Update on Muthoot Finance Ltd By Motilal Oswal
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Belstar MFI enters into a definitive agreement for primary equity infusion of INR3.5b
* In an exchange filing, MUTH disclosed details of a definitive agreement entered by its subsidiary Belstar Microfinance (MUTH holds ~70% stake prior to the equity capital infusion) with Augusta Investments, Arum Holdings, MAJ Invest, and MUTH.
* This definitive agreement is in connection with a proposed primary equity infusion of INR3.5b in Belstar Microfinance and secondary OFS by promoters for a total consideration of INR200m (Exhibit 1).
* Post this equity infusion, MUTH's stake in Belstar Microfinance will reduce to 57.9%, and MAJ Invest, Augusta Investments, and Arum Holdings will hold 10%, 4.6%, and 13.8% stake, respectively. On a trailing basis, the transaction was undertaken at a valuation of 2.4x (pre-money, Exhibit 2). We have not factored in this equity infusion in Belstar Microfinance in our estimates.
Others transaction details
The transaction is subject to obtaining required regulatory approvals by Belstar Microfinance. The indicative time period for completion of the above transaction is around three months. The nature of the transaction would be 100% cash based, with no share swap to be undertaken.
About Belstar Microfinance (formerly known as Belstar Investment & Finance Pvt)
* As of 1QFY22, its operations are spread across 18 states and a Union Territory. It has 651 branches, with 170 controlling regional offices and 4,651 employees. Its gross loan portfolio stood ~INR31b as of Jun’21. In the last 12 years, it has primarily relied on taking over existing groups formed by Hand in Hand India. It predominantly follows the SHG model of lending.
* 1QFY22 performance highlights: Business volumes were impacted in 1QFY22, with the loan book declining by 7% QoQ to ~INR31b. GNPL ratio rose to 3.7% from 2.4% on a QoQ basis.
Valuation and view
* MUTH showcased its resilience yet again with its 1QFY22 performance. Its Gold loan book and holdings were sequentially flat in 1QFY22, despite muted Gold loan demand during the COVID-led lockdowns. Led by ~6% QoQ increase in average gold prices, the LTV on Gold loans fell ~390bp to ~71%, offering comfort to MUTH and not necessitating the need for aggressive auctions.
* Even as normalcy is restored and business activities resume, we expect Gold loan demand to rebound as customers fall back on Gold loans when their own cash flows are stressed. We expect MUTH to deliver ~15% loan growth over the medium term. With an AA+ rating, the cost of funds is likely to decline in coming quarters. This should mitigate yield pressures, if any. RoA/RoE is likely to remain robust (6.6%/24%) over the medium term.
* MFI contributes ~5% to MUTH’s consolidated AUM. We do not see any material impact of this transaction on MUTH. It is important to note that MUTH’s stake in its MFI subsidiary will reduce to ~58% post this transaction from ~70%, but with two new investors (Augusta Investments and Arum Holdings), there could be some operational improvements.
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