Rating Rationale
July 04, 2018 | Mumbai
Muthoot Capital Services Limited
Rated amount enhanced
 
Rating Action
Total Bank Loan Facilities Rated Rs.2000 Crore (Enhanced from Rs.1600 Crore)
Long Term Rating CRISIL A/Stable (Reaffirmed)
 
Rs.50 Crore Non Convertible Debentures CRISIL A/Stable (Reaffirmed)
Fixed Deposits Programme FA+/Stable (Reaffirmed)
Rs.250 Crore Commercial Paper CRISIL A1 (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its rating on the bank facilities and debt instruments of Muthoot Capital Services Limited (MCSL; a part of Muthoot Pappachan Group (MPG)) at 'CRISIL A/Stable/CRISIL A1'. The rating on fixed deposit programme has also been reaffirmed at 'FA+/Stable'.
 
On June 27, 2018, CRISIL had upgraded its rating on the bank facilities of MCSL to 'CRISIL A/Stable' from 'CRISIL A-/Stable'. The rating on the fixed deposit programme was also upgraded to 'FA+/Stable' from 'FA-/Stable'.
 
The upgrade of the ratings was primarily driven by the upgrade in the rating of the flagship-company of the group - Muthoot Fincorp Ltd (MFL; rating upgraded to 'CRISIL A/CRISIL BBB+/Stable' from 'CRISIL A-/CRISIL BBB/Stable'). 
 
The rating on fixed deposit programme was earlier kept one notch lower than the derived rating as per mapping framework. The rating was upgraded factoring the waning of risk of adverse regulatory action on parent MFL. MFL had completely repaid the deposits that were collected by Muthoot Estate Investments ((MEI, an MPG owned partnership firm). Therefore, the one notch lower deviation was removed and the fixed deposit rating was derived as per the mapping framework corresponding to the long-term credit rating of MCSL. Kindly refer to 'CRISIL's criteria for rating fixed deposit programmes'.
 
The rating continues to reflect the expected financial, operational and managerial support from MPG as MCSL has strong linkages with MPG. MCSL has healthy earnings profile and moderate capitalisation. These strengths are partially offset by risks that are normally inherent to two wheeler financing business and by geographic concentration in revenue profile that MCSL exhibits. While the segment where MCSL operates are inherently risky, the company has able to grow its operations and maintain its profitability during last 1-2 years.  

Analytical Approach

For arriving at the ratings, CRISIL has also factored in the support from Muthoot Pappachan group (MPG). MCSL being integral part MPG will continue to derive significant financial, operational and management benefits due to its strong linkages with MPG.

Key Rating Drivers & Detailed Description
Strengths
* Strong support from Muthoot Pappachan Group
MCSL is an integral part of the Muthoot Pappachan group. It derives significant benefits from its linkages with the group. MCSL is the vehicle for the group to diversify into two- wheeler financing. MCSL and other group companies have common shareholders and directors. Mr John Muthoot is the chairman of MCSL and other Muthoot Pappachan group companies. There are common directors who are on boards of MCSL and other group companies. MCSL also has strong operational linkages with other group companies. Besides its own sales force, MCSL also utilises the wide branch network and large customer base of MFL for origination of new loans and for collection. CRISIL believes that MCSL, being an integral part of the Muthoot Pappachan group, will continue to receive operational and managerial support from MPG on an ongoing basis, and funding support in case of any distress.
 
* Healthy Earnings profile
MCSL has a healthy earnings profile, with a high return on average assets of 2.9% for fiscal 2018 (2.4% during fiscal 2017) primarily supported by high yields of over 24-25%. MCSL continues to enjoy NIMs of over 12% for the past few years. Although yields have declined in the past few years by about 300 bps, primarily on account of competition and relatively lower yields from corporate loans (14-16%), CRISIL believes it would stabilize at the present levels. Moreover, credit costs, which have remained steady in the past 2 years in spite of the tightening of regulatory asset classification norms to 90 days from 180 days, is expected to remain at present levels. In view of the above, CRISIL believes MCSL's earnings profile will continue to remain healthy primarily over the medium term.
 
