Muthoot Finance Limited 'CRISIL AA+/Stable' assigned to Non Convertible Debentures
Rating Action
Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. 1 crore = 10 million Refer to annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has assigned its ‘CRISIL AA+/Stable’ rating to Rs 7000 crore and Rs 3000 crore Non-Convertible Debentures of Muthoot Finance Ltd (Muthoot Finance). The ratings on existing debt instruments have been reaffirmed at 'CRISIL AA+/CRISIL PP-MLD AA+/Stable/CRISIL A1+'.
CRISIL Ratings has also withdrawn its ratings on non convertible debentures worth Rs 4561.9 crore and subordinated debt worth Rs 33.04 crore on receipt of independent confirmation that these instruments are fully redeemed (See ‘Annexure- Details of Ratings Withdrawn’ for details). This withdrawal is in line with CRISIL Ratings’ withdrawal policy.
The ratings are driven by Muthoot Finance’s demonstrated ability of profitably scaling up its core gold loan business while maintaining its strong financial risk profile. It also factors in the company’s strong market position within the gold loan segment of India, bolstered by promoter experience. These strengths are partially offset by geographical concentration in operations and low market share in the non-gold segments and, asset quality challenges relating to these non-gold segments.
The consolidated AUM of Muthoot Finance grew by 11.2% (YTD) reaching closer to Rs 80,000 crore (Rs 79,493) crore from Rs 71,497 crore. Growth in fiscal 2024 was influenced by a number of factors like revival in gold loan demand, appreciating gold prices, increased disbursements to new and inactive customers and rise in average LTVs. Over the near to medium term, CRISIL Ratings expects Muthoot Finance to continue with its current growth momentum and will continue retain its leadership position among gold loan financiers. However, in the long term, the ability to maintain this growth pace alongside increasing competition from banks, will continue to be monitorable.
As far as, non-gold loan portfolio is concerned, the microfinance business (which is 2nd largest of the group) has shown steady improvement both in asset quality and profitability metrics. The 90+ dpd in microfinance segment improved to 2.1% as of September 30, 2023, from 2.6% as of March 31, 2023. Similarly, profitability in this segment (in terms of return on managed assets (RoMA)) has also shown steady improvement with RoMA at 3.3% (annualised during first half fiscal 2024 as against 2.0% during fiscal 2023. The other non-gold segment such as housing finance has also shown steady growth with portfolio reaching to Rs 1616 crore as of September 30, 2023, from 1438 crore as of March 31, 2023. Nevertheless, as proportion housing finance business remained low at around 2% of the overall AUM.
CRISIL Ratings believes that the gold loan AUM will continue to account for 85% of the consolidated AUM and over 90% of consolidated profit over the medium term. Consequently, the consolidated credit profile has the ability to absorb asset quality and earnings risks in the microfinance, vehicle or housing finance businesses in the near term.
The company’s earnings profile has remained healthy over the years. Muthoot Finance reported a consolidated return on managed assets (RoMA) of 5.1% (annualized) for first half of fiscal 2023. This superior earnings profile is supported by high interest margins and low operating and credit costs. The company has maintained a strong capital position while ramping up operations over the years. As on September 30, 2023, its reported networth was Rs 22,883 crore (on consolidated basis) and gearing low at 2.7 times (consolidated). |
Analytical Approach CRISIL Ratings has combined the business and financial risk profiles of Muthoot Finance and its subsidiaries, including Muthoot Homefin India Limited [Muthoot Homefin], Muthoot Money Limited [Muthoot Money]) and Belstar Microfinance Limited [Belstar].
Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation. |
Key Rating Drivers & Detailed Description Strengths:
Muthoot Finance has sustained its leadership position in the gold financing segment, supported by the long and established track record of 84 years of its promoter family. The group has a large operational base of over 6169 branches across India (with over 4700 branches offering gold loans), which has supported its leadership position among NBFCs carrying out gold loan business over the years. The group maintained consistent growth in gold loan business; the gold loan portfolio grew by around 9% (YTD, non-annualised) as of September 30, 2023, During first half fiscal 2024, the gold AUM grew by around 9.2% (non-annualised) taking portfolio closer to Rs 70,000 crore (Rs 69,001 crore) as of September 30, 2023 (Rs 63,210 crore as of March 31, 2023). The growth was also visible in average AUM per branch which stood at Rs 14.3 crore (highest since last 10 years) as against Rs 13.1 crore as of March 31, 2023. The growth was also supported by appreciation in gold prices during the last 4-6 quarters and new disbursals getting aligned with the same. In terms of active borrowers and no.of loan accounts, it also showed steady increase; the active borrowers crossed 55 lakh mark as of September 30, 2023 from 53.2 lakh as of March 31, 2023. Similarly, the number of loan accounts also increased to 84.9 lakh as of September 30, 2023, from 81.5 lakh as of March 31, 2023. Muthoot Finance’s extensive branch network and client base, which is relatively more diverse in terms of geographies and is gradually improving further, should support the further strengthening of its competitive position over the medium term. CRISIL Ratings overall believes that, while the company has taken substantial steps and diversified non-gold segments, its primary focus will continue to remain on gold loans over the medium term.
Muthoot Finance’s capital position remains strong in relation to its scale and nature of operations, supported by its demonstrated ability to raise capital frequently and large accretions to networth. As on September 30, 2023, the company reported a consolidated networth of Rs 22,883 crore and a comfortable gearing of 2.7 times. The gearing has remained below 4 times for several years now. Tier I and overall capital adequacy ratios on a standalone basis have also remained comfortable over 20% over the last few years driven by stable growth in business and stood at 29.5% and 30.3% respectively on September 30, 2023. Strong internal cash generation from the gold loan business will allow Muthoot Finance to prudently capitalize its subsidiaries and provide need-based liquidity support, apart from strengthening its standalone capital position. Even after factoring in leverage in the key subsidiaries, CRISIL Ratings believes the consolidated gearing will remain below 5 times and capital adequacy ratio above 20% over the medium term.
The company’s earnings profile has been healthy in the past and has improved further over the last few fiscals to outperform NBFCs and banks. For fiscal 2023 and during first half of fiscal 2024, the consolidated RoMA stood at 4.9% and 5.1% (annualized), respectively – and is expected to remain at similar level over the medium term. This superior profitability can be attributed to the company’s ability to generate high interest margins while keeping operating expenses and provisioning requirements low. Over the past 2-3 fiscals, increased focus on collection of interest on a regular basis and revision in interest rates on different schemes helped sustain margins. In terms of asset quality as measured by annualised credit costs has also been under control. Stage III assets, which have remained below 3% on a steady state basis in the past and stood at 4. 01% as on September 30, 2023. However, the ultimate credit costs have remained within 1% on account of low asset-side risk (security of gold, which is liquid and is in the lender’s possession) in the gold finance business. In the medium term, consolidated profitability is expected to remain healthy. As the group diversifies into other segments in the long run, asset quality and profitability of the non-gold businesses will remain monitorable.
Weaknesses:
Muthoot Finance’s operations have a degree of geographical concentration - South India accounting for about 59% of its branches as on September 30, 2023. However, from gold loan portfolio perspective, there has been reduction in concentration with South region accounting for 47% as of September 30, 2023, which was at 86% in fiscal 2007. Nevertheless, higher regional concentration renders the company to vulnerabilities of economic, social, and political disruptions in the region.
Apart from continued focus on regional diversity, Muthoot Finance also diversified its product suite across microfinance, housing finance, vehicle finance and a few other segments. However, the share of non-gold segments in the group’s portfolio remains low given the gradual restoration of asset quality and lagged pick-up in growth across most segments except microfinance. Furthermore, in the aftermath of the pandemic, the company took a conscious decision to limit disbursements. Nonetheless, during last 3-4 quarters, the non-gold portfolios has shown substantial growth. During first half fiscal 2024, the microfinance, housing and vehicle loan portfolio clocked a growth (Y-o-Y) of 53%, 14% and 170%, respectively. Overall, non-gold loans saw a growth of over 100% on Y-o-Y basis. Over the medium term, as the focus on these segments will remain low – high segmental concentration in AUM and revenue profile will remain a key monitorable.
