Shares of gold lender Muthoot Finance list at 12 per cent premium

Shares of India's largest specialist gold lender Muthoot Finance Ltd listed At Rs 196.60 on the NSE , a premium of 12.34 percent to its issue price.

The company, which raised Rs 9 billion by selling 51.5 million shares through the initial public offering, set its issue price at the upper end of its Rs 160-175 price band.

At 10:35 a.m., the shares were trading at Rs 177.40, a marginal premium to the issue price.

In all eleven anchor investors including Citigroup Global Markets Mauritius, Abu Dhabi Investment Authority , Goldman Sachs India Fund and Baring India Private Equity Fund invested Rs 1.3 billion in the company.

ICICI Securities and Kotak Mahindra Capital Co were the book running lead managers to the issue while HDFC Bank was the co-manager.

The rising prices of gold makes the company's core business stronger, Managing Director George Alexander Muthoot said.

"Borrowing powers of gold owners rise with the prices and this would prove beneficial for us going forward."

Commenting about the interest rates for gold loans, Muthoot said "RBI (India's central bank) has given the direction...hence we will have to take a decision on raising interest rates soon".

The company has a network of about 3,000 branches of which about 60 percent are based in southern India.

Goldman Sachs, Citigroup, Temasek rush for Muthoot Finance IPO

Goldman Sachs, Citigroup and Temasek are among scores of global investors scrambling for a share of the pie in companies that are in the rapidly-growing business of lending against gold. Heightened investor interest in this segment is reflected in the fact that the 900-crore initial public offering from Muthoot Finance, the country's largest gold loan company, drew bids for at least 25 times the shares on offer.

Returns from an earlier public offering by rival Manappuram have raised investors' hopes of profiting from this issue too. That raises the possibility of pricing it at the top end of the 160-175 band.

"It is a unique business model and given Indians' obsession with gold, it is an attractive business model," said a director of a US-based fund that bid for it, but did not want to be identified for regulatory reasons. "Given these reasons, the issue is priced attractively and it is difficult to match the scale and expertise of the private players in this segment for banks as it is not their core business."

Manappuram has more than doubled while Shriram Transport Finance has gained 72% since January 2010, compared with a 21% rise for the benchmark Sensex. South Korea's Mirae, US' GMO, Jupiter, Tudor, DKR Oasis, Geosphere and Congruix and private funds such as Barings and Wellcome Trust were among the global bidders, said brokers familiar with the bids.

Attractively priced, feel investors

Domestic funds SBI, HDFC, Reliance, Birla and IDFC also bid for the Muthoot IPO. Lending against gold is seen as the best bet in secured lending, with the precious metal at a record high of $1,500 an ounce. With inflation fears, gold and silver prices are forecast to rise.

Commodities bull Jim Rogers expects gold to rise to $2,000 an ounce in the coming years. Lending about 30% of the value of such an asset ensures safety at 13% interest. If the loan value rises, then interest rate jumps without additional risk which equity investors prefer.

"Investors want to buy unique stories," says Falguni Nayar, head of investment banking at Kotak Mahindra, one of the share sale arrangers. Furthermore, investors believe the stock was priced at a reasonable valuation compared with listed peers, unlike most other issues that are overpriced.

"Muthoot will be trading at an FY12 priceto-book range of 2.2-2.4 times," says Santosh Singh, analyst at Espirito Santo Securities .