Rating Rationale

Strengths
* Established track record in financing against gold jewellery
MFL's leadership position in the business of providing finance against gold jewellery is backed by the promoter family's established track record, extending to over seven decades. The rich experience gained over this period has helped design an appropriate assessment and underwriting methodology; the company constantly refines this methodology. Assessing the purity of gold without causing any damage to the jewellery, fixing an appropriate value that can be lent against a gram of gold, and determining appropriate loan-to-value (LTV) ratios are critical aspects in the assessment process. Extensive business experience has helped develop a robust model that has helped it maintain strong asset quality, scale up business significantly, and facilitate easy replication over various geographic areas.

* Adequate capitalisation
Capitalisation is adequate, with a networth of Rs.7,324 crore and gearing of 3.1 times as on September 30, 2017. Large accretion to networth and moderation in growth in the past three yeaRs.resulted in a healthy capital adequacy ratio of 26.5% as on September 30, 2017. Lower asset-side risk (security of gold, which is liquid and is in the company's possession) also supports capitalisation. Assets under management (AUM) in the gold loan segment is not expected to grow sharply over the medium term. Also, other segments (affordable housing finance, and microfinance finance) have a relatively small scale. Even after factoring in investments in the subsidiaries housing finance company, Muthoot Homefin (India) Ltd, and Belstar Investment and Finance Pvt Ltd, a microfinance company, CRISIL believes the consolidated gearing will remain below 5.5 times over the medium term.

* Healthy profitability
Profitability has improved with RoA at 4.1% for fiscal 2017 from 3.0% in fiscal 2016 mainly on account of recovery efforts and partly due to favourable movement in gold prices. Though MFL charges relatively low interest rates than its peers, operating efficiency helps maintain healthy profitability. With increased focus on regular interest collection, along with revision in interest rates on different schemes, has resulted in higher yields and profitability during fiscal 2017. Though gross NPA has increased to 4.6% as on September 2017 from 2.1% as on March 2017 due to slowdown in auctions, the credit cost is not expected to increase materially and remain at below 1% over the medium term. In addition, the company is diversifying into microfinance and housing finance where its ability to maintain low credit cost will remain a key rating monitorable.

Weakness
* Geographical and product concentration in revenue
MFL has high geographic concentration in South India, which currently accounts for 52% of its total loans. While the level of concentration has been declining and is much lower than that of peers, the significant regional exposure makes the company vulnerable to economic, social, and political situation in the region. In addition, operations remain confined to financing against gold ornaments; this segment constitutes over 92% of the company's total advances. To diversify its product segment, MFL has entered into housing finance and microfinance by acquiring separate subsidiaries. It has also taken majority stake in a Sri Lanka-based diversified non-banking financial company (NBFC). Though the company is diversifying into other product segments the proportion of AUM and revenue of non-gold loan segment will remain at 15% over the medium term and hence, will remain susceptible to risks of revenue concentration in a single asset class.

Furthermore, implementation of the Kerala Money LendeRs.Act, 1958, for NBFCs (which depends on the decision of the Supreme Court) could affect MFL's lending rates and operational expenditure as the compliance requirements under the act would be rigorous and cumbersome. This will remain a key rating monitorable.

* Challenges associated with non-gold segments
The Muthoot group diversified into non-gold loan segments post 2012. Primarily, affordable housing and microfinance are the focus areas. Although the affordable housing segment is a secured business, the key challenge is the low credit profile of borroweRs.and limited track record of MFL. The microfinance sector has seen significant decline in collection efficiency post demonetