Risks outweigh benefits of investing in the initial public offering (IPO) of
Muthoot Finance Ltd (MFL), said punters. The offering by MFL, a single-product gold loan dispenser, is highly avoidable, they said.
"Intricacies of the business, complicated business model (compared to banks, which also dispense gold loans), pending Supreme Court judgment over pledging loan agreements for raising funds and heavy risk of exposure to fluctuating global gold prices weigh heavy against subscribing to the IPO," said Kishor Ostwal, chairman and managing director (CMD), CNI Research.
The MFL offering opens for subscription on Monday and closes on Thursday (April 21). The issue, priced in the range of
Rs 160-175 per share, aims at raising about Rs 900 crore.
Meanwhile, on Sunday MFL said it has received Rs 131 crore investment from 15 anchor investors.
Shane Sequeira, senior manager of Karvy Institutional Equities said, "Subscribe (to the issue) for listing gains only … expect Rs 200 on listing."
Since MFL is highly leveraged and the ROE (return on equity) is high, it is commanding an upper band price-to-book value of 2.2 times earnings for 2010-11 versus two times of Manappuram Finance, giving it a premium valuation of about Rs 210-220, Sequiera explained.
Questions are also being raised about pricing the IPO at higher levels than the pre-IPO placement of shares at Rs 133 per share to some investors.
The company follows the loan assignment route for raising funds for their business. "It is as good as the 'sub-prime' prevalent in the US. The Gujarat High Court in 2009 has ruled that the Banking Regulation Act, 1949 does not permit banks to assign debts due to them even if it is between two banks," Ostwal said. Loan assignment means pledging a loan agreement with some other bank for raising loans.
"Though the company has mentioned in the prospectus that the matter is pending before the Supreme Court, we believe that the uncertainty will have a direct impact on MFL's business," Ostwal added.
MFL's business is heavily dependent on global gold prices and any sharp fall could affect it.
"If gold prices were suddenly to plunge 30 per cent from the current level and 30 per cent of MFL's customers default, MFL would be wiped out. A black swan (sudden fall in asset prices) event in my opinion is due in the bullion markets," said Sequiera.
MFL is the largest gold financing company in India with a market share of 19.5 per cent in 2009-10, followed by Indian Overseas Bank (IOB) and Indian Bank with over 10 per cent each.
According to Apurva Shah, head-institutional equities of Prabhudas Lilladher, MFL's asset quality remains healthy with gross non-performing assets (NPAs) at just 0.35 per cent of gross retail loans as on November 2010.
Courtesy: Mail Today 
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