| Muthoot Capital Services Limited | ||||||||
| 'CRISIL A/Stable' assigned to NCD | ||||||||
| Rating Action | ||||||||
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| 1 crore = 10 million | ||||||||
| Refer to annexure for Details of Instruments & Bank Facilities |
| Detailed Rationale |
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CRISIL has assigned its 'CRISIL A/Stable' rating to Rs 150 crore of non-convertible debentures of Muthoot Capital Services Limited (MCSL; part of Muthoot Pappachan Group [MPG]) and reaffirmed it 'CRISIL A/Stable/CRISIL A1' ratings on the existing bank facilities and debt instruments. The rating on the fixed deposit programme has also been reaffirmed at 'FA+/Stable'. |
| Analytical Approach |
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For arriving at the ratings, CRISIL has taken a standalone view of MCSL and also factored in support from MPG, whose flagship company is Muthoot Fincorp Ltd (MFL; 'CRISIL A/CRISIL BBB+/Stable/CRISIL A1'). |
| Key Rating Drivers & Detailed Description |
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Strengths: * Adequate capitalisation and earnings profile MCSL is adequately capitalised, as reflected in networth of Rs 507 crore as on March 31, 2020. Gearing increased marginally from 4.5 times as on March 31, 2018, to 4.7 times as on March 31, 2019, and remained almost stable at 4.7 times as on March 31, 2020, supported by steady internal accrual. Capitalisation improved significantly over the past few years, with the company raising Rs 165 crore through qualified institutional placement in November 2017. The company's philosophy is to maintain gearing at 5-6 times on a steady state basis. MCSL continues to be a steady contributor to the overall profitability of the group. Profitability was healthy in fiscal 2019, but moderated in fiscal 2020 on account of provisions toward standard assets and increased cost of borrowing, leading to decline in net interest margin (NIM) during the period. However, MCSL continues to enjoy NIM of around 12%, supported by high yield of 21-22%. Although yield has moderated in the past few years primarily on account of competition and relatively lower yield (14-16%) from the growing corporate loan portfolio, yield is expected to stabilise at the current level. Profitability was also constrained on account of increase in delinquencies in fiscal 2020, in line with industry trends, which led to increase in credit costs for the period. Consequently, return on managed assets (RoMA) moderated to 2.0% in fiscal 2020 (3.2% in fiscal 2019). MCSL is likely to see an increase in credit cost because of the challenges in the economic environment. Nevertheless, the pre-provisioning profitability should be able to absorb the increase in credit cost during the first half of fiscal 2021. * Extensive experience of the promoter and management in vehicle finance segment Each of the 3 Promoter Directors have more than 3 decades of experience in the business of lending, beginning with gold loans and have over the years forayed into two-wheeler financing, microfinance, and housing finance. The group ventured into two-wheeler financing in 1998, and since then, has expanded into financing used cars, consumer durables, and small ticket business loans. The company also has a strong management team that has rich experience in similar businesses. The team has strengthened the systems and processes of the company, which will support the planned scale-up. The group has established a strong reputation and brand in India, particularly in Southern India, and has an appropriate assessment and underwriting methodology, which is being constantly refined. * Strong support from MPG MCSL is an integral part of MPG, whose flagship company is MFL. It derives significant benefits from its linkages with the group. The group diversified its operations into vehicle financing through MCSL. MCSL has common Promoters and Promoter directors like the other MPG companies. Mr. Thomas John Muthoot is the chairman of MCSL and other Muthoot Pappachan group companies. The company also has strong operational linkages with other group companies. It has the third largest portfolio in the group, and has been leveraging on the branch network of the group to grow its book at a compounded annual growth rate of 23% over the 3 years ended March 31, 2020. Besides its own sales force, MCSL also has access to the wide branch network and large customer base of MFL for origination of new loans and collection. MCSL, being an integral part of the group, will continue to receive operational and managerial support from MPG on an ongoing basis, and timely financial support, in case of exigencies. Weaknesses: * Modest asset quality MCSL is exposed to risks inherent in the two-wheeler financing business, considering the weak credit profile of customers and low resale value of used assets. However, MCSL, with its robust credit underwriting process and focused collection mechanism, has historically been able to maintain delinquencies