| Muthoot Fincorp Limited | ||||||||||||||||||||||||||
| 'CRISIL A-/Stable' assigned to Perpetual Bonds | ||||||||||||||||||||||||||
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| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL has assigned its ‘CRISIL A-/Stable’ rating to Rs 50 crore perpetual bond of Muthoot Fincorp Limited (MFL; flagship company of Muthoot Pappachan group [MPG]). The rating on other debt instruments and bank facilities has been reaffirmed at ‘CRISIL A+/CRISIL A-/Stable/CRISIL A1+’.
The rating continues to reflect MFL’s healthy performance 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) and improving earnings profile. Gold loan portfolio accounts for around 67% of the group’s overall AUM as on December 31, 2020 and 87% of its profits.
MFL’s gold loan business grew at steady rate of 22% compound annual growth rate (CAGR) over fiscals 2018 to 2020. Furthermore, in fiscal 2021, gold loan AUM growth is estimated at 18.7% to Rs 17,722 crore (provisional) including assigned loans despite increase in competition from banks and having a regulatory loan-to-value (LTV) disadvantage during this period. The AUM per branch has also increased to Rs 4.8 crore as on December 31, 2020, compared to Rs 3.5 crore a year ago. CRISIL Ratings expects the company to grow 18-20% over the medium term.
MFL has maintained healthy asset quality over the years, backed by strong collection efficiency, as reflected in gross non-performing assets (GNPAs) for the gold loan portfolio of 1.0-1.8% over the last five fiscals. Asset quality, as better measured by credit costs, has also been under control within 0.5% during this period. As on December 31, 2020, MFL’s GNPA and credit cost stood at 2.3% and 0.2% (annualised), respectively. Furthermore, in the current fiscal, the company has focused on short tenure (six 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 has steadily improved in the past 2-3 fiscals as evidenced by standalone return on managed assets (RoMA) of 1.7% (annualised) during the nine months through December 2020, against RoMA of 0.9% in fiscal 2018. This improvement is backed by improving branch productivity, steady reduction in operating costs while maintaining overall low credit costs.
The non-gold loan portfolio accounted for around 33% of the total portfolio as on December 31, 2020. Out of this, the microfinance business accounted for Rs 4,594 crore AUM as on December 31, 2020, while the AUM of vehicle and housing finance stood at Rs 2,224 crore and Rs 1,221 crore, respectively. The non-gold portfolio has faced asset quality challenges especially in the aftermath of the pandemic. The management remains cautious and has strategically decided to curtail disbursements resulting in decline in the microfinance and vehicle finance businesses. The microfinance portfolio (under Muthoot Microfin Ltd [MML]) shrunk by 3% (annualised) whereas the vehicle loan portfolio (under Muthoot Capital Services Ltd [MCSL]) has registered decline of 21% (annualised) during the nine months ended December 31, 2020. On the other hand, housing finance business (under Muthoot Housing Finance Co Ltd [MHFCL]) has grown 5.8% (annualised) over the same period. At consolidated level, the MPG’s RoMA stood at 1.4% (annualised) for the nine months ended December 31, 2020. The significant increase in pro-forma GNPA in the non-gold businesses during the nine months of fiscal 2021 has resulted in higher provision, thereby impacting the earnings profile of subsidiaries. Nevertheless, since the gold loan business will continue to dominate the group’s overall loan portfolio, the consolidated credit profile has the ability to absorb asset quality and earnings risks in the non-gold businesses in the near term.
The consolidated networth of MPG (adjusted for inter-group investments and as per Ind-AS reporting) was estimated at Rs 3,337 crore as on December 31, 2020, against Rs 3,160 crore as on March 31, 2020. Accordingly, the estimated gearing (including securitisation [assignments or PTCs], treated as borrowings) of the group stood at 7.6 times as on December 31, 2020, which is similar to gearing as on March 31, 2020. Capitalisation is supported by low asset-side risks (security of gold jewellery which is liquid and in the lender’s possession). Furthermore, MFL’s exposure to real estate assets stood at Rs 540 crore (2.5% of total assets) as on December 31, 2020, down from Rs 876 crore as on March 31, 2017 (6.5% of total assets). CRISIL Ratings also understands that the company has raised funds by placing around 55% of these assets as security and utilised those funds for core business operations. 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. Post making this adjustment, the group’s adjusted gearing stood at around 8.0 times as on December 31, 2020. 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.
