asset-class diversification strategy, MGFL ventured into vehicle finance
towards the end of FY15. The business is co-located with gold loan branches and
caters largely to the unorganised category of customers underserved by banks. In
FY17, it extended financing to construction equipment (CE), auto and 2W loans.
MGFL focuses on used vehicles, and offers 70-75% LTV on products. The business is
supported by strong pre-screening and credit assessment methods, with a team of
domain specialists at the helm. Sourcing is via references and old client relationships.
All branches have a separate collection team (in house) and an operations team that
conducts credit bureau checks from CIBIL and Equifax. The target segment is either
new to credit for 2Ws, or is in the earn-and-pay segment. These customers suffered
from cashflow distress during COVID, and hence the quality of this portfolio was
impacted over the last 2 years. We expect this portfolio to recover during FY23E-24E,
as the macro economy, especially the education and tourism sectors has open up.
Exhibit 40: Vehicle finance, yet to scale up… Exhibit 41: …with modest ticket size and high yield
(Rs mn) (Rs mn) (Rs mn) (%)
19.5 19.7 19.2
20,000 82.3 90 18.2 18.7 18.3 18.5
1.0 20
18,000 72.5 70.6 80 18
66.3 67.9
16,000 60.6 70 0.8 16
14,000 60 14
12,000 47.4
50 0.6 12
10,000 10
40
8,000 0.4 8
6,000 30
6
20
11,146
13,444
10,526
16,432
17,550
18,855
4,000 0.2 4
6,254
2,000 10 0.9 0.7 0.8 0.5 0.6 0.6 0.6 2

0 0 0.0 0
FY18 FY19 FY20 FY21 FY22 1QFY23 2QFY23 FY18 FY19 FY20 FY21 FY22 1QFY23 2QFY23
Vehicle finance AUM AUM per branch (RHS) Avg. tkt. size Avg. yield (RHS)
Exhibit 42: MGFL is expanding its vehicle finance operations Exhibit 43: Healthy mix of used and new vehicles
(Nos) (%)
300 267 100
242 242 90 20
250 222 222 30 34
80 38 41
70
200 168 60
150 50
40 80
100 76 70 66
30 62 59
20
50
10
0 0
FY18 FY19 FY20 FY21 FY22 1QFY23 2QFY23 FY18 FY19 FY20 FY21 FY22
Branches Used New
Exhibit 44: Vehicle finance sourcing mix Exhibit 45: Vehicle finance AUM split
(%)
12% 100
8 10 10
90 20
80 23 24 20
70 17
60
DSA
50
50% In-house 40
69 66 70 63
Existing gold customer 30
38% 20
10
0
FY19 FY20 FY21 FY22
CV 2W PV
Key risks
• Competitive intensity in gold loans could hamper growth
• Reintroduction of teaser rate loans could hurt margins
• Event risk (like Natural calamity) in the microfinance business; Can lead to higher
credit cost and hence impact profitability
• Higher attrition (rose to ~10% during FY22 ) due to poaching by competition could
inflate employee costs
Valuation & Outlook

Margins have bounced back from the bottom and are likely to stabilise at
~12.7% (280bps lower than pre-COVID high of 15.4% in FY20). But lower cost/ AUM
ratio (-50bps vs FY20) and lower credit cost (-40bps vs FY20) should absorb a
significant portion of NIM compression, and limit the impact on RoA to ~130bps to
4.6%. We estimate earnings to expand at 17% CAGR over FY22-25E, with RoA/ RoE
at 4.6%/ 17.5%, respectively. MGFL trades at 0.9x/ 0.7x FY24E/ FY25E BV. We initiate
coverage with a BUY rating, and a Mar’24 sum-of-the-parts (SOTP) target price of Rs
155. We value the standalone book at Rs 127/share, based on 1.0x FY25E BV and
Asirvad MFI at Rs 28/share, based on 1.5x FY25E BV after factoring in a holding
company discount of 20%.
Exhibit 46: SOTP-based valuation methodology to arrive at our target price

SOTP (Rs) Value (Rs bn) Value/ Sh. (Rs) % of total Rationale
Standalone (gold loan) business 107 127 81.7 1.0x BV
Subsidiary (Asirvad MF) 30 35 22.9 1.5x BV
Less: 20% holding discount 6 7 4.6
Value of subsidiary 24 28 18.3
Target value post 20% holding company discount 131 155 100.0
CMP 95 112
Upside (%) 38.4 38.4
Exhibit 47: One-year forward P/B band Exhibit 48: One-year forward P/E band
(x) (x)
4 20
3 15
2 10
1 5
0 0
Dec-18
Dec-19
Dec-20
Nov-21
Nov-22
May-09
Apr-10
Apr-11
Feb-15
Feb-16
Mar-12
Mar-13
Mar-14
Jan-17
Jan-18
Apr-09
Dec-17
Dec-18
Dec-19
Nov-20
Nov-21
Nov-22
Feb-13
Feb-14
Mar-10
Mar-11
Mar-12
Jan-15
Jan-16
Jan-17
Exhibit 49: Well capitalised…(standalone) Exhibit 50: …with low leverage (consolidated)
(%) (x)
4.8
5 4.6
40 4.4 4.4
4.1
35 31.3 3.8
29.0 4 3.6 3.5
30 27.0
23.3
25 21.7 3
20
15 2
10
1
5
0 0
FY18 FY19 FY20 FY21 FY22 FY18 FY19 FY20 FY21 FY22 FY23E FY24E FY25E
CAR Leverage
Exhibit 51: Conslodated RoE to stabilse at ~18% over FY23-25E

(%) (%)
7 35
28.5
6 26.2 30
5 22.5 25
18.7 18.1 17.5
4 16.9 17.3 20
3 15
2 10
1 5
4.2 5.1 5.9 5.7 4.1 4.6 4.5 4.6
0 0
ROAA ROAE (RHS)
Company Background
MGFL is the second-largest player in the gold finance space with AUM of Rs 306bn as
at 2QFY23. The company has pan-India presence with 5,000+ branches, with ~5.0mn
loan customers as at 2QFY23. Its key subsidiaries are a) Asirvad MFI; and
b) Manappuram Home Finance.
Name Designation Background
• Postgraduate in Science
Mr. V.P.Nandakumar MD & CEO
• Managing committee member of ASSOCHAM and FICCI
• Director since July 1992
BN Raveendra Babu MD MFI
• Worked in a senior role with Blue Marine International in UAE
• B-tech graduate in applied electronics and instrumentation engineering and masters in
Mr. Suveen PS CEO - Housing Finance embedded system
• Worked with Manappuram Finance
Head - Vehicle and • Over 24 years of experience with organisations such as Fullerton India, HDFC Bank, Citicorp,
Mr. Senthil Kumar
Equipment Finance etc
• Fellow member of the Institute of Chartered Accountants of India
Mrs. Bindu AL CFO
• 21 years of work experience in various capacities
Source: Systematix Institutional Research
Exhibit 53: MGFL – Timeline

Increased focus on
Diversified into HL digitization- Online gold
and CV financing and loans account for 63% of the
online gold loan. gold AUM.
Acquired the
Permitted by RBI to Investment from Impact of demon
Chennai based MFI, Due to COIVD, there were
accept deposit from Sequoia Capital and and GST facilitated
Asirvad Microfinance stricter underwriting norms
MGFL was public without Hudson Equity gold loan demand
Pvt. Ltd (85% stake) with review and reset of
incorporated in restriction on the Holdings investing reflected in AUM
for Rs 671mn geographical limits and
Thrissur limit Rs 700mn growth (+55%)
margin on collateral.
1992 1995 1996 2005 2007 2011 2015 2016 2018 2020 2021 2022
Institutional funding AUM crossed 100% ownership in

Public issue of share Infused Rs 2.6bn in Asirvad Disbursed Rs 6.6bn
of Rs 250mn from Rs 75bn Manappuram
of Rs 17.2mn microfinance through right through doorstep gold
ICICI Bank under Insurance broker
Pvt. Ltd. issue and increased the lending in FY22
working capital
stake to 93.3%
facility
Exhibit 54: MGFL – Corporate structure