at moderate levels. During the 9 months of fiscal 2020, delinquencies increased primarily on account of floods in Kerala (comprising 39% of the portfolio), Karnataka, and Maharashtra, and industry-specific disruptions in the automobile sector, which also hampered the company's growth. As per IndAS, Gross stage 3 assets has increased to 6.7% as on March 31, 2020, while Gross NPA as on March 31, 2019 was 4.4%.Although the company, through its collection efforts, anticipated to witness correction in the delinquent portfolio by the end of fiscal 2020, asset quality is further expected to remain under pressure in the near term, as the debt servicing capacity of its inherently risky customer base is likely to be impacted by the nationwide lockdown. Thus, asset quality will be a key monitorable. * Geographically concentrated portfolio Although MCSL has sequentially reduced the concentration in its portfolio over the years, the company's operations continue to be largely concentrated in the southern states of the country. Concentration in the southern states reduced from 83% in March 2018 to 75% in March 2019 and further to 70% as on March 31, 2020. MCSL's operations are concentrated in Kerala, which accounted for 38% of hypothecation loans as on March 31, 2020, though it has declined from 42% as on March 31, 2019. However, MCSL has, over the past 2-3 years, entered the northern and eastern parts of India. Disbursements in the eastern region in fiscal 2020 depicted a growth of 37%, compared with the corresponding period in fiscal 2019. The company plans to further reduce its dependence on the southern states over the medium term. |
| Liquidity Adequate |
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MCSL's asset liability maturity profile is comfortable, with cumulative positive mismatches across all buckets up to 1 year as on March 31, 20120. Liquidity is adequate, even with minimal collections on account of the lockdown. MCSL, as on June 18, 2020, has adequate liquidity of Rs 414 crore (Rs 0.36 crore of cash and equivalents, Rs 1.84 crore of unencumbered fixed deposits and Rs 412 crore of unutilised bank lines ' CC/WCDL). Against the same, they have total debt repayments due of Rs 196 crore (including operating expenses) over the next 2 months ' June and July 2020. Cash credit or working capital demand loan (CC/WCDL) of Rs 545 crore are due for renewal over the same period. The company has been able to rollover its CC/WCDL limit of Rs 95 crore in April 2020 and Rs 127 crore in May 2020 and expects to be able to rollover the balance limits falling due during the period. The liquidity cover for 2 months stands adequate at ~2 times including operating expenses of the company. As MCSL's liquidity cover during this period largely hinges on the timely rollover of CC/WCDL limits, it will be a key monitorable. Furthermore, CRISIL expects MCSL to receive need-based support from the group. |
| Outlook: Stable |
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CRISIL believes MCSL will maintain its healthy earnings profile and moderate capitalisation, and will remain an integral part of MPG, benefitting from linkages with the group, over the medium term. |
| Rating Sensitivity factors |
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Upward factors * Significant scale up and geographic diversification in operations * Substantial improvement in earnings, leading to improvement in RoMA to above 3% on a steady state basis * Upward revision in the rating of MPG Downward factors * No material improvement in the collections on month on month basis * Weakening of the asset quality, with 90+ dpd steadily remaining above 8% * Significant increase in gearing at more than 7 times on a steady state basis |
| About the Company |
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Set up in 1994, MCSL is a deposit-taking, systemically important NBFC. Though the Company started its operations in 1995, it started its lending activities in 1998 after acquiring an NBFC license. Though initially the Company was doing some amount of Gold Loans, subsequently, as the group scaled up its gold financing business in MFL, MCSL entered the two-wheeler financing segment again in fiscal 2008 and gradually exited the gold loan business. MCSL is listed on Bombay Stock Exchange and National Stock Exchange, and is the only listed company of MPG. As on March 31, 2020, its advances portfolio of Rs 2,650 crore comprised 92% two-wheeler loans and 8% corporate loans. |
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Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL complexity levels are assigned to various types of financial instruments and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels. |
| Annexure - Details of Instrument(s) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Annexure - Rating History for last 3 Years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of various bank facilities | ||||||||||||||||||||||||||||||||||||
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