* Moderate Capitalisation
Capitalisation of MCSL improved significantly as the company raised Rs 165 crore via qualified institutional placement in November 2017.  The networth increased to Rs 394 crore from Rs.178 crore as on March 31, 2017.  During same period, gearing has declined to 4.5 times from 6.9 times. However, with expected growth in portfolio the steady state gearing will remain at around 5 to 6 times over the medium term.
 
Weaknesses
* Risks inherent to two wheeler financing business 
MCSL is exposed to risks inherent to two wheeler financing business.  The borrowers' credit profiles are inherently weak and the resale value of used asset is typically low. However, MCSL, with robust credit underwriting process as well as a focused collection mechanism, has managed to keep delinquencies at moderate levels.  Gross non-performing assets (GNPA) have declined to 4.0% as on March 31, 2018 compared to 5.2% as on March 31, 2017, albeit asset recognition norms tightening to 3 months (90 days past due) from 4 months (120 days past due). Also in absolute terms the delinquencies has remained largely stable despite of huge growth in the portfolio. MCSL's portfolio has grown by 55% during fiscal 2018, hence a substantial portion of the book is not adequately seasoned. In view of the above, CRISIL believe, asset quality will remain susceptible.
 
* Geographically concentrated portfolio
MCSL's operations are concentrated in Kerala, which accounted for about 46% of its advances as on March 31, 2018, though it has gradually declined from 84% as on March 31, 2010. The proportion of disbursements in Kerala has remained at around 48% over the past two years. The operations also continues to remain concentrated in other southern states like Karnataka, Tamil Nadu, and Andhra Pradesh. However, MCSL has, recently, entered into northern and eastern part of India which could reduce its geographical concentration over the medium term.
Outlook: Stable

CRISIL believes that MCSL will maintain its healthy earnings profile and moderate capitalisation and will remain an integral part of the Muthoot Pappachan group benefitting from linkages with the group over the medium term. The outlook may be revised to 'Positive' in case of a similar revision in CRISIL's rating outlook on Muthoot Fincorp Limited (MFL, a flagship company of MPG). Conversely, the outlook may be revised to 'Negative' in case of a similar revision in outlook in CRISIL's rating on MFL or in case of material weakening in MCSL's profile or reduction in importance of MCSL to the Muthoot Pappachan group. 

About the Company

Set up in 1994, MCSL is a deposit-taking, systemically important, non-banking financial company. It started with financing two-wheelers; later, it began offering business loans. In the late 1990s, on account of intense competition, the company exited these businesses and shifted to gold loans. Subsequently, as the group scaled up its gold financing business in MFL, MCSL entered the two-wheeler financing segment once again in fiscal 2008 and gradually exited the gold loan business. MCSL is listed on the Bombay Stock Exchange and the National Stock Exchange and is the only listed company in MPG. As on March 31, 2018, its advances portfolio of Rs 2,238 crore comprised 90% two-wheeler loans and corporate loans of 10%.

Key Financial Indicators
Particulars March 31 Unit 2018 2017
Total Assets Rs. Cr. 1,978 1,278
Total Income Rs. Cr. 398 284
Profit after tax Rs. Cr.  54 30
Gross NPA % 4.0 5.2*
Adjusted Gearing Times 4.5 6.9
Return On Managed Assets % 2.9 2.4
*based on 120 days past due

