| Muthoot Fincorp Limited | ||||||||||||||
| 'CRISIL A/Stable' assigned to Perpetual Bonds | ||||||||||||||
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| 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 A/Stable’ rating to Rs 120 crore of Perpetual debt of Muthoot Fincorp Limited (MFL; flagship company of Muthoot Pappachan group [MPG]). The ratings on other debt instruments and bank facilities has been reaffirmed at ‘CRISIL AA-/CRISIL PP-MLD AA-/CRISIL A/Stable/CRISIL A1+’.
CRISIL Ratings has withdrawn its rating on Non Convertible Debentures of Rs 82.92 crore (See Annexure 'Details of rating withdrawn' for details) in line with its withdrawal policy. CRISIL Ratings has received independent confirmation that these instruments are fully redeemed.
The rating continues to reflect MFL’s healthy performance and strong market position in the core gold loan portfolio, as indicated by steady growth in assets under management (AUM), sound asset quality (despite the challenges created by the Covid-19 pandemic). Gold loan portfolio accounts for around 59% of the group’s overall AUM as on December 31, 2022 and stood at Rs 17,852 crore (including co-lending of Rs 1143 crore).
The non-gold loan portfolio accounted for around 41% of the total MPG portfolio as on December 31, 2022. Out of this, the microfinance business accounted for Rs 8,192 crore AUM as on December 31, 2022, while the AUM of vehicle and housing finance stood at Rs 2,141 crore and Rs 1,469 crore, respectively. The non-gold portfolio has faced increased asset quality challenges especially in the aftermath of the second wave of pandemic. The management remains cautious with continued focus on increasing collection efficiency. Also, they have made higher provisions buffers which are sufficient to cover any further asset quality challenges.
The capitalisation profile was supported by the capital infusion at both standalone level and in the microfinance subsidiary. Consequently, the networth at the consolidated level increased to estimated Rs 4836 crore in 9M 2023 as compared to Rs 3,595 crore in fiscal 2021. Moreover, net gearing (adjusted for cash and real estate assets) at the standalone level improved to 4.6 times in 9M 2023 as compared to 6.2 times in fiscal 2021 and at consolidated level improved to 6.0 times in 9M 2023 as compared to 7.4 times in fiscal 2021.
MFL’s standalone profitability has steadily improved in the past 2-3 fiscals as evidenced by standalone return on managed assets (RoMA) of 1.8% (annualised) in 9M 2023 as compared to 1.2% in fiscal 2020. If we adjust for non-interest bearing assets, adjusted RoMA further improves to 2.2% in 9M 2023. This improvement is backed by increasing branch productivity, steady reduction in operating costs while maintaining overall low credit costs. At consolidated level, RoMA improved to 1.8% (annualised) in 9M 2023 as compared to 1.2% in fiscal 2020. With expected improvement in NIMs and reduction in the credit cost in the non-gold loan segment, profitability is expected to improve further in fiscal 2023.
The ratings are further supported by promoters’ extensive experience in the loan-against-gold jewellery business, its established market position in the gold business and diversified product profile of MPG. These strengths are partially offset by geographical concentration in portfolio and potential challenges associated with non-gold loan segments. |
Analytical Approach For arriving at the ratings, CRISIL Ratings has combined the business and financial risk profiles of MFL (engaged in businesses of financing against gold jewellery, financing micro and small and medium enterprises [MSMEs]), Muthoot Microfin Limited (MML; microfinance), Muthoot Capital Services Limited (MCSL; two-wheeler finance and MSME loans), and Muthoot Housing Finance Company Limited (MHFCL; housing finance). This is because all the companies, collectively referred to as the MPG, have significant financial, managerial and operational linkages. MML and MHFCL are subsidiaries of MFL while the promoters hold a 62.5% stake in MCSL. Furthermore, MFL has exposure to real estate assets which stood at Rs 496 crore (2.1% of total assets as of December 31, 2022). CRISIL Ratings notionally allocates a part of networth towards such asset acquisition so as to simulate a funding model for these assets, with low gearing (debt:equity) of 0.5 time.