Manappuram Finance
Limited
Manappuram Computech
Asirvad Microfinance Manappuram Home Finance Manappuram Insurance
and Consultants Limited
(97.51% stake) (100% stake) Broker Limited (100% stake)
(99.8%)
FINANCIALS (CONSOLIDATED)

Other income 828 1,351 3,099 3,835 4,652 Reserves 71,382 81,991 95,256 1,10,540 1,28,634
Net Income 41,557 41,149 44,933 49,615 56,402 Net worth 73,074 83,683 96,949 1,12,233 1,30,326
Pre provision profit 27,561 22,697 24,995 27,463 31,470 Others 12,669 13,076 15,917 16,815 23,677
Provisions 4,401 4,862 2,905 3,007 2,743 Total liabilities 3,13,378 3,38,106 3,78,398 4,25,591 4,92,862
Tax 5,911 4,548 5,700 6,344 7,479 Investments 3,380 4,207 4,902 6,276 8,276
Tax rate 25.5 25.5 25.8 25.9 26.0 Loans 2,65,076 2,89,710 3,15,337 3,56,170 4,11,652

Interest Expense 7.3 6.2 6.3 6.5 6.6 Cost of borrowings 9.8 8.6 9.0 9.3 9.6
Pre provision profit 9.1 7.0 7.0 6.8 6.9 RoA (%) 5.7 4.1 4.6 4.5 4.6
Provisions 1.4 1.5 0.8 0.7 0.6 RoE (%) 26.2 16.9 18.1 17.3 17.5
Tax total 1.9 1.4 1.6 1.6 1.6 CAR (%) 29.0 31.3 30.3 31.2 31.3

Net interest income 15.1 -3.6 8.9 9.5 13.1 FDEPS (Rs) 20 16 19 21 25
Net Income total 11.7 -1.0 9.2 10.4 13.7 PER (x) 6 7 6 5 5
Pre provision profit 22.8 -17.6 10.1 9.9 14.6 Book value (Rs) 87 99 115 133 154
Profit before tax 15.4 -23.0 23.9 10.7 17.5 P/BV (Rs) 1.3 1.1 1.0 0.9 0.7
Profit after tax 16.5 -23.0 23.4 10.5 17.3 Adjusted book value (Rs) 83 91 109 126 147
Loan 9.1 9.3 8.8 12.9 15.6 P/ABV (Rs) 1.4 1.2 1.0 0.9 0.8
AUM 7.9 11.2 10.2 13.1 15.6 P/PPP (x) 3.5 4.2 3.8 3.5 3.0
FINANCIALS (STANDALONE)

Other income 464 445 471 498 548 Reserves 67,325 77,736 88,956 1,00,533 1,13,439
Preprovision profit 23,995 18,305 19,508 20,148 22,231 Others 11,119 11,017 9,097 6,894 10,682
Provisions 1,299 807 782 825 691 Total liabilities 2,56,540 2,69,706 2,84,252 3,05,319 3,41,383
Tax 5,716 4,452 4,765 4,917 5,481 Investments 12,002 12,155 12,510 13,554 15,163
Tax rate 25.2 25.4 25.4 25.4 25.4 Loans 2,10,594 2,27,197 2,30,914 2,50,034 2,79,534

Interest Expense 7.0 5.3 5.3 5.3 5.4 cost of borrowings 9.7 7.8 8.1 8.3 8.5
Preprovision profit 9.7 7.0 7.0 6.8 6.9 RoA (%) 6.9 5.0 5.0 4.9 5.0
Provisions 0.5 0.3 0.3 0.3 0.2 RoE (%) 27.7 17.6 16.4 14.9 14.8
Tax total 2.3 1.7 1.7 1.7 1.7 CAR (%) 29.0 31.3 34.0 35.8 36.2

Net interest income 18.0 -7.9 6.0 4.3 9.5 FDEPS (Rs) 20 15 16 17 19
Net Income total 17.3 -8.0 6.0 4.3 9.5 PER (x) 4 5 5 5 4
Preprovision profit 36.0 -23.7 6.6 3.3 10.3 Book value (Rs) 82 94 107 121 136
Profit before tax 35.1 -22.9 7.0 3.2 11.5 P/BV (Rs) 1.0 0.9 0.8 0.7 0.6
Profit after tax 38.0 -23.2 7.0 3.2 11.5 Adjusted book value (Rs) 78 87 102 115 130
Loan 8.8 7.9 1.6 8.3 11.8 P/ABV (Rs) 1.1 0.9 0.8 0.7 0.6
AUM 7.8 8.9 2.9 8.3 11.9 P/PPP (x) 2.9 3.8 3.6 3.4 3.1
Systematix
IIFL Finance 28 November 2022
On an accelerated growth path

INITIATING COVERAGE IIFL Finance (IIFL) is one of the leading retail-focused NBFCs with a well-balanced
Sector: NBFCs Rating: BUY portfolio spanning product categories like home loans, gold loans, business loans
CMP: Rs 481 Target Price: Rs 775 and microfinance. Its retail AUM recorded 27% CAGR over last 5 years, supported
by strong distribution franchise, a combination of Phygital and partnership model.
Stock Info
IIFL continues to leverage its distribution franchise, and has managed to build an
Sensex/Nifty 62,505/18,563
Bloomberg IIFL IN asset-light model with 39% of its portfolio under assignment, securitisation or co-
Equity shares 380mn lending. A significant share of its off balance-sheet book has helped IIFL create a
52-wk High/Low Rs 485/267 sustainable revenue model through a combination of net interest margin (NIM)
Face value Rs 2 and fee income (which require less capital). Moreover, we expect its opex to assets
M-Cap Rs 183bn/ USD 2.2bn ratio to revert to a normalised level of 4.2% by FY25E, as it has already incurred a
3-m Avg volume USD 4.6mn
large part of the technology and network-related expenses. This should further
Financial Snapshot (Rs bn) improve its RoA profile. We estimate 25%/29% CAGR in AUM/earnings over FY22-
Y/E March FY23E FY24E FY25E 25E. At CMP, the stock trades at 1.4x FY25E BV with RoA/ RoE of 3.8%/21.1%,
NII 39,288 45,747 53,803
respectively. We initiate coverage on IIFL with a BUY rating, and a target price of
PPP 29,346 36,228 44,944
PAT 16,095 20,411 25,278 Rs 775, based on 2.25x FY25E P/BV. Key risk. Rising competitive intensity in gold
EPS (Rs) 42.4 53.8 66.6 loan remain key risk.
EPS Gr. (%) 35.5 26.8 23.8
BV/Sh (Rs) 238 285 345 Retail-focused with a well-diversified portfolio: Nearly 94% of IIFL’s portfolio is retail
Ratios in nature; the portfolio has turned granular, with the average ticket size having
NIM (%) 8.3 8.0 7.6 slipped to Rs 1.6/0.9mn from Rs 1.8/2.3mn in the Home loan/ Business loan
C/I ratio (%) 42.5 40.5 38.1 segments over FY18-22. A more granular and diversified portfolio should help the
RoA (%) 3.3 3.6 3.8
RoE (%) 20.8 20.6 21.1
company in balancing any cyclical swings.
Payout (%) 11.1 11.1 11.1 Under penetration plus three-pronged distribution franchise to accelerate AUM
Valuations
P/E (x) 11.2 8.8 7.1
growth: The company’s three-pronged distribution franchise (Branch + Digital +
P/BV (x) 2.0 1.7 1.4 partnership) caters to a wide spectrum of retail customers with ticket sizes ranging
Div. Yield (%) 1.0 1.3 1.6 from ~Rs 30,000 to ~Rs 25mn. Moreover, there is significant under penetration in all
Shareholding pattern (%) core product segments, which should further support balance sheet growth over a
Sep’22 Jun’22 Mar'22 longer time frame. We estimate 25% CAGR in AUM over FY22-25E.
Promoter 24.9 24.9 24.9
–Pledged
Asset and capital-light model drive higher profitability: The company has an asset-
FII 25.6 23.1 20.6 light model, with off balance sheet assets forming a significant 39% of the overall
DII 3.4 2.7 1.1 AUM, which also reduces the capital requirement. As a result, the company is able to
Others 46.1 49.3 53.4 leverage at 6x, and in turn aid profitability, to generate an RoE of 20%, the best
among peers. Further increase in off balance sheet share to ~45% by FY25E would
Stock Performance (1-year)
improve RoA/RoE to 3.8%/21% from 2.7%/20% in FY22, in our view.
150
125 Superior asset quality aided by prudent credit underwriting: IIFL has managed to
100
sustain its superior asset quality over the last 5 years, seen from its steady GNPA
75
50
hovering in a tight 1.5-2.3% range - best among peers. Even including the impact of
25 RBI circular dated 12th Nov, GNPA stood at 3.15% during Mar’22. Its asset quality has
0 outperformed that of peers, due to its stringent credit underwriting measures.
Dec-21
Nov-21
Apr-22
Jan-22
Feb-22
Mar-22
Jul-22
Oct-22
Nov-22
Aug-22
Sep-22
May-22
Jun-22
Valuation and outlook: Historical evidence shows valuations of NBFC companies