Any other information: Not applicable

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)
SIN Name of Instrument Date of
Allotment
Coupon
Rate (%)
Maturity Date Issue Size 
(in Crore)
Rating Assigned
with outlook
NA Commercial Paper NA NA 7-365 days 250 CRISIL A1
NA Fixed Deposits NA NA NA 0 FA+/Stable
NA Non-Convertible Debentures* NA NA NA 50 CRISIL A/Stable
NA Proposed Long Term Bank Loan Facility NA NA NA 1098 CRISIL A/Stable
NA Working Capital Demand Loan NA NA NA 420 CRISIL A/Stable
NA Cash Credit NA NA NA 360 CRISIL A/Stable
NA Working Capital Term Loan^ Feb-15 9.85% Feb-18 52 CRISIL A/Stable
NA Working Capital Term Loan Feb-16 10.9% Feb-19 20 CRISIL A/Stable
NA Working Capital Term Loan June 2015 11.25% Jun-19 25 CRISIL A/Stable
NA Long Term Loan June 2015 10.25% Jun-19 15 CRISIL A/Stable
NA Long Term Loan^ May 2017 9.3% May-18 10 CRISIL A/Stable
*Yet to be issued
^CRISIL is awaiting independent confirmation of redemption before withdrawing ratings on the facilities
Annexure - Rating History for last 3 Years
  Current 2018 (History) 2017  2016  2015  Start of 2015
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  250.00  CRISIL A1  27-06-18  CRISIL A1  13-12-17  CRISIL A1    --    --  -- 
        27-04-18  CRISIL A1               
        03-01-18  CRISIL A1               
Fixed Deposits  FD  0.00  FA+/Stable  27-06-18  FA+/Stable  13-12-17  FA-/Stable  23-11-16  FA-/Stable  04-11-15  FA/Stable  FA/Stable 
        27-04-18  FA-/Stable  23-11-17  FA-/Stable  18-11-16  FA-/Stable  29-10-15  FA/Stable   
        03-01-18  FA-/Stable  07-11-17  FA-/Stable      30-04-15  FA/Stable   
            19-09-17  FA-/Stable           
Non Convertible Debentures  LT  0.00
04-07-18 
CRISIL A/Stable  27-06-18  CRISIL A/Stable  13-12-17  CRISIL A-/Stable  23-11-16  CRISIL A-/Stable  04-11-15  CRISIL A/Stable  -- 
        27-04-18  CRISIL A-/Stable  23-11-17  CRISIL A-/Stable  18-11-16  CRISIL A-/Stable  29-10-15  CRISIL A/Stable   
        03-01-18  CRISIL A-/Stable  07-11-17  CRISIL A-/Stable           
            19-09-17  CRISIL A-/Stable           
Short Term Debt  ST          23-11-17  CRISIL A1  23-11-16  CRISIL A1  04-11-15  CRISIL A1  CRISIL A1 
            07-11-17  CRISIL A1  18-11-16  CRISIL A1  29-10-15  CRISIL A1   
            19-09-17  CRISIL A1      30-04-15  CRISIL A1   
Fund-based Bank Facilities  LT/ST  2000.00  CRISIL A/Stable  27-06-18  CRISIL A/Stable  13-12-17  CRISIL A-/Stable  23-11-16  CRISIL A-/Stable  04-11-15  CRISIL A/Stable  CRISIL A/Stable 
        27-04-18  CRISIL A-/Stable  23-11-17  CRISIL A-/Stable  18-11-16  CRISIL A-/Stable  29-10-15  CRISIL A/Stable   
        03-01-18  CRISIL A-/Stable  07-11-17  CRISIL A-/Stable      30-04-15  CRISIL A/Stable   
            19-09-17  CRISIL A-/Stable           
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Cash Credit 360 CRISIL A/Stable Cash Credit 360 CRISIL A/Stable
Long Term Loan 25 CRISIL A/Stable Long Term Loan 25 CRISIL A/Stable
Proposed Long Term Bank Loan Facility 1098 CRISIL A/Stable Proposed Long Term Bank Loan Facility 698 CRISIL A/Stable
Working Capital Demand Loan 420 CRISIL A/Stable Working Capital Demand Loan 420 CRISIL A/Stable
Working Capital Term Loan 97 CRISIL A/Stable Working Capital Term Loan 97 CRISIL A/Stable
Total 2000 -- Total 1600 --
Links to related criteria
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating Criteria for Finance Companies
CRISILs Criteria for rating short term debt
Criteria for Notching up Stand Alone Ratings of Companies based on Group Support

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