Thursday, April 14, 2011

Muthoot IPO - Drops Pre-Placement & Retail Discount, Rejigs Valuations

Muthoot Finance Ltd has filed the Red Herring Prospectus, and the IPO has also been scheduled, opening on 18th April 2011 and closing on 21st.

As Seasonal Magazine had predicted in an earlier article, the IPO size and valuations have been re-worked downwards. From the widely-reported plan to raise between Rs. 1200 to Rs. 1400 crore, the IPO size now stands revised at Rs. 901 crore.

The reduction has been effected through lower valuations as the stake-sale size remains unaltered at 5.15 crore shares. The price band for the issue is between Rs. 160 to Rs. 175. At the upper edge of the price band, Muthoot IPO is valued at a P/E of 23 times and a P/BV of 9 times, based on annual results for March 2010 as published in their DRHP.

However, as per November 30th 2010 results, which Muthoot has published now in their RHP, the P/BV comes to around 5 times. Comparable peers who does gold loans like Mahindra & Mahindra Financial Services trades at a P/BV of around 4.75, while Shriram City Union Finance is available at a P/BV of around 3 times. A better comparison to Muthoot - due to dedicated gold loan business - is Manappuram Finance, which trades at 2.80 times as per their December 31st 2010 NAV.

On a trailing 8-month basis for the period ended November 30th, Muthoot Finance IPO is at a P/E of 18.82 times. For the trailing 9-month period ended December 31st, Manappuram now trades at a P/E of 26.19 times. M&M Financial Services now trades at 18.42 times, while Shriram City Union is available at a P/E of 13.86 times, but both on a trailing twelve months (TTM) basis.

For the past three fiscals, Muthoot Finance had negative net cash flows. Though this is quite unhealthy, the company explains in its RHP that it is primarily on account of borrowing under financing activities for the purpose of lending under operating activities.      

Muthoot Finance has dropped its plans for a pre-IPO placement, which would have amounted to around 27% of the IPO size, though mutually exclusive. Muthoot Finance has also dropped its plans to offer a 10% discount to retail investors.

However, the concerns regarding a sizeable annual royalty payments to promoters, and anti-dilution guarantees provided to four institutional investors - Baring, Matrix, Wellcome, & Kotak - remain. Queries sent by Seasonal Magazine to Muthoot Finance seeking clarifications on these issues remained unanswered at the time of publication.

The book running lead managers to the IPO are Kotak & ICICI Securities, together with HDFC Bank.

In an advertisement dated 14th April 2011, Muthoot Finance has made fresh disclosures as addendum cum corrigendum that was not mentioned in the RHP filed on April 7th. It mainly describes several civil, criminal, consumer, and tax cases by and against Muthoot Vehicle & Asset Finance Ltd, which is a group concern.

Also Read: Muthoot Finance IPO - Invest or Wait?

1 comment:

  1. Kolkata, April 14, 2011

    A Company raising funds to fight its legal battles;Shareholders to fund cost of litigation?

    Muthoot Finance Limited is entering the capital market on 18th April, 2011 with an IPO at a price band of Rs.160 to Rs.175 per Equity Share. At the lower end of the price band, the company will raise around Rs.824 crores !

    A cursory look at the Offer Document (Link: ) shows that the company is embroiled in innumerable litigations. Just the summary has required nearly 20 pages of the offer document (page 10, 11, 272 to 291 lists out the criminal, civil, consumer, income tax, service tax and various litigations).

    On going through the same, we found that the recovery suit filed by us is not listed and accordingly we wrote a letter to SEBI, the Company and the Book Running Lead Managers. In the letter we requested that the company should be asked to withdraw the issue because they have not disclosed the litigation and it is likely that there may be many more litigations which they have not disclosed (enclosed letter dated 13th April, 2011).

    However, to somehow comply with the disclosure norms, the company has issued an advertisement in several newspapers dated 14th April, 2011 (copy of advertisement attached) where the company has listed out additional litigations as below:

    12 outstanding litigations against Muthoot Vehicle and Asset Finance Ltd.
    79 outstanding litigations by Muthoot Vehicle and Asset Finance Ltd.

    It is surprising that so many litigations were not disclosed at the first instance. Maybe there are many more.

    That’s not all. The advertisement further lists out 5 additional consumer proceedings (2a); 3 additional civil suits (2b); 1 arbitration claim (2c), 1 civil suit for recovery (2d); 56 additional criminal complaints (2e); 10 additional recovery suits (2f); 9 additional execution petitions (2g); 4 additional criminal complaints (2h) and 2 additional income tax demands (2i)

    Would you believe that all these litigations were not disclosed in the original offer document and disclosed only after a letter was written to SEBI?

    The advertisement goes on to summarise that with these additions, the total number of litigations stand at:

    107 outstanding litigations against the company, and 6,978 outstanding litigations by the company

    Quite clearly, a very large amount of money being raised from the public will go towards funding the company’s litigation costs. Fully embroiled in all these litigations, the company is making an IPO at a premium of Rs.160 to Rs.175 per share !

    There is a larger issue: Should such companies be allowed to go public in the first place?



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