CRISIL Ratings believes MFL has adequate liquidity, on standalone basis, to manage during this period even if asset-side collections will be negligible while liability-side outflow continues as per schedule. As on April 30, 2021, MFL had liquidity of Rs 836 crore (Rs 357 crore of cash and equivalent and Rs 479 crore of unutilised bank lines). Against this, they have total debt repayment (including operating expense) of Rs 929 crore in the next two months. The total debt repayment excludes cash credit or working capital demand loan (CC / WCDL) limits, which are typically rolled over. CRISIL Ratings notes MFL has been able to rollover the CC/WCDL limits during the previous three months and expects to be able to rollover the balance limits falling due in the coming months.
In terms of funding, MFL on standalone basis, has been able to get sanction of Rs 2,865 crores (in addition to the unutilised bank lines) in fiscal 2021 in the form of term loans from public and private sector banks. Furthermore, during fiscal 2021, MFL was able to diversify its resource profile. The company mobilised Rs 3182 crore through debt instruments, including retail public issue, subordinate debt, commercial paper and covered bond as on March 31, 2021. While a larger proportion of borrowing has been sourced as funding lines from banks and financial institutions such as term loans (21.1%) and CC/WCDL (41.2), the company’s resource profile remained diversified across avenues, such as NCDs (24.9%) and subordinated debt (12.8%%) as on March 31, 2021.
The ratings are further strengthened 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, healthy asset quality and improving earnings profile in the gold loan segment. These strengths are partially offset by moderate capitalisation, 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]), MML (microfinance), MCSL (two-wheeler finance and MSME loans), and 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 whose promoters hold a 62.5% stake in MCSL. Furthermore, MFL has exposure to real estate assets which stood at Rs 540 crore (2.5% of total assets as of December 2020). 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, particularly Kerala and Tamil Nadu, and has an appropriate assessment and underwriting methodology.
The gold loan AUM is estimated at around Rs 17,722 crore as on March 2021 from Rs 14,924 crore as on March 31, 2020. The total gold holding stood at around 51 tonne on the same date (49.4 tonne as on March 31, 2019). The company maintained its pace of growth with an average of over Rs 3,000 crore in disbursements on monthly basis till March 2020. During fiscal 2021, the company disbursed Rs 38,487 crore. The growth has been despite increase in competition from banks and having a regulatory LTV disadvantage during this period. The AUM per branch has also increased to Rs ~4.8 crore as on December 31, 2020 as compared to Rs ~3.5 crore a year ago. CRISIL Ratings expects the company to grow 18-20% over the medium term.
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 estimated to be around Rs 26,359 crore as on December 31, 2020 (Rs 24,103 crore as on March 31, 2020). The proportion of gold loans has seen steady increase to over 60% as on March 31, 2020 and further to 67% as on December 31, 2020. The microfinance portfolio is second largest with around 17% of overall portfolio of the group as on December 31, 2020. In light of the current pandemic-related challenges, the growth in non-gold segments, such as microfinance and vehicle finance, is expected to remain muted in the near term. Furthermore, the demand for gold loans during this period is expected to remain high and, as a result, the proportion of gold loans is expected to be maintained in the near term.
The gross NPAs for MFL stood at 2.31% as on December 31, 2020, against 1.86% as on March 31, 2020. The NPAs are primarily in the SME portfolio wherein the performance was affected due to slowdown in the sector. 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 December 31, 2020, from 8% as on March 31, 2018. In the gold loan segment, MFL has maintained healthy asset quality over the years, backed by strong collection efficiency, as reflected in GNPAs of 1.0-1.8% 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. Since November 2020, the company has initiated regular auction process and the NPAs in the gold segment are likely to reduce in the coming period. As on December 31, 2020, MFL’s GNPA and credit cost stood at 2.3% and 0.2% (annualised), respectively. Furthermore, in the current fiscal, the company has focused 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 in fiscal 2021 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% (annualised) compared to just 1.2% and 1.0% in fiscal 2020 and 2018, respectively. 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. On a consolidated level, MFL’s profitability accounts for 87% of the overall group profits and is expected to support the group’s profitability. 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:
MFL’s networth, at standalone level, stood at Rs 3,065 crore as on December 31, 2020, against Rs 2,954 crore as on March 31, 2020. Additionally, estimated gearing (including securitisation [assignments or PTCs] treated as borrowings) stood at 5.9 times as on December 31, 2020 (5.3 times as on March 31, 2020). On a consolidated level, estimated gearing of the group stood at 7.6 times as on December 31, 2020, which is similar to gearing as on March 31, 2020. Capitalisation is further supported by low asset-side risks (security of gold jewellery, which is liquid and in the lender’s possession) despite no fresh capital infusion thus far. Post adjusting the MFL’s real estate exposure of Rs 540 crore, the adjusted gearing at standalone and consolidated levels stands at 6.4 times and 8 times, respectively, as on December 31, 2020. The management is expected to maintain gearing at current level over the medium term. Additionally, the promoter is expected to infuse around Rs 200 crore in fiscal 2022. However, any material increase in gearing beyond current thresholds will be a key rating sensitivity factor.
