dilution last time was not at one time book before dilution…when book value was 45…rights was made at 80 rupee…after raising money and current year profit…book value went to abt 80…im sure next time rights will be at about 160-200 price…i have my own experience…investing works beyond what can be seen…
Hi Anil, as usual thought provoking queries from you. Will clarify certain aspects here.
** **Borrowers are not necessarily people with own house. They try to get either the owner/guarantorwith own house. Guarantor can be spouse/father/brother/friend/colleague. And they fund without this criteria too in which case they might lower the LTV get gold as additional security or see if customer has good track record with Muthoot Fincorp.**When you walk into the showroom no Bank executive will tell you rates are 28%. Rates mentioned will be 12-13% only. Fee is high and they also take advance EMI. Interest rate is flat and not diminishing. All this leads to yield of 28%. I don’t think credit card is cheaper and many folks wont have limit over 25000. Would agree with Kiran on convenience and being at the right place at the right time. People don’t look at yields…its Rs 1800-2000 per month and I get my bike. ** No lien. This is just to give one more weapon for arbitrage. They can claim dues through legal means of attaching property. This just acts as a scare. “OWN HOME” already answered. And own home in rural India is still affordable and many will have an ancestral property…atleast some farm-land. They just collect the tax receipt.
I am visiting Valuepickr after many months now (if not years) despite prodding by Donald.
There is a good discussion going here. Have been tracking this company since some time now. Got interested while looking at the Gold finance companies like Muthoot Finance and Manappuram (bought and exited). Not invested in MCS yet. I may do a trade though.
(Donald, don’t know disclosure guidelines if I do transactions, which was one major reason for me to stay away as I am likely to forget - if this is a must, I would rather not participate here. I primarily post on Twitter and Facebook mainly for companies I have vested interest in, but do not make disclosures every time as I don’t make any recommendations to buy or sell).
(1) While reading MCS Annual Reports, I got the impression that they look for a regular source of income, or they mortgage some property in order to provide a vehicle loan. This looked good at first thought. However, a 1.8% Gross NPA should raise more questions. 1.8% doesn’t seem low when you think about the consequences of not paying up. What went wrong here? (The NPA is not comparable with other finance companies if they don’t mortgage property).
(2) I am also not surprised by the NIM/ ROA contraction as the company gets bigger. Any insights on how they would manage to do on these fronts would be helpful.
(3) There was not much discussion around asset liability duration mismatch (just some passing reference), and how the company manages this risk.
(4) I exited Manappuram due to a decent run up, but also due to worsening conditions for finance companies, specifically rising NPAs for the sector and RBI’s insistence on diversification of business due to which Manappuram was likely to di-worse-ify. Does RBI not require MCS to diversify its risk (since it is concentrated on one segment as well)? Or can it happen in future?
(5) Why does CRISIL not delink MCS from Muthoot FinCorp if it is really delinked as they claim to be. Going to ICRA and CARE instead of CRISIL is never a good sign (just my observation). Any insights?
Some other minor questions that come to mind… will wait for the management Q&A.
Thanks Donald, Ayush, Vinod MS, Ananth, Kiran, Anil and others for a good discussion.
Dear fellow boarders,
The stock story on Muthoot Capital Services really excited me however, 2 news articles are really concerning me:
1). Honda ties up its 2 wheeler financing with L&T finance on pan india basis (article 29th Jan 2014) -
2). Hero enters retail financing with plan to extend 2 wheeler financing to all 800 dealerships by FY 2016 (article 30th April 2013) -
Given that a huge proportion of AUM comes from financing these 2 brands of motorcycles, what do you think will be the impact on loan growth of Muthoot? I feel that while Muthoot might be getting their house in order in terms of improving employee productivity and making capital available, this might really impact it on the sales front starting 2015 unless it really does something about it.
Reading last years annual report, the management claims that they also plan to enter LCV financing and used car financing but things on the 2 wheeler might change very rapidly and it might be a case of too little too late.
Views and opinions invited by everyone!
Disc: Not invested in MCS.
Abhishek
Delighted to present to you Muthoot Capital Management Q&A,finally. Please read this in conjunction with the Muthoot Capital Stock Story )- for an informed look at it’s strengths, opportunities and challenges.
Once you have a look - you will see how extensive this interaction has been, and more importantly how transparent the organisation is - you might also get a sense of how much valuable Management Time was made available to us. However this was probably only the 2nd time ValuePickr was doing an in-depth look at an NBFC, and we needed TIME to ask all the right questions and then capture back every nuance!
Needless to say - we added several follow-up questions in batches - and thus a lot of delay (inevitably from Management on account of year-ending, as also from our end).
However we are happy with the end-result. Management has patiently answered every question that we went back to them with. And are open to more?So digest this and start shooting your comments/questions, as also appreciation for Team ValuePickr, should you find this useful.