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:
MFL is the third largest gold loan non-banking financial company (NBFC). The promoters have spent over seven decades in the business of lending against gold jewellery. Over the years, the group has established a strong reputation and brand in South India and has an appropriate assessment and underwriting methodology.
MFL’s gold loan business grew at steady rate of 22% compound annual growth rate (CAGR) over fiscals 2018 to 2020 and 21% in fiscal 2021 despite increase in competition from banks and having a regulatory loan-to-value (LTV) disadvantage during last fiscal. However, in fiscal 2022, higher volatility in gold prices between January and April 2021 followed by localised lockdown impose by states to curb the impact of the second wave of covid-19 impacted the branch operations and disbursements during first half of current fiscal. This coupled with higher auctions in Q3 of fiscal 2022, MFL’s gold loan AUM stood at Rs 18,125 crore as of March 2022 as compared to Rs 18,701 crore as of March 2021. As of December 31, 2022, MFL’s gold loans AUM stood at Rs 17,852 crore.
The total gold holding stood at around 50.1 tonnes on of December 31, 2022 (51 tonnes as on March 31, 2020) owing to decline in the gold loan portfolio. During fiscal 2022, the company disbursed Rs 35,154 crore as compared to Rs 38,744 crore in previous fiscal. In 9M 2023, company disbursed Rs 28,844 crore. The AUM per branch stood at Rs ~5.1 crore as on December 31, 2022, as compared to Rs ~3.6 crore in fiscal 2019.
MPG has diversified its product profile over the past few years. Currently, the group operates in five major segments: loan against gold jewellery, two-wheeler finance, microfinance, housing finance and small business loans. Overall managed AUM of MPG is around Rs 30,328 crore as on December 31, 2022 (Rs 28,308 crore as on March 31, 2022). The proportion of gold loans has remained high at 59% in 9M 2023 as compared to 67% in March 2021. The microfinance portfolio is the second largest with around 27% of overall portfolio of the group as on December 31, 2022. CRISIL Ratings believes that the gold loans will continue to hold the largest share in the consolidated AUM over the medium term.
MFL’s networth, at standalone level, stood at Rs 3,900 crore (including CCCPS) as on December 31, 2022 as against Rs 3,201 crore as on March 31, 2021 supported by the capital infusion of Rs 150 crore CCPS. Capitalisation is further supported by low asset-side risks (security of gold jewellery, which is liquid and in the lender’s possession). On a consolidated level, networth stood at Rs 4,119 crore as on March 31, 2022, against Rs 3,595 crore as on March 31, 2021 which was bolstered by $50 million in MML by a PE investor Greater Pacific Capital in fiscal 2022 and $10 million in September 2022. Consequently, the networth at the consolidated level increased to estimated Rs 4836 crore in 9M 2023 as compared to Rs 3,595 crore in fiscal 2021. Moreover, net gearing (adjusted for cash and real estate assets) at the standalone level improved to 4.6 times in 9M 2023 as compared to 6.2 times in fiscal 2021 and at consolidated level improved to 6.0 times in 9M 2023 as compared to 7.4 times in fiscal 2021.
Furthermore, MFL’s exposure to real estate assets has reduced to Rs 496 crore in 9M 2023 (2.1% of total assets) as compared to Rs 540 crore (2.2% of total assets) as on March 31, 2022 down from Rs 876 crore as on March 31, 2017 (6.5% of total assets). The management is expected to maintain gearing at current level over the medium term. Any material increase in gearing beyond current thresholds will be a key rating sensitivity factor.