IIFL Sensex have been following their balance‐sheet growth. We estimate strong 25% CAGR in
IIFL’s AUM to deliver 29% CAGR in earnings over FY22‐25E. An asset-light model,
Pradeep Agrawal coupled with operating leverage should enable IIFL’s RoA/ RoE to improve to 3.8%/
pradeepagrawal@systematixgroup.in
+91 22 6704 8024
21% by FY25E from 2.7%/ 20% in FY22, respectively. We value IIFL at 2.25x FY25E BV
to arrive at our target price of Rs 775. We initiate coverage with a BUY rating.
Hena Vora
+91 22 6704 8045
28 November 2022 IIFL Finance
Story in Charts
Exhibit 1: A well-diversified portfolio Exhibit 2: AUM to expand at 25% CAGR over FY22-25E
3.9 2.0 1.0 1.5 1.3 1.2 0.9 (Rs bn)
100% 5.7 4.7 4.7
90% 14.0 12.0 9.5 1,200
16.1 10.6 12.0 11.9 12.2
80% 3.1 7.0 9.0
14.8 14.5 14.4 1,000
70% 21.0 16.7
60% 30.3 24.0
800
50% 31.7 32.5 32.2
18.0 24.0 29.4
40% 14.9 600
30%
20% 400
31.7 35.0 33.0 32.3 34.6 35.3 35.6
10% 200
223
271
349
380
447
512
627
779
973
0%
FY18 FY19 FY20 FY21 FY22 1QFY23 2QFY23 0
Home loans Gold loans FY17 FY18 FY19 FY20 FY21 FY22 FY23E FY24E FY25E
Business loans Microfinance AUM
Construction & Real estate Capital market finance
Exhibit 3: NIMs on an improving trend Exhibit 4: Portfolio yield and cost of funds steady
(%) (%)
15 20
14.7 15.5 15.1
9.6 14.4 14.6
10 8.5 7.8 15
7.3
6.3 8.0 8.9 9.3 8.8 8.6
10 8.4
5.9
5 7.2 6.7 7.2 7.0
6.4 6.4 6.9
4.0 5
0
FY18 FY19 FY20 FY21 FY22 0
NIM on on-book assets FY18 FY19 FY20 FY21 FY22
Assignment and fee income on off-book assets Yield Cost of funds
NIM (total)
Exhibit 5: Gross NPA hovers in a tight range… Exhibit 6: …so also does Net NPA, barring the regulatory impact
(%) (%)
3.5 Gross GNPA Net NPA
2.0 1.83
3.0
0.85 1.5
2.5 1.5
1.2
2.0
1.0 0.82 0.89
1.5
2.58 2.42 0.58
2.30 0.52 0.49
1.0 2.04 1.98
1.76 1.62 1.74 0.5
0.5
0.0 0.0
Exhibit 7: Off balance sheet share in the portfolio continues to increase

As % of AUM FY20 FY21 FY22 2QY23
Loan book using risk capital 69 67 62 61
Securitised book (%) 5 9 5 3
Loan Book (Ind AS Balance sheet) (%) 74 75 67 64
Assigned assets (%) 26 25 28 28
Co-lending book (%) - 0.1 6 9
Assets under management (%) 100 100 100 100
Retail-focused NBFC with a well-diversified portfolio

Portfolio mix becoming increasingly retail and granular
Nearly 94% of IIFL’s portfolio is in retail, comprising home loan, gold loan, business
loan and microfinance segments, key focus areas for the company. A minor portion
of its portfolio (6% of AUM) falls under the construction & real estate and capital
market, which are non-core segments for the company. In line with its strategy of
focusing on the above-mentioned four core segments, IIFL exited the commercial
vehicle financing business in FY19 (CV portfolio (14% of AUM), sold to Indostar).
As a conscious strategy to build a more granular book, management lowered the
average ticket size of its home/business loan segment to Rs 1.6/0.9mn from
Rs 1.8/2.3mn in FY18. A more granular and diversified portfolio should help the
company in balancing any cyclical swings.
Exhibit 8: A well-diversified retail portfolio targeting small loans to underbanked people/ enterprises in Tier 2,3,4 towns
AUM
Core/ Target Customer Average
Segments (2QFY23) ATS-FY18 ATS-FY22 ATS- Unique features
Non-core Profile Yield (%)
(%) 2QFY23
Salaried / Self- • Focused on affordable and non-metro housing segments
Home loans employed 36 1.8 1.7 1.6 10.6
individuals • Leverages underwriting skills developed over time
Medium, Small
• Predominantly lending to business owners, backed by
Gold loans and Micro 32 0.06 0.07 0.07 17.5
cash flows and collateral
Enterprises
Core segments
• Small-ticket loans with very low delinquencies
Business loans Individuals 14 2.3 1.0 0.9 17.6 • Competitive advantage over peers, given the vast branch
network and segment experience
Rural self- • High-yielding granular portfolio dominated by Self Help
Microfinance employed 12 0.02 0.03 0.03 22.4 Groups (SHGs) of women for income-generating activities
women • Presence across 17 states
Core products
94
Total
Construction • Lending to residential projects and developers, with focus
Developers 5 212.0 281.3 215.6 15.3
Non-core and real estate on affordable housing
segments • Lending to HNIs, corporates, private trusts, etc., looking
Capital markets Individuals / HNIs 1 14 12.2 14.7 12.3
to monetise their investments to raise capital
Grand Total 100.0 15.5
Exhibit 9: Retail and non-retail mix