Please note :
a) Management Q&A and/or Stock Story are NOT ValuePickr Public Portfolio Reccomendations
b)Mandatory disclosures by ValuePickr participants have been appended to the document
There are obvious challenges on the business front, as also on the organisational front, as might become evident as you read through teh MAnagement Q&A and digest it.
To enable us to discuss and debate the key issues, let me highlight a few things:
A) Key Challenge - Funding : Management has now categorically stated that Working Cpaital funding for FY15 is now all tied up. IF they are on course to do log a 1000 Cr loanbook, they will look for infusion of Tier II funds (from Promoters) later in the year, depending on group liquidity levels, for ensuring 15% Capital Adequacy compliance
B) Key Challenge - Ending FY15 with a 1000 Cr Loanbook would imply fresh disbursement of about 800 Cr for the year (as ~500 Cr of existing loanbook is bprobably expiring in the year)
C) Key Challenge - Keeping 3 Wheeler NPAs under control
We have to see Management walking the talk for both B) & C) which are tough challenges for Muthoot this year. In recent months, Management has been found slipping on both fronts.
Needless to say there are big, unique advantages to Muthoot Capital. They might be able to effectively harness technology initiatives and DB syncing/cross-selling with Muthoot Fincorp customer base, which may take time before they make significant contributions to productivity and efficiency.
Key Question to answer - IS there significant UNDERVALUATION at this stage? Or are these challenges/prospects priced-in at the moment - on the recent run up?
Over to the group.
@ Abhishek
Thanks for your links/question. This may emerge as a key developing RISK for Muthoot’s business.
Honda - L&T Finance tie up;Hero - own finance arm
Ayush & Gaurav will be the best person to answer exactly the Management response on this front. I think Management had indicated that the focus of Honda-L&T Finance is unlikely to be Rural locations. 80% of Muthoots business comes from rural belts. A Hero finance arm is probably more serious, but again rural traction still a couple of years away.
You have interacted with both SCUF and MCS…
What is your view regarding the strengths/weaknesses of both of the businesses, management and their future plans…
Have you taken any followup on the ground level or after discussions with the management of MCS regarding their funding issues??
Thanx!!!
Ravjit,
Nice to hear from you! I always remember you as the first guy - who clearly saw the merit in Business Value Drivers thread - you had said "this is the most valuable thread according to me"!
SCUF - is a much more mature, risk-diversified business. In my books it’s a great story unfolding for the long term - on the “unorganised to organised business” larger theme. There are ready in every way - Funding, Processes, Employees, and the Collection-led culture that’s a must for NBFCs serving the unbanked. I have been very bullish ever since we first met them - however there wasn’t unanimity in our Core Team.
Muthoot is clearly not in the same league. It has miles to walk before it can reach there. It’s effectively a single product business. The undervaluation (in my opinion) however is good - and hence its a good opportunistic bet in my Portfolio. The undervaluation will make sure of 20-25% returns; now whether it can do much more - is dependent on how it walks the talk - its gotta prove itself in the next 4 quarters! I am convinced about the sincerity and integrity of the Management and key operating managers. The culture in the company is good.
Whether they have it in them? - to scale to the next level - is the CALL!
I have become fond of quoting my Spiritual Guru Sri Sri - " Kuchh jaan ke chalo, kuchh maan ke chalo"! You can’t know it all, at any point of time. You gotta keep some faith - after having done all the homework you possibly could!
Disc: I have significant >5 % holdings in both SCUF and Muthoot Capital since a few months
Hi Donald,
Thanks for the elaborate report on MCS.
The stock indeed looks interestingly poised at current juncture.
The loan book growth has been phenomenal from 10 cr to 582 crores in 6 years.
The revenue increase YoY at 48% is simply amazing when the industry was facing headwinds.
Undoubtedly, there seems to be significant undervaluation compared to its peers.
The short to medium term could be interesting for the stock:
-Leveraging Fincorp to cross-sell products for MCS would be a key driver of growth. This could provide significant traction for MCS growth
-Growth of discretionary spending in rural markets is on the rise, owing to good monsoons and this may provide headroom for growth for MCS in the next few quarters
-Management is confident of growing loan book to Rs.2000 Cr from current 582 crores in 2 years
-With current market size being 2% of 2-wheeler market, this offers significant headroom for growth
-Use of technology (Loan origination system) and automation of processes would significantly improve things on the margin front
-Expenses have increased significantly in current fiscal (increased finance cost and other expenses for expanding into different geographies?). These are not recurring; thereby we could see significant margin expansion in current fiscal.
However, there are some concerns:
-Expansion into new territories â Significant Competition from other established players such as SCUF, Sundaram, Bajaj exist. Also, maintaining the same levels of NPAs would be a big challenge.