Given the limited seasoning in the non-gold loan segments (excluding microfinance segment), the growth, asset quality and profitability in those segments are yet to stabilise. Within the housing finance segment, Muthoot Homefin operates in the affordable housing finance segment, catering to self-employed customers engaged in small business activities and thus, have a relatively weak credit risk profile because of the volatile nature of their income and employment in un-organised segments. Similarly, microfinance loans (under Belstar Microfinance), through which the company intends to cater to weaker sections of the society, are unsecured in nature and are rendered to borrowers with a weak credit risk profile. This segment also exhibits high subjectivity to local socio-political issues. The vehicle finance business (under Muthoot Money), which is relatively new, deals with lending against commercial vehicles and equipment – majority of which are used/pre-owned vehicles. Nevertheless, the asset quality situation (post absorbing Covid impact) has been restored, owing to the inherent weaknesses of the non-gold segments in which Muthoot Finance operates - the standalone earnings profile of non-gold businesses is expected to remain susceptible. From a longer-term perspective, as the growth within these segments has remained limited as yet, the asset quality and profitability in these businesses will be a key monitorable. |
Liquidity: Strong The company’s standalone liquidity position remains strong with a liquidity balance of Rs 9,019 crore as on December 31, 2023 (including un-utilized portion of existing term loans, including un-utilized portion of Cash Credit and Working Capital Demand Loans). Liquidity cover for debt obligations arising over the following 2 months, without factoring in any rollover or incremental collections, was at 1.1 time. Over the last 4-5 quarters, Muthoot Finance has been maintaining about 5-8% of its balance sheet as liquidity balance. The company has also been able to roll over existing working capital lines and also raise incremental funds at competitive rates over the last few quarters. Over 9M 2024, the company has raised around Rs. 30,968 crore of funds from various avenues.
ESG Profile CRISIL Ratings believes that Muthoot Finance’ Environment, Social, and Governance (ESG) profile supports its already strong credit risk profile. The ESG profile for financial sector entities typically factors in governance as a key differentiator. The sector has reasonable social impact because of its substantial employee and customer base, and it can play a key role in promoting financial inclusion. While the sector does not have a direct adverse environmental impact, the lending decisions may have a bearing on the environment. Muthoot Finance has a continuous focus on strengthening various aspects of its ESG profile.
Muthoot Finance’s key ESG Highlights:
There is growing importance of ESG among investors and lenders. Muthoot Finance’s commitment to ESG principles will play a key role in enhancing stakeholder confidence, given the sizable share of market borrowings in its overall debt and access to both domestic and foreign capital markets. |
Outlook: Stable CRISIL Ratings believes Muthoot Finance will sustain its strong capitalisation and healthy profitability. Asset quality in the gold business, which accounts for a majority of the AUM, will remain sound, supported by increased frequency of interest collections and the highly liquid nature of the underlying security (gold jewelry), which should keep credit losses low. For non-gold segments, maintenance of asset quality and profitability alongside growth remains a monitorable |
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About the Company Muthoot Finance, an NBFC, was originally set up as a private limited company in 1997 and was reconstituted as a public limited company in November 2008. It provides finance against used household gold jewellery. The promoter family has been in this business for over eight decades. During the initial days, the business was carried out under Muthoot Bankers, a partnership firm. Muthoot Finance is the flagship company of the Muthoot group (promoter of Muthoot Finance), which is also in the hospitality, healthcare, media, education, information technology, foreign exchange, insurance distribution, and money transfer businesses. |
Key Financial Indicators
Key Financial Indicators (consolidated)
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Any other information: Not applicable |
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Annexure - Details of Instrument(s)
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Annexure - Details of Rating Withdrawn
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Annexure – List of entities consolidated
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