(%)
100 6.0 6.0 6.0
17.3 15.0 13.0 11.0
90
80
70
60
50 94.0 94.0 94.0
82.7 85.0 87.0 89.0
40
30
20
10
0
FY18 FY19 FY20 FY21 FY22 1QFY23 2QFY23
Retail Non-Retail
Three-pronged distribution franchise; Business built on branch, digital and
partnership model…
Over the last few years, IIFL has built a multi-pronged distribution channel,
supplementing the traditional branch-led model with partnership-led models and
direct-to-customer models. Its uniqueness is that it is scalable, technology-enabled,
and highly specialised, which differentiates it from traditional models that largely
rely on branch infrastructure. Each of the company’s channel is powered by
technology, which helps in improving customer experience.
While technology remains a focus area for the company, it places equal thrust on
physical presence through branches. This is because, ground presence helps in
building trust with customers. While the company provides end-to-end service to
customers through its digital platform, it has consistently expanded its branch
network from ~2,000 in FY19 to 3,766 branches across India.
The company’s strategy has been to expand into geographies under penetrated by
banks. Around ~87% of its branches are in Tier II and Tier III locations, which enable
the company to fill the credit gap to the marginalised sections of the society. Its
branch network is well diversified in terms of geography, albeit more inclined to rural
areas versus urban.
Exhibit 10: Business built on branch, digital and partnership models
Exhibit 11: Three-pronged distribution channel to achieve scale
• While Physical branches continue to be the face of the brand, they are integrated with technology for fast and superior
Branch Led customer experience
Channel
• Network of 3,766 branches across India.
• Focus areas: Strategic tie-ups with banks for Co-lending and Strategic partnership with third-party fintech partners
• Colending: undertook multiple bank partnerships leveraging their extensive reach and bank’s low-cost funding to explore
untapped opportunities ; Strong growth in co-lending disbursement.
• Fintech: Strategic partnerships with Paytm, PhonePe, Google Pay, MobiKwik and BHIM, among other unified payment
interfaces. Fintech integrations have also made repayments easy and secure for the clients. ; tied up with fintech and
Partnership
& Alliances digital players to get leads and add new customers to gold loan portfolio; entered into partnerships with leading fintechs
channel with appropriate risk-sharing agreements for businesss loans.
• Formed a joint venture with SME-focused neo-banking platform Open Financial Technologies to establish India’s first Neo
bank, which caters to micro and small businesses banking and credit needs. The initial capital was Rs 1.2bn with a 51:49
split between IIFL finance and open. Both the entities have a huge customer base (IIFL Finance- 8 mn + users and open
has 2.3mn + users) which will benefit in reaching around 1mn customers within a year and generating a US$2 bn lending
book in two years.
• Digital initiatives gained traction with DIY loan disbursement growing at healthy pace and 100% of home loan processing
Digital becoming paperless.
Channel • From customer onboarding, credit underwriting, loan disbursement, collections, the company follows a completely
paperless process through their platform.
Exhibit 12: Strong branch network… Exhibit 13: …supported by adequate employees
(Nos) (Nos) (%)
4,000 3,766 35,000 32,369 50
3,595 28,369
3,500 3,294 45
30,000
40
3,000 43.1
2,563 25,000 35
2,377 19,825
2,500 18,580 36.1 30
1,947 20,000 16,779
2,000 25
15,000 20
1,500
10,000 15
1,000
10
500 5,000
10.7 5
6.7
0 0 0
FY19 FY20 FY21 FY22 1QFY23 2QFY23 FY19 FY20 FY21 FY22 2QFY23
Branch Employee YoY growth (RHS)
Exhibit 14: Pan-India branch presence Exhibit 15: Balanced branch geographical distribution (numbers)
PAN INDIA
REACH 20
31
South
North
West
East
27
3,766: Total branches
across India 22
Exhibit 16: The notable digital enhancements across segments are:

• Launched co-branded prepaid cards, an innovative product with ICICI bank
Gold loan • Tied up with fintech and digital players to get leads, and add new customers to their portfolio
• Provides digital gold loan with online top-up as well as repayment options for their customers, with 24*7 servicing
• ‘Jhatpat Home Loan’, their pan-India product for instant home loan disbursement, accounted for nearly 100% of the home
Home loan
loans disbursed during FY22
• Unsecured business loan is a complete digital offering, while under their secured loans, they provide digital top ups to existing
customers
Business loan
• IIFL is the first entity in India to launch instant business loan on whatsapp
• They have also entered into partnerships with leading fintechs with appropriate risk-sharing agreements
• Microfinance loans achieved 100% cashless disbursements. Established various digital collection methods including UPI-
Fingpay, UPI through their customer application - Sakhi, AEPS, UPI collection using whatsapp, and Bharat Bill Payment System
Microfinance Loan
(BBPS), to minimise the risk of carrying cash in the field
• These modes provide real time, error free reconciliation and immediate payment confirmation to customers
Exhibit 17: IIFL is the first entity in India to launch instant business loan on whatsapp
• Ease of chat introduced to make the complex loan journey more convenient. 450+ mn whatsapp users in India may now utilise
Onboarding
a 24*7 lending option to acquire loan in less than 10 minutes. Account aggregator embedded in the route to reduce bank
journey
statement drop offs
Powered by AI • A powerful AI-BOT matches users’ inputs to the loan offer and streamlines the application process with KYC and mandate
BOT creation. Users can avail a loan of up to 1mn with minimal paperwork and clearance in 5 minutes
Data analytics • API integration with fintech vendors. Machine learning models to assist underwriting. E-KYC and E-signature
Fraud checks • Fraud checks are integrated within the journey itself. Has deployed new-age fintech solution, which gives fraud scores of users
• IIFL loans app: Easier access to account statements, online top up/renewal of gold loans, online application for an instant
personal loan, faster EMI payments, and smoother issue resolution. Average monthly +0.2mn users
The two mobile
• My Money app: User can avail instant paperless unsecured business and personal loans. It helps customers simply manage
applications
their money. It has a 100% online loan application process and provides loans ranging from Rs 0.05mn to Rs 1mn for business
loans and from Rs 0.05mn to Rs 0.2mn for personal loans - average monthly 0.09mn users
Exhibit 18: DIY Channel - My Money app and whatsapp Exhibit 19: Digital DIY disbursement gaining traction
(Rs bn) (%)
3.5
4.0 3.0
• 100% online loan application process 3.5 2.9
2.6 2.5
3.0 2.7
• Loans ranging from Rs 50,000 to Rs 1mn for 2.0
2.5 2.2
Business Loans and from Rs 5,000 to
Rs 200,000 for Personal Loans 2.0 1.9 1.5
1.1
1.5
1.0
• API Integration with fintech vendors 1.0 1.1
0.3 0.5
0.5 0.1
• More than 60,000 customers on boarded till 0.3
0.0 0.2 0.0
date through MyMoney and WhatsApp
1QFY22 2QFY22 3QFY22 4QFY22 1QFY23 2QFY23
Digital disbursement % of the total disbursement (RHS)
Exhibit 20: Co-lending partnerships

Home loan Gold loan MSME LAP
State Bank of India DBS Punjab National Bank
Union bank of India Shivalik ICICI Bank
Punjab National Bank CSB Bank Standard Chartered Bank.
ICICI Bank Union Bank of India
Central Bank of India DCB Bank
Standard Chartered Bank
Exhibit 21: Co-lending gold disbursement is growing at a fast pace… Exhibit 22: ..so is co-lending home loan disbursement
(Rs bn) (%) (Rs bn) (%)
15.1
25 13.5 16 12 16
12.2 9.9
14 11.9 14
20 11.4 10
12 8.2 12
10 8 6.6
15 6.3 10
8 6 8
9.2
10 6 6
4
4 1.6 4
5 1.2 5.1
0.2 0.0 0.2 0.1 2 2
21.0 16.2 17.9 0.1 2
2.6 0.1 1.2
0 0 0 0
1QFY22 2QFY22 3QFY22 4QFY22 1QFY23 2QFY23 1QFY22 2QFY22 3QFY22 4QFY22 1QFY23 2QFY23
Co-lending gold disbursement Co-lending home disbursement

Co-lending Gold AUM as a % of Gold AUM (RHS) Co-lending AUM as a % of HL AUM (RHS)
Extensive distribution franchise + Under penetration =

Accelerated AUM growth
Multi-pronged distribution franchise along with under penetration in all the focus
business segments will likely continue to drive accelerated AUM growth for IIFL. The
company’s three-pronged distribution franchise caters to a wide spectrum of retail
customers having ticket sizes ranging from ~Rs 30,000 to ~Rs 25mn. Moreover,
significant under -penetration in all core product segments will likely further support
balance sheet growth over a longer time frame. Over the last 5 years, overall AUM
has grown at a CAGR of 18%. With all the infrastructure in place, we estimate 25%
CAGR in the company’s AUM over FY22-25E to attain a portfolio size of Rs ~1trn.
Exhibit 23: AUM to expand at 25% CAGR over FY22-25E Exhibit 24: A well-diversified portfolio
(Rs bn) 3.9 2.0 1.0 1.5 1.3 1.2 0.9
100% 4.7
12.0 9.5 5.7 4.7
1,200 90% 16.1 14.0 11.9 12.2
10.6 12.0
80% 7.0 9.0
3.1 14.5 14.4
1,000 70% 16.7 14.8
24.0 21.0
60% 30.3
800
50% 31.7 32.5 32.2
18.0 24.0 29.4
600 40% 14.9
30%
400 20% 35.0 35.3 35.6
31.7 33.0 32.3 34.6
10%
200 0%
223
271
349
380
447
512
627
779
973
FY18 FY19 FY20 FY21 FY22 1QFY23 2QFY23