-Unlike SCUF, MCS is a single product business. Thereby significant risks exist
-Cost of funding is high. Unless the borrowing costs come down (depending on ICRA ratings), the margins are going to remain under pressure
-Since 80% of the business is from rural markets, there might be significant impact of bad monsoons / El Nino on the business
There are a couple of questions that I am looking for an answer, which would provide more clarity.
-What is the impact of Hero Fincorp on MCS (Since 80% of MCS business originates from Hero)
-The company adopts a liberal dividend policy (25% of the profits). Why is this so in a situation where the borrowing costs are higher and the company needs significant capital to expand
Altogether, the short â medium term story seems promising. Given the undervaluation, it seems worth taking a bet on MCS.
Thanks Sharath. Nice Summary
Re: Concerns
1). Employee expenses - While we may be assured of a less steeper climb on this front in coming quarters, we need to see where employee productivity is headed (something that Ashish Kila from Delhi pointed us to - he/family runs a vehicle finance business for a number of years). Will try and get Ashish Kila to post here at ValuePickr.
Meanwhile - for a 580 Cr disbusrsement last year with ~1000 Sales folks - on an average works out to 4.8 lakhs/month/salesperson - @40,000 per vehicle works out to 12 disbursements/month/salesperson
He says they are able to easily do 25 disbursements/salesperson/month in Delhi - that points to lot of under-utilisation of staff at the moment?
2). 80% business from Hero - this may not be the correct figure as business from Honda is significant. Will ask Vinod MS to check and get back
3). High Dividend payout - indeed this has been questioned in the light of funding issues faced - not one of the very rational decisions it may seem. We need to see if the Promoters to do fill in with Tier II Capital later in the year
Hi,
80% business is from Honda+Hero, there won’t be a skew. Muthoot group has the distribution business of Honda in Kerala. Though this does not mean captive clients, they do have an edge compared to competitors in their own group’s Honda showrooms.
Honda Finance threat is atleast 3 years away. And this is something we can track. With just 1-2% market share there is long way to go for MCS by just executing the Fincorp branch led business model.
I do not see demand as an issue with Fincorp having more than 2500 branches in south alone.
But building the team with same “collections” skills might be time consuming. Can’t expect stellar growth in revenues, but bottom line could have robust growth aided by cost control and 3w pain decreasing. FY16 can be very interesting, with IT systems running in full flow saving costs and enabling group data mining, teams well established in non-Kerala southern states, possible upgrade in credit ratings and 3w pain totally out.
MCS needs to be monitored closely and the good news is that we can do it.
Cheers
Vinod
Very exhaustive mgt interviewâ.thanks to the entire team. Even before I discuss some of my concerns let me make it clear that I think price risk & Mgt riskis very low but the main risk continue to remain business. Not because its a single product business, but because of the presence of well established players and the fact that company is yet to see a downturn. This sort of stocks do provide possibility of 3-5x in next 3-5 years, IF ONE CAN BE RIGHT ON BUSINESS RISK AND SCALABILITY, but downside will be equally severe if one is wrong.
Just a few vague thoughts. For long time, I am trying to think what could possibly the reason for very low NPA compared to industry [ofcourse apart from their strict credit appraisal]. I GUESS possibly a mix of below, but difficult to say to what extent.
NPA
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NPA % is ratio of NPA divided by loan book. So if denominator is increasing in a disproportionate manner, overall % will be low. For eg if NPA increases from 10 to 20 but loan book increased from 1000 to 2000, NPA ratio for second year will still reflect 1% NPA, though logically fresh loan granted in the last one year will have substantially lower slippage. So it might be WRONG TO GIVE UNDUE WEIGHTAGE ONLY TO LOW NPA.
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To my understanding RBI says for asset financing companies, NPA to be recognised when interest remains outstanding for more than six months. In case of term loans there is specific reference to both principal and interest, but for asset based loan I could see reference only to interest. So if the company accepts small repayment as low as 200 to 300, itâs quite possible that all those loans where interest was paid partly without any repayment of principal, is not recognised under NPA. Something similar was done by Manapurram, wherein technically gold loan became NPA only after expiry six months the loan become due. As gold loans disbursed for a year, so they waited till 18 months before recognising any NPA. Obviously MC mgt integrity is much higher compared to Manapurram. But I think it will be advisable to get more clarity on how NPA are recognised. [to get more clarity on NPA it will help if company is willing to share the loan disbursements numbers for last 5 years. Then will become somewhat possible to see if loan maturities, somewhat matches with their loan period.
Operating leverage
- In one of the conference call of Bajaj Capital, they claim that it will be difficult for new entrants to earn reasonable ROE in 2W business, as operating leverage start flowing from a very very high base level. They said âFor consumer and 2W business put together we have 20 lakhs customer and we will incur losses, if we have only 15 lakh customersâ [Dec 2011 transcript]
Growth
- MC already has 25% market share in Kerala. So to grow at 25% CAGR for next 3 years, MC needs to expand outside Kerala. Few questions a) Any idea on share of unorganised or small finance company share in 2W segment, as it is much more easy to grab market share from these unorganised segment compared to SCUF, HDFC and other big players. Secondly if much of the growth will come from new markets then wonât operating leverage will take much more time than we are anticipating. Infact expansion in newer markets might put temporary pressure on margins.