The gross NPAs for MFL stood at 2.88% as on March 31, 2022 against 1.92% as on March 31, 2021. The rise in NPAs are primarily due to accumulation of auctionable gold loan portfolio and the SME portfolio wherein the performance was affected due to slowdown in the sector. Further there is a negligible impact of the Reserve Bank of India (RBI) clarification released in November 2021 on the NPAs as gold loans are demand loans where the interest and principal amount are due for payment at the end of tenor. However, CRISIL Ratings notes that due to asset quality issues and the pandemic, the company, incrementally, has reduced its exposure to the SME segment and has started focusing primarily on gold loan products. The proportion of SME loans has reduced further to around 3% of the overall group’s AUM as on September 30, 2022, from 8% as on March 31, 2018. As of December 31, 2022, gross NPA stood at 3.7%. Additionally, company is doing regular auctions of gold loans which would help in reducing GNPA around 1% in gold loans. In the gold loan segment, MFL has maintained healthy asset quality over the years, backed by strong collection efficiency, as reflected in GNPAs of 1.0-2.0% over the last five fiscals. Asset quality, as better measured by credit costs, has also been under control within 0.5% during this period for gold loans. In fiscal 2022, credit cost stood at 0.3%. Post second wave of covid, company has been doing regular auctions since June 2021 and the NPAs in the gold segment are likely to reduce in the coming period. Furthermore, company is focusing on short tenure (6-month) gold loan product compared to average 9-month product in the previous fiscal. This should help MFL de-risk the portfolio from any sharp movements in gold prices in the near term.
MFL's profitability, on standalone basis, has improved over the last 2-3 years on account of higher returns from the gold business during the pandemic, steady reduction in overall opex cost over the years and overall low credit costs. RoMA improved significantly to 1.7% in fiscal 2021 compared to just 1.2% and 1.0% in fiscal 2020 and 2018, respectively. In fiscal 2022, MFL reported slight reduction in RoMA to 1.5% owing to slight decline in NIMs and rise in operating cost associated with core banking migration and rise in employee benefit expense. In 9M, 2023, RoMA improved at 1.8% (annualised). If we adjust for non-interest bearing assets, profitability improves to 2.2% in 9M 2023. MFL has maintained its focus on regular interest collection which may reduce loss on interest income, if any, on auction of pledged jewellery. Furthermore, with the current trend in gold prices, the company is not expecting any issues with respect to interest losses. For fiscal 2023, CRISIL Ratings expects further improvement in profitability as the benefits of branch operating efficiency kicks in.
On a consolidated level, RoMA improved to 1.8% (annualised) in 9M 2023 as compared to 1.2% in fiscal 2020. MFL’s profitability is expected to support the consolidated profitability. Additionally, with the expected improvement in the earning profile of subsidiaries and MCSL, overall profitability is expected to improve in fiscal 2023. As of December 2022, MML has total provisioning buffer of Rs 161 crore (2.0% of the total book). Given the higher provisioning buffer, company is well placed to cover any further asset quality challenges arising from the restructured book. Additionally, the removal of interest rate cap as per new RBI directives is expected to bolster the profitability of the company. Similarly, MCSL is carrying a huge provision buffer of Rs 429.7 crore (20.1% of the total portfolio as of December 31, 2022), write backs are also expected in the current fiscal in addition to the improving profitability on account of expected growth. Therefore, profitability of MPG is expected to improve steadily over the medium term. However, the group’s ability to manage earnings primarily within non-gold segments will be monitored.
Weaknesses:
High geographical concentration persists, with South India accounting for around 62% of the gold loan portfolio as on March 31, 2022 (as compared to 70% as on March 31, 2019). This was achieved by increase in per branch business from branches other than southern branches, opening of new branches in North, East and South and closure or merger of non-viable branches in South India. At the MPG level, around 80% of AUM is concentrated in South Indian states. While the level of concentration has been declining, it is higher than that of its peers. Presently, the demand for gold loans has been high in the region. Therefore, the proportion of AUM from the South region may not decline further in the current fiscal.
The non-gold segments accounted for 41% of the overall portfolio as on December 31, 2022. While MPG has managed to grow these businesses and increase the segmental share over the last 2-3 years, potential challenges linked to seasoning of the loan book and asset quality remain. In fiscal 2022, microfinance portfolio and housing finance portfolio has registered a growth of 26% and 6.3% respectively whereas vehicle loan portfolio declined by 1.8%.