0
FY17 FY18 FY19 FY20 FY21 FY22 FY23E FY24E FY25E Home loans Gold loans
Business loans Microfinance
AUM
Construction & Real estate Capital market finance
Exhibit 25: Gold loan AUM grew at 41% CAGR over FY17-22 Exhibit 26: Home loan AUM surging at a healthy pace
(Rs bn) (%) (Rs bn) (%)
55.6 60.8
200 60 250 80
180 45.0 42.4 60
44.4 50 26.2 25.4
160 38.7 200 22.8 40
15.3
140 31.1 40 2.5 20
29.2
120 23.4 30 150 0
100 -20
80 20 100 -40
60 10 -60
40 -1.0 50 -99.8 -80
0
20 29 40 63 91 131 162 171 178 86 122 125 144 177 186 197 -100
53
0 -10 0 -120
AUM YoY growth (RHS) AUM YoY growth (RHS)
Exhibit 27: Microfinance AUM showing robust growth Exhibit 28: Business loan book showing pick-up in growth
(Rs mn) (%) (Rs bn) (%)
80 300 90 82 84 25
251.9 80 80
67 75 76 76
70 63 80 20
62 250 67 23.5
60 70 13.8
190.5 15
47 200 60
50 7.4
50 10
40 34 150
40 2.0 5
30 24
100 30
48.3 0
20 39.8 38.7 43.1 20 -4.9
8 29.9 -6.3 1.3
50 -5
10 2 10
0 0.0 0 0 -10
AUM YoY growth (RHS) AUM YoY growth (RHS)
Optimum product mix to aid NIMs

The company’s healthy 7% NIM in on-book assets is aided by an optimum mix of
high-yielding portfolio. The company had a portfolio yield of 14.6% during Mar’22,
with the average product yield ranging 10%-22%. Medium and high-yielding
portfolios, viz., microfinance, gold loan and business loan, construction & real estate
constituted 64% of the AUM in FY22.
Off-book assets constitute a major 39% of the overall AUM (assigned, securitised or
under co-lending), which is in line with the company’s capital optimising strategy.
The company makes a healthy 9.6% income on off-book assets, which translates into
a good 38% of the total income.
On blended basis, the company recorded NIM of 8.01% in FY22, which has improved
significantly from 6.65% in FY20 to 7.22% in FY21.
Exhibit 29: Off balance sheet share in the portfolio continues to increase
As % of AUM FY20 FY21 FY22 2QY23
Loan book using risk capital 69 67 62 61
Securitised book (%) 5 9 5 3
Loan Book (Ind AS Balance sheet) (%) 74 75 67 64
Assigned assets (%) 26 25 28 28
Co-lending book (%) - 0.1 6 9
Assets under management (%) 100 100 100 100
Exhibit 30: NIMs on an improving trend Exhibit 31: Portfolio yield and cost of funds steady
(%) (%)
12 18
9.6 15.5 15.1
16 14.4 14.7 14.6
10 8.5
7.3 7.8
14
8 6.3 8.0
12
6 5.9 8.9 9.3 8.8
7.2 7.2 7.0 10 8.4 8.6
6.7
6.4 6.9
4 6.4 8
2 4.0 6
0 4
FY18 FY19 FY20 FY21 FY22 2
NIM on on-book assets 0

FY18 FY19 FY20 FY21 FY22
Assignment and fee income on off-book assets
Yield Cost of funds
NIM (total)
Calibrated expansion plan and focus on digitisation to steer

operational efficiency
We expect productivity at IIFL’s existing branch network to improve, given the
company’s calibrated network expansion plans for the next couple of years (+300 in
3 years) coupled with the breakeven at its existing branches over 12-18 months.
Moreover, digitisation of all processes, from sourcing to disbursement, too should
steer operational efficiency over FY24/25E. We expect the cost/ income ratio to slide
back to ~38% in FY25E after having risen to ~43% in 1HFY23 (35% in FY21). The
change will likely be brought about because of the extensive branch network
(+730/472 branches in FY22/ 1HFY23) expansion and technological investments
during the year. However, as the investment phase is largely over, the company is
likely to derive its benefits over FY23-25, with its cost/ income ratio normalising at
38% by FY25.
Exhibit 32: Cost/ Income to normalise by FY25E… Exhibit 33: …so would cost/ AUM ratio
(%) (%)
60 4.0 3.8
51.6 3.5 3.5
3.4 3.3
46.9 3.5 3.2
50
42.5 2.9
39.6 40.5 3.0
38.1
40 35.4
2.5
30 2.0
1.5
20
1.0
10
0.5
0 0.0
FY19 FY20 FY21 FY22 FY23E FY24E FY25E FY19 FY20 FY21 FY22 FY23E FY24E FY25E
Cost to Income Cost/AUM
Superior asset quality aided by prudent credit underwriting

IIFL has been able to maintain superior asset quality over the last 5 years by
sustaining its GNPA levels in a tight 1.5-2.3% range, the best among peers. Despite
including the impact of RBI circular dated 12th Nov on daily stamping of NPA, GNPA
stood at 3.15% during Mar’22. Asset quality is better than industry peers, on account
of stringent credit underwriting measures. Few of the company’s notable credit
underwriting processes include- (i) stress testing mechanism to carry out event-
based sensitivity analysis, (ii) Detailed review mechanism of portfolio quality, (iii) Tie-
ups with external bureaus to analyse collection performance, coupled with
continuous credit assessment for various key segments, (iv) Application scorecard to
enable the company to standardise credit underwriting and improve sourcing quality
in the long run.
Among all the product segments, microfinance and unsecured business loans (1/3rd
of business loan) were the most affected by COVID, as lockdowns hampered
customers’ livelihoods. These segments recorded relatively higher GNPA of 3.1%/
4.2%, respectively, during Mar’22.
Exhibit 34: Gross NPA hovers in a tight range… Exhibit 35: …so also does Net NPA, barring the regulatory impact
(%) (%)
Gross GNPA Net NPA
3.5 2.0 1.83
1.8
3.0
0.85 1.6 1.5
2.5 1.4 1.2
2.0 1.2
1.0 0.89
0.82
1.5 0.8
2.58 2.42 0.58
2.30 0.6 0.52 0.49
1.0 2.04 1.98
1.76 1.62 1.74
0.4
0.5 0.2
0.0 0.0
Exhibit 36: Home loan - GNPA% Exhibit 37: Gold loan - GNPA%
(%) (%)
Home Loans Gold Loans
3.0 1.0
0.9
2.5
0.8
0.80 0.7
2.0 0.50
0.6
1.5 0.5
0.90
2.40 2.40 0.4 0.80
1.0
1.80 0.3 0.60
1.40 1.50
0.2 0.40 0.40
0.5 0.30 0.30
0.70 0.70 0.80 0.1 0.20
0.0 0.0
Exhibit 38: Business loan - GNPA% Exhibit 39: Microfinance – GNPA%
(%) (%)
Business Loans Microfinance Loans
7 4.5
4.0
6
3.5 0.80
5 1.80
3.0
4 2.5
3 2.0
5.70 5.30 3.70 3.50
1.5 3.10
2 4.20 4.30
3.70
1.0 1.80
2.50 2.20 1.50
1 1.70 0.5 0.80
0.50 0.50
0 0.0
Exhibit 40: Maintains healthy provision cover across products (2QFY23)

0-30 dpd 31-90 dpd 90+ dpd % of Gross Provision (%)
Loan book (Rs mn)
Stage 1 Stage 2 Stage 3 Stage 1 Stage 2 Stage 3 Stage 1 Stage 2 Stage 3
Home loans 1,08,750 5,040 2,840 93.2 4.3 2.4 1.6 9.2 45.0
Business loans 57,700 6,140 2,850 86.5 9.2 4.3 2.2 14.4 50.9
Gold loans 69,320 8,430 650 88.4 10.8 0.8 0.7 0.9 16.5
Microfinance 52,750 4,280 2,060 89.3 7.2 3.5 2.0 5.6 63.8
Construction and Real Estate 25,220 610 100 97.3 2.4 0.4 7.8 9.2 67.8
Capital market finance 4,650 220 - 95.5 4.5 - 0.4 0.4 -
Total 3,18,380 24,730 8,500 90.5 7.0 2.4 2.1 6.9 49.6
Source: Company, Systematix Institutional Research; Note: dpd – days past due
Exhibit 41: Collection efficiency robust