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minor observations from my side ;
1). eligibilty criteria for muthoot is less stringent as compared to shriram and bajaj. one like residency status for 2 years sometimes irks people who have to move around cause of work.
2). also bajaj asks for IT return too and we have to find out how many possible customers file IT returns in the two wheeler financing section.
3). Muthoot as of now does not have any helpline or customercare set up while others have. might cause of lower customer base or reasons best known to management.
4). a good thing is that while googling two wheeler loans it show muthoothonda together. this is kind of a moat. and we need to track expansion plans of honda and its effect on muthoot.
5). above observations in a expanding and growing scenario may provide tail winds to the core business of muthoot which can have a lollapalloza effect comparing the small base as of now.
6). As it has been rightly brought out , the group is yet to see a downturn. But as of now they are placed in the correct cycle of growth and recession.
regards
divyansh
Company has not been able to push bottomline . Though its look promising and doubled from when I entered almost 2 year back , now the I am starting to doubt whether I should continue >5% in Muthoot Capital and loosing opportunity cost
Is there any disclosure from the company as to how much was the disbursement in the first quarter of this year? Looking at the revenue number and assuming 27% yield on advances, they seem to have done about 165 crs of disbursement as compared to 120 crs last year same quarter, which gives us about a 37-38% growth in advances which is the % growth needed Q-o-Q to achieve full year disbursements of about 800 crs as compared to 581 crs in FY 14.
Also the company has got A/Stable long term rating back from Crisil on 26th Aug 2014 which should help to bring down the funding costs slightly.
Also wanted to understand if the company finances only motorbikes or they finance scooters as well since both Honda and Hero have started selling a significant % of scooters as well; i would assume that they would be financing both but I am not sure as to how much % of rural sales are comprised of scooters? If the share of scooter sales in rural areas is less then it may work against growth in disbursements since in the month of August 2014 Honda sold 153K motorcycles as against 144K in August 2013 (~6.25% growth) whereas the numbers for scooters increased from 148K to about 218K (~47% growth).
Disclosure - Not Invested
Can someone throw light on the dividend declared by the company.
Regards
Divyansh
@divyansh,All these enq abt div etc can be checked @ exchange sites ,why ask here?
Conference Call - from Capital Markets
Expects disbursement growth at 20-25% for FY2016
Muthoot Capital Services conducted concall on 28 May 2015 to discuss financial performance for the quarter ended March 2015. R Manomohanan, CEO, Muthoot Capital Services addressed the call:
Highlights:
• The company has recorded disbursements at Rs 590 crore in FY2015 compared with 582 crore in FY2014. The company sourced about Rs 111 crore of disbursements from branches and rest from dealers in FY2015.
• Disbursements have shown healthy growth to Rs 199 crore in Q4FY2015 over Rs 141 crore in Q4FY2014.
• Two-wheelers loan portfolio increased to Rs 841 crore at end March 2015 from Rs 691 crore at end March 2014.
• The company has targeted disbursement growth of 20-25% for FY2016. As per the company, its disbursements growth would be supported by expanding to new geographies, tying up more dealers and manufacturers.
• The company proposes to tie up with 600 more dealers in FY2016, in addition to existing tie-ups with 1600 dealers.
• The bottomlines of the company were nearly flat in FY2015, as the NPA provisions surged to Rs 13.3 crore in FY2015 from Rs 4.9 crore in FY2014.
• However, the company showed improvement in asset quality in Q4FY2015, after witnessing deterioration for last seven sequential quarters.
• The loan-to-value ratio of the company stood at 70%, while the average loan ticket size stood at Rs 44000.
• GNPA has been reduced to Rs 32.68 crore (3.94%) at end March 2015 from Rs 35.5 crore (4.85%) at end December 2014.
• NPAs were mainly contributed by the three-wheelers portfolio. After witnessing stress in the three-wheelers book, the company reduced three-wheelers disbursement in FY2014 and stopped in FY2015.
• The outstanding three-wheelers book stood at Rs 58 crore, of which Rs 9.69 crore in NPAs. The company has provision coverage of 15-16% against three-wheelers NPAs.
• The employee count of the company stood at 2153 employees at end March 2015.
• The outstanding borrowings of the company stood at Rs 704 crore, of which 80.5% constituted bank borrowings.
• CRAR ratio of the company stood at 15.77% at end March 2015.
• The company does not have any plans to enter into any new loan product segment, in the immediate future.
Disc: Not Invested