However, asset quality in both microfinance and vehicle finance segments has witnessed deterioration. The 90+ dpd level for MML stood at 6.8% as on March 31, 2022 (8.0% as on March 31, 2021). The 90+ dpd in case of MCSL have increased to 18.6% as on March 31, 2022 as against 8.7% as on March 31, 2021. The 90+ dpd for MHFCL stood at 3.9% as on March 31, 2022 (3.5% as on March 31, 2021). As of 9M 2023, 90+ dpd for MML stood at 5.7%, MCSL at 17.4% and MHFL at 3.5%
The microfinance and vehicle finance businesses are more prone to risks arising due to the pandemic. Nevertheless, post September 2020, CRISIL Ratings has observed substantial improvement in the collection efficiency within the vehicle finance segment. The microfinance segment has also witnessed improvement in its collections consistently during the last quarter of fiscal 2021. However, due to the second wave of Covid 19, collection efficiency dropped in the month of April 2021 and further in the month of May 2021. However, it has picked up from June 2021 onwards. CRISIL Ratings believes that the consolidated credit profile will be able to absorb asset quality risks in the microfinance, vehicle or housing finance businesses in the near term. Furthermore, the non-gold segments are recovering post the pandemic. Nevertheless, CRISIL Ratings will continue to closely monitor the delinquency trend and collection efficiencies in the non-gold loan segments in the near term. Additionally, sufficiency of capital buffers to withstand asset-side shocks remains a key rating sensitivity factor. |
Liquidity: Strong As per Asset Liability Management (ALM) statement of December 31, 2022, MFL, on standalone basis, has cumulative positive gaps in the upto 1 year bucket. As on March 31, 2023, MFL had liquidity of Rs 2,556 crore (Rs 2,221 crore of cash and equivalent and Rs 335 crore of CC/WCDL). Against this, they have total debt repayments (including operating expense) of Rs 1,580 crore in the next three months. The total debt repayments exclude CC / WCDL limits which are typically rolled over. CRISIL Ratings notes that MFL has been able to rollover the CC/WCDL limits in the past and also during the previous three months and expects to be able to rollover the balance limits falling due in coming months.
In terms of collections, the company had average collections of around Rs 3,227 crore on monthly basis during the Q3 2023. In terms of additional funding, MFL has been able to raise Rs 3,195 crore in the form of term loans from public and private sector banks in fiscal 2022. The company also mobilised Rs 1,065 crore through public issue NCDs, Rs 575 crore through private placement of NCDs including MLDs, Rs 100 crore as subdebt, Rs 135 crore as PDI, Rs 380 crore through Commercial paper and Rs 455 crore as CC/WCDL during the same period. In fiscal 2023, MFL has raised Rs 2355 crore till December 2022. While a larger proportion of borrowing has been sourced as funding lines from banks and financial institutions such as term loans (25.8%) and CC/WCDL (43.3%), the company’s resource profile remained diversified across avenues, such as NCDs (19.3%) and subordinated debt (11.5%) as on December 31, 2022. |
Outlook: Stable CRISIL Ratings believes MFL’s business profile will continue to be supported by its established market position in the gold loan segment |
Rating Sensitivity factors Upward factors
Downward factors
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About the Company MFL, set up in 1997, is a non-deposit-taking, systemically-important NBFC, engaged in lending against gold jewellery. It is the flagship company of the MPG, which has diverse business interests such as hospitality, real estate and power generation. The company also distributes mutual funds, and general and life insurance products, and operates in the money-transfer segment.
MFL (on standalone basis) had AUM of Rs 18,531 crore. MML had AUM of Rs 8.192 crore, MCSL has Rs 2,141 crore and Muthoot Housing has Rs 1,469 crore as on December 31, 2022. |
Key Financial Indicators of MFL – Standalone
*annualised, ^net gearing is adjusted for off balance sheet assets and real estate exposure and cash # including off balance sheet assets and co-lending
Key financials for MPG
^net gearing is adjusted for off balance sheet assets and real estate exposure and cash $ including off balance sheet assets and adjustment for real estate exposure |
Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
#Yet to be issued
Annexure - Details of Rating Withdrawn
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Annexure – List of entities consolidated
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This Annexure has been updated on 28-Apr-23 in line with the lender-wise facility details as on 20-Dec-21 received from the rated entity.
Criteria Details
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