(%)
140
120
100
80
60
40
20
0
4QFY20 1QFY21 2QFY21 3QFY21 4QFY21 1QFY22 2QFY22 3QFY22 4QFY22
Home Gold Business Micro-Finance
Strong capital adequacy and diversified borrowing profile to

support growth
IIFL has a strong capital base, as well as diversified sources of funding, which aid
growth. The company has a healthy Tier I of 16.1%, with overall capital adequacy at
23.9%.
Borrowing mix too is pretty diversified, with bank loans constituting the largest
source of funds at c.63%, followed by NCDs at c.28% and securitised liability at c.7%.
Over the years, the company’s liability profile too has been floating in a similar range,
with bank borrowings at 50-60% of total borrowings and NCD at 25-30%. As at
Sep’22, liquidity (free cash + undrawn lines) stood at Rs 82bn, more than enough to
cover the next six months of repayments.
Exhibit 42: Diversified borrowing profile Exhibit 43: Well covered debt repayment schedule
(%) (Rs bn)
140.2
2 2
100
123.6
4 160
118.8
4 7 7
111.9
90 3 12 1
2 140
97.8
80
88.4
120
70 50
50 100
60 63
56.0
53
50 80
42.1
37.1
29.4
40 60
13.8
30 17 40
1
7.8
20 37 20
26 31 28
10 0
0
May-23
Nov-22
Dec-22
Jun-23
Oct-22
Jul-23
Feb-22
Apr-23
Sep-23
Aug-23
Jan-22
Mar-22
FY19 FY20 FY21 FY22
Non-Convertible Debentures Commercial Papers
Term loans Cash Credit
Principal + Interest
Securitised liability Others
Exhibit 44: Capital adequacy comfortable Exhibit 45: Higher off-balance sheet facilitating higher leverage
(%) (%)
30 7.7
25.4 7.63
23.9
25 7.6
18.3 7.9
20 17.6 7.8 7.5
7.41
5.1 7.39
15 4.5 7.4
7.30
10 7.3
17.5 16.1
13.1 13.1
5 7.2
0 7.1
FY19 FY20 FY21 FY22 FY19 FY20 FY21 FY22
Tier I Tier II Leverage
Key Risks
• Rising competitive intensity: Rising competitive intensity across product
(especially Gold loan) categories could disappoint on expected growth.
• Inherent risk to MFI Industry: The MFI industry is prone to event-based risk, as
seen in the previous periods (demonetisation, Kerela/Assam floods and COVID-19
pandemic).
• Weak demand environment could impact C/I ratio: The company expects to
achieve high growth over the next 2-3 years, for which it has aggressively built the
required branch network and strengthened its employee base over the last 12-18
months. As a result, its C/I increased to ~43% in H1FY23 from 35% in FY21. As we
expect 25% CAGR in its AUM over the next three years, we have built in a
normalised C/ I ratio of 38% for FY25E. Any material slowdown in the demand
environment could have a negative impact on the C/I ratio.
Valuation & Recommendation

Historical evidence shows valuations of NBFC companies have been following their
balance‐sheet growth. We estimate strong 25% CAGR in IIFL’s AUM to deliver 29%
CAGR in earnings over FY22‐25E. Its asset-light model, coupled with operating
leverage should enable its RoA/RoE to improve to 3.8%/21% by FY25E from
2.7%/20% in FY22, respectively. We value IIFL at 2.25x FY25E BV to arrive at our
target price of Rs 775. We initiate coverage with a BUY rating.
Exhibit 46: One year forward P/B band Exhibit 47: One year forward P/E band
(x) (x)
2 16
14
12
10
1 8
6
4
2
0 0
Jun-22
Nov-20
Dec-19
Jul-20
Dec-19
Nov-20
Jun-21
Nov-21
Nov-22
Jun-21
Nov-21
Jun-22
Nov-22
Jul-19
Jul-19
Jul-20
Feb-20
Apr-19
Sep-19
Feb-20
Apr-20
Sep-20
Feb-21
Apr-21
Sep-21
Apr-22
Sep-22
Apr-19
Sep-19
Apr-20
Sep-20
Feb-21
Apr-21
Sep-21
Apr-22
Sep-22
Jan-22
Jan-22
Exhibit 48: RoA Exhibit 49: RoAE

(%) (%)
4.5 25
3.8 20.8 20.6 21.1
4.0 3.6 20.0
3.5 3.3 20
2.7 15.9
3.0 15.0
15
2.5 2.1 2.0 11.0
2.0
1.5 10
1.5
1.0 5
0.5
0.0 0
FY19 FY20 FY21 FY22 FY23E FY24E FY25E FY19 FY20 FY21 FY22 FY23E FY24E FY25E
RoAA RoAE
Company background
• The company was incorporated in 1995, and is one of the leading players in the
financial services business, together with its subsidiaries – IIFL Home Finance
Limited, IIFL Samasta Finance Limited (formerly known as Samasta Microfinance
Limited) and IIFL Open Fintech Private Limited.
• IIFL Finance was the result of a demerger between IIFL Wealth and IIFL Securities
from IIFL Holdings in FY20.
• The company has an AUM of Rs 553bn with a network of 3,766 branches across
India and 32,369 employees.
• Its various products include home loans, gold loans, business loans (including
loans against property and medium & small enterprise financing), microfinance,
developer & construction finance and capital market finance.
Key subsidiaries
• IIFL Home Finance Limited - Registered as a Housing Finance Company with the
National Housing Bank in 2009, IIFL Home Finance provides small-ticket home
loans, secured MSME loans and project loans.
• IIFL Samasta Finance Limited (formerly Known as Samasta Microfinance Limited)
- Incorporated in Mar’08 and categorised as a Non-Banking Finance Company-
Micro Finance Institution (NBFC MFI) that provides innovative and affordable
financial products and services to more than a million rural and semi-urban
women.
• IIFL Open Fintech Private Limited - Offers neo-banking services to consumers and
micro-enterprises and retail customers including lending, investment, and wealth
management services to certain target groups
IIFL Finance IIFL Home Finance IIFL Samasta
Mr. Kapish Jain Mr. Amit Gupta Mr. Anantha Kumar T
• Chartered Accountant • Chartered Accountant • Chartered Accountant
• Worked as CFO at PNB Housing Finance • 20+ years of experience in financial • 10+ years of varied experience across
CFO and Xander Finance services in accounting, finance, audit & industries such as financial services, steel,
• Has over two decades of experience in compliance garments and IT
the banking and financial services
industry
Mr. Nirmal Jain (Managing Director) Ms. Monu Ratra Mr. N Venkatesh
• PGDM (IIM), Ahmedabad; rank holder • Qualified architect and MBA • Strategic leadership
Chartered Accountant and a Cost • 20+ years of experience with HDFC, ICICI • Program in microfinance at Harvard
CEO Accountant. Bank and Indiabulls Housing in mortgages • 20 years of experience in the financial
• Founded and led IIFL since 1995 services sector
• Worked with Unilever for 5 years
Mr. Sanjeev Srivastava Mr. Abhishikta Munjal Mr. Sabari Krishna
• Chartered Accountant • Chartered Accountant • ACS, CAIIB
CRO • Over 20 years of experience in financial • 19 years of work experience with 17+ • 13+ years of experience in Risk
services years of experience in mortgages and Management, Operational Risk, Risk
housing finance Assessment, Compliance
Exhibit 51: Shareholding pattern (Sept’22)
Name of the Shareholders Shareholding (%)
Promoter and Promoter group 24.9
Mutual Fund 0.3
Alternate Investment Fund 1.4
Foreign portfolio investors 25.6
Smallcap world Fund Inc 6.1
Bank Muscat India Fund 3.3
WF Asian Reconnaissance Fund Limited 2.8
Nomura India Investment Fund Mother Fund 1.2
Vanguard Emerging Markets Stock Index Fund, A Series of Vanguard
1.0
International Equity Index Funds
FI/Banks
Insurance companies 1.6
Individual share capital up to Rs 2 lakh 7.7
Individual share capital in excess of Rs 2 lakh 3.7
Non-institution 34.6
FIH Mauritius Investments Ltd 22.3
Non-Resident Indian (NRI) 7.4
Parajia Bharat Himatlal 5.2
Satpal Khattar 1.3
Source: BSE, Company, Systematix Institutional Research
Exhibit 52: IIFL timeline