High geographical concentration persists, with South India accounting for around 64% of the gold loan portfolio; with Tamil Nadu and Kerala constituting around 27% of the gold loan portfolio as on December 31, 2020 (as compared to 70% and 34%, respectively, 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, with Tamil Nadu and Kerala constituting around 47%. While the level of concentration has been declining, it is higher than that of its peers. Furthermore, with some relaxations allowed by the state governments in Kerala and Tamil Nadu, the branch operations in those regions have been restarted. Presently, the demand for gold loans has been high in these regions. Therefore, the proportion of AUM from the South region may not decline further during fiscal 2021.
Furthermore, Kerala accounts for around 11% of the group’s loan portfolio. Impact of the Kerala Money Lenders Act, 1958, on NBFCs, the applicability of which depends on the decision of the Supreme Court, could affect lending rates and operational expenditure.
The non-gold segments accounted for less than 35% of the overall portfolio as on December 31, 2020. 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. Asset quality in both microfinance and vehicle finance segments has witnessed deterioration. The 90+ dpd level for MML (microfinance business) stood at 7.2% as on December 31, 2020 (5.7% as on March 31, 2020). The gross NPAs in case of MCSL (vehicle finance business) have increased to 11.4% (stage III including proforma NPA) as on December 31, 2020, against 5.8% as on March 31, 2019. The 90+ dpd for MHFL (housing finance business) stood at 3.9% as on December 31, 2020.
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 2-3 months. 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 segment is expected to recover over the next 2-3 quarters. 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, 2020, MFL has cumulative positive gaps in the upto 1 year bucket. As on April 30, 2021, MFL had liquidity of Rs 836 crore (Rs 357 crore of cash and equivalent and Rs 479 crore of unutilised bank lines). Against this, they have total debt repayments (including operating expense) of Rs 929 crore in the next two 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 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 3,000 crore on monthly basis during the recent period. In terms of additional funding, MFL has been able to raise Rs 2,865 crore (in addition to the unutilised bank lines) in the form of term loans from public and private sector banks in fiscal 2021. The company also mobilised Rs 3,182 crore through debt instruments, including retail public issue, subordinate debt and covered bond during the same period. |
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 18,460 crore (provisional). MML had AUM of Rs 4,594 crore, MCSL (Rs 2,224 crore) and Muthoot Housing (Rs 1,221 crore) as on December 31, 2020. |
Key Financial Indicators MFL – Standalone
^as per Ind-AS reporting # including off balance sheet assets
Key financials for MPG
^as per Ind-AS reporting # including off balance sheet assets and adjustment for real estate exposure, **7.6 times as of March 31, 2020 post adjusting real estate assets which were monetised to avail borrowings |
Any other information: Note on perpetual debt instrument MFL issued the perpetual bonds in four series between November 2008 and September 2010, in accordance with regulations applicable on issuance of such instruments as specified by the RBI. These bonds are held by a group company, Muthoot Hotels Pvt Ltd (MHPL). Terms and conditions of the issue, as laid down by the issuer, MFL, at the time of original issue, remain in effect.
The ratings on the perpetual bonds also take into account the deep subordinated nature of these instruments: MFL is restricted from servicing these instruments if it breaches the regulatory minimum capital requirement or if the regulator denies permission to MFL to make payments of interest and principal if it reports a loss. Therefore, for these instruments, transition from one rating category to another can be significantly sharper than with other debt instruments, as debt servicing on perpetual debt instruments is far more sensitive to the company’s overall capital adequacy levels and profitability. |
| Note on complexity levels of the rated instrument: CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
Annexure - Details of Instrument(s)
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Annexure – List of entities consolidated
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| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Annexure - Details of various bank facilities | ||||||||||||||||||||||||||||||||||||||||||
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Criteria Details
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