Incorporated as
Probity Research Began with Set up advisory
and Services Pvt. IIFL finds backing by marquee
wholesale services for
Ltd., the name of institutional investors:
institutional broking succession and First entity in India to
the company was Launched online • Fairfox group- USD 202mn. Raised Rs 7.5bn by
along with leading estate planning in launch Instant
later changed to trading through • CDC group plc- USD 150mn. way of fresh issue of
foreign brokerage IIFL Wealth business loan on
India Infoline Ltd. www.5paise.com • General Atlantic-USD 157mn. equity
house. Management What’sapp.
1996 1999 2000 2005 2007 2010 2014 2015 2016 2017 2018 2019 2022
Listed on NSE and Commenced gold Acquired Samasta Group Reorganized

Launched Launched stock
BSE loan business in 2010, microfinance to into three listed
www.indiainfoline.com. trading mobile
diversifying the expand its offerings entities:
Private equity firm CDC platform in Feb’15.
product portfolio. IIFL securities
invested in India Infoline
Demerged and limited, IIFL wealth
funding to the tune of
listed 5paisa capital management and
USD 1mn.
limited IIFL Finance limited.
Exhibit 53: IIFL corporate structure
IIFL Finance Ltd.
Subsidiaries Joint Veture
IIFL Home Finance IIFL Samasta Finance

IIFL OPEN Fintech
Ltd. Ltd.
Private Ltd.
(100.0%) (100.0%)
IIHFL Sales Ltd.

(100.0%)
FINANCIALS (CONSOLIDATED)

Net interest income 27,954 32,039 39,288 45,747 53,803 Equity 758 759 759 759 759
Other income 5,685 8,114 11,718 15,117 18,781 Reserves 53,117 63,879 89,399 1,07,547 1,30,021
Preprovision profit 21,734 24,235 29,346 36,228 44,944 Others 30,169 37,153 19,475 28,060 31,931
Provisions 11,686 8,875 8,541 9,843 12,269 Total liabilities 4,06,669 4,59,102 5,16,901 6,08,795 7,10,729
Profit before tax 10,048 15,360 20,806 26,385 32,675 Cash 47,841 81,569 87,735 1,01,330 1,16,785
Tax 2,440 3,477 4,710 5,973 7,397 Investments 316 11,922 13,787 16,369 19,464
Tax rate 24.3 22.6 22.6 22.6 22.6 Loans 3,35,332 3,36,929 3,80,279 4,47,440 5,19,972

Interest Income 14.4 14.3 14.5 14.9 14.9 Yield on Avg. AUM 13.7 14.1 13.8 13.4 12.7
Interest Expense 7.0 6.9 6.5 6.8 6.7 cost of borrowings 8.8 8.8 8.3 8.7 8.7
Preprovision profit 5.8 5.6 6.0 6.4 6.8 RoA (%) 2.0 2.7 3.3 3.6 3.8
Provisions 3.1 2.1 1.8 1.7 1.9 RoE (%) 15.0 20.0 20.8 20.6 21.1
Profit before tax 2.7 3.5 4.3 4.7 5.0 Gross NPA (%) 2.0 3.2 2.5 2.4 2.3
Tax total 0.7 0.8 1.0 1.1 1.1 Net NPA (%) 0.9 1.8 1.3 1.2 1.2
Profit after tax 2.0 2.7 3.3 3.6 3.8 Provision coverage (%) 54.9 42.1 50.0 50.0 50.0

Net interest income 26.3 14.6 22.6 16.4 17.6 FDEPS (Rs) 20 31 42 54 67
Net Income total 36.8 19.4 27.0 19.3 19.3 PER (x) 24 15 11 9 7
Preprovision profit 82.4 11.5 21.1 23.4 24.1 Book value (Rs) 142 170 238 285 345
Profit before tax 38.6 52.9 35.5 26.8 23.8 P/BV (Rs) 3.3 2.8 2.0 1.7 1.4
Profit after tax 51.1 56.2 35.5 26.8 23.8 Adjusted book value (Rs) 134 154 224 271 328
Loan 17.5 0.5 12.9 17.7 16.2 P/ABV (Rs) 3.5 3.1 2.1 1.8 1.4
AUM 17.8 14.6 22.4 24.4 24.9 P/PPP (x) 8.3 7.4 6.1 5.0 4.0
Institutional Equities Team

Nikhil Khandelwal Managing Director +91-22-6704 8001 nikhil@systematixgroup.in
Equity Research
Analysts Industry Sectors Desk-Phone E-mail
Dhananjay Sinha Co Head of Equities & Head of Research - Strategy & Economics +91-22-6704 8095 dhananjaysinha@systematixgroup.in
Ashish Poddar Consumer Durables, Building Materials, Small & Midcaps +91-22-6704 8039 ashishpoddar@systematixgroup.in
Himanshu Nayyar Consumer Staples & Discretionary +91-22-6704 8079 himanshunayyar@systematixgroup.in
Pradeep Agrawal NBFCs & Diversified Financials +91-22-6704 8024 pradeepagrawal@systematixgroup.in
Pratik Tholiya Specialty & Agro Chem, Fertilisers, Sugar, Textiles and Select Midcaps +91-22-6704 8028 pratiktholiya@systematixgroup.in
Rahul Jain Metals & Mining +91-22-6704 8066 rahuljain@systematixgroup.in
Rakesh Kumar Banking, Insurance +91-22-6704 8041 rakeshkumar@systematixgroup.in
Ronak Sarda Auto, Auto Ancillaries +91-22-6704 8059 ronaksarda@systematixgroup.in
Sudeep Anand Oil & Gas , Telecom, Logistics +91-22-6704 8085 sudeepanand@systematixgroup.in
Vishal Manchanda Pharmaceuticals and Healthcare +91-22-6704 8064 vishalmanchanda@systematixgroup.in
Bezad Deboo Pharmaceuticals and Healthcare +91-22-6704 8046 bezaddeboo@systematixgroup.in
Chetan Mahadik Consumer Staples & Discretionary +91-22-6704 8091 chetanmahadik@systematixgroup.in
Girija Ray Cement +91-22-6704 8098 girijaray@systematixgroup.in
Hena Vora NBFCs & Diversified Financials +91-22-6704 8045 henavora@systematixgroup.in
Poorvi Banka Auto, Auto Ancillaries +91-22-6704 8063 poorvibanka@systematixgroup.in
Pranay Shah Consumer Durables, Building Materials, Small & Midcaps +91-22-6704 8017 pranayshah@systematixgroup.in
Pratik Oza Midcaps +91-22-6704 8036 pratikoza@systematixgroup.in
Purvi Mundhra Macro-Strategy +91-22-6704 8078 purvimundhra@systematixgroup.in
Rajesh Mudaliar Consumer Staples & Discretionary +91-22-6704 8084 rajeshmudaliar@systematixgroup.in
Shraddha Kapadia Consumer Durables, Building Materials, Small & Midcaps +91-22-6704 8019 shraddhakapadia@systematixgroup.in
Shweta Dikshit Metals & Mining +91-22-6704 8042 shwetadikshit@systematixgroup.in
Varun Gajaria Midcaps +91-22-6704 8081 varungajaria@systematixgroup.in
Equity Sales & Trading
Name Desk-Phone E-mail
Vipul Sanghvi Co Head of Equities & Head of Sales +91-22-6704 8062 vipulsanghvi@systematixgroup.in
Nirbhay Kumar Singh Sales +91-22-6704 8061 nirbhaysingh@systematixgroup.in
Sidharth Agrawal Sales +91-22-6704 8090 sidharthagrawal@systematixgroup.in
Shivang Agrawal Sales +91-22-6704 8068 shivangagrawal@systematixgroup.in
Rahul Khandelwal Sales +91-22-6704 8003 rahul@systematixgroup.in
Pawan Sharma Director and Head - Sales Trading +91-22-6704 8067 pawansharma@systematixgroup.in
Mukesh Chaturvedi Vice President and Co Head - Sales Trading +91-22-6704 8074 mukeshchaturvedi@systematixgroup.in
Vinod Bhuwad Sales Trading +91-22-6704 8051 vinodbhuwad@systematixgroup.in
Rashmi Solanki Sales Trading +91-22-6704 8097 rashmisolanki@systematixgroup.in
Karan Damani Sales Trading +91-22-6704 8053 karandamani@systematixgroup.in
Vipul Chheda Dealer +91-22-6704 8087 vipulchheda@systematixgroup.in
Paras Shah Dealer +91-22-6704 8047 parasshah@systematixgroup.in
Rahul Singh Dealer +91-22-6704 8054 rahulsingh@systematixgroup.in
Corporate Access
Pearl Pillay Sr. Associate +91-22-6704 8088 pearlpillay@systematixgroup.in
Production
Madhu Narayanan Editor +91-22-6704 8071 madhunarayanan@systematixgroup.in
Mrunali Pagdhare Production +91-22-6704 8057 mrunalip@systematixgroup.in
Vijayendra Achrekar Production +91-22-6704 8089 vijayendraachrekar@systematixgroup.in
Operations
Sachin Malusare Vice President +91-22-6704 8055 sachinmalusare@systematixgroup.in
Jignesh Mistry Manager +91-22-6704 8049 jigneshmistry@systematixgroup.in
Sushant Chavan Manager +91-22-6704 8056 sushantchavan@systematixgroup.in
DISCLOSURES/APPENDIX
I. ANALYST CERTIFICATION
I, Pradeep Agrawal, Hena Vora; hereby certify that (1) views expressed in this research report accurately reflect my/our personal views about any or all of the subject securities or issuers
referred to in this research report, (2) no part of my/our compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed in this research
report by Systematix Shares and Stocks (India) Limited (SSSIL) or its group/associate companies, (3) reasonable care is taken to achieve and maintain independence and objectivity in
making any recommendations.
Disclosure of Interest Statement Update

Analyst holding in the stock No
Served as an officer, director or employee No
II. ISSUER SPECIFIC REGULATORY DISCLOSURES, unless specifically mentioned in point no. 9 below:
1. The research analyst(s), SSSIL, associates or relatives do not have any financial interest in the company(ies) covered in this report.
2. The research analyst(s), SSSIL, associates or relatives collectively do not hold more than 1% of the securities of the company(ies) covered in this report as of the end of the
month immediately preceding the distribution of the research report.
3. The research analyst(s), SSSIL, associates or relatives did not have any other material conflict of interest at the time of publication of this research report.
4. The research analyst, SSSIL and its associates have not received compensation for investment banking or merchant banking or brokerage services or any other products or
services from the company(ies) covered in this report in the past twelve months.
5. The research analyst, SSSIL or its associates have not managed or co-managed a private or public offering of securities for the company(ies) covered in this report in the previous
twelve months.
6. SSSIL or its associates have not received compensation or other benefits from the company(ies) covered in this report or from any third party in connection with this research
report.
7. The research analyst has not served as an officer, director or employee of the company(ies) covered in this research report.
8. The research analyst and SSSIL have not been engaged in market making activity for the company(ies) covered in this research report.
9. Details of SSSIL, research analyst and its associates pertaining to the companies covered in this research report:
Sr. Yes /
Particulars
No. No.
1 Whether compensation was received from the company(ies) covered in the research report in the past 12 months for investment banking transaction by SSSIL. No
2 Whether research analyst, SSSIL or its associates and relatives collectively hold more than 1% of the company(ies) covered in the research report. No
3 Whether compensation has been received by SSSIL or its associates from the company(ies) covered in the research report. No
Whether SSSIL or its affiliates have managed or co-managed a private or public offering of securities for the company(ies) covered in the research report in the
4 No
previous twelve months.
Whether research analyst, SSSIL or associates have received compensation for investment banking or merchant banking or brokerage services or any other
5 No
products or services from the company(ies) covered in the research report in the last twelve months.
10. There is no material disciplinary action taken by any regulatory authority that impacts the equity research analysis activities.
STOCK RATINGS
BUY (B): The stock's total return is expected to exceed 15% over the next 12 months.
HOLD (H): The stock's total return is expected to be within -15% to +15% over the next 12 months.
SELL (S): The stock's total return is expected to give negative returns of more than 15% over the next 12 months.
NOT RATED (NR): The analyst has no recommendation on the stock under review.
INDUSTRY VIEWS
ATTRACTIVE (AT): Fundamentals/valuations of the sector are expected to be attractive over the next 12-18 months.
NEUTRAL (NL): Fundamentals/valuations of the sector are expected to neither improve nor deteriorate over the next 12-18 months.
CAUTIOUS (CS): Fundamentals/valuations of the sector are expected to deteriorate over the next 12-18 months.
III. DISCLAIMER
The information and opinions contained herein have been compiled or arrived at based on the information obtained in good faith from sources believed to be reliable. Such information
has not been independently verified and no guaranty, representation of warranty, express or implied, is made as to its accuracy completeness or correctness.
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28 November 2022 Gold Finance NBFCs

India biggest market for gold loan financiers....................................................................................................................... 6

Huge untapped potential; organised penetration at mere ~7%............................................................................................ 7

Banks are dominant players in the organised segment ........................................................................................................ 8

NBFCs lose share to banks, despite growth in gold loan market........................................................................................... 9

Banks’ market expansion focus to benefit NBFCs long term ...............................................................................................10

Key conclusions of the 2013 RBI report on gold-loan NBFCs................................................................................................12

Valuations and view ..........................................................................................................................................................13

Companies Section ............................................................................................................................................................14

IIFL Finance ........................................................................................................................................................................ 46

Gold Finance NBFCs 28 November 2022

Disruption inevitable, but long term story intact

Exhibit 2: MUTH RoA/ RoE Exhibit 3: …MUTH P/BV band

Exhibit 4: MGFL RoA/ RoE Exhibit 5: …MGFL P/BV band

Exhibit 6: IIFL RoA/ RoE Exhibit 7: IIFL P/BV band

RoAA RoAE P/B Avg Max Min +1SD

0 0 140 150 162 177 192 195 198

Exhibit 14: Rising penetration of organised players

India biggest market for gold loan financiers

0 0 140 150 162 177 192 195 198

Exhibit 17: Rising penetration of organised players

Huge untapped potential; organised penetration at mere ~7%

76% 76% 75% 74% 73% 20% 19%

Banks are dominant players in the organised segment

LTV Up to 75% Lower LTV than NBFCs Higher than 75%

Nil for small loans, nominal fees for

Penetration High Low High

Cash/cheque (disbursals more than

Regulated Regulated by RBI Regulated by RBI Not regulated

Monthly interest, end of tenure

Turnaround Time 10 minutes 1-2 hours 10 minutes

NBFCs lose share to banks, despite growth in gold loan market

Short-term pain but long-term story intact for gold-loan NBFCs

Banks’ market expansion focus to benefit NBFCs long term

Credit consumption Primary

Housing loan, CD loan,

Housing loan, CD loan,

Co-operative banks, MFIs,

Stable regulation and firm domestic gold prices spell healthy

Key conclusions of the 2013 RBI report on gold-loan NBFCs

Valuations and view

Muthoot Finance 28 November 2022

Gold when beaten, shines

4.9%/ ~17.8% in FY23E, respectively. We value MUTH at 2.0x FY25E consolidated BV to

Monthly Disbursement Monthly Collection

Gold finance leader to benefit from rapid market expansion

Exhibit 9: DuPont analysis

Tailwinds to AUM growth

Source: Company, Systematix Institutional Research

Source: Company, Systematix Institutional Research

Source: Company, Systematix Institutional Research

Exhibit 13: Disbursement/ collection ratio bottomed out in 1Q

Source: Company, Systematix Institutional Research

Rising competition impacts yields; focus on low ticket non-bank

Exhibit 16: Spreads slated to stabilise at ~10% levels

Source: Company, Systematix Institutional Research

Operating leverage to enhance opex ratios

Source: Company, Systematix Institutional Research

Cost/ Income Opex/ AUM

Diversified funding profile skewed towards bank loans

Borrowing from banks/FIs External commercial borrowings

Subordinated debt Subordinated debt - listed

Commercial papers Other loans

Source: Company, Systematix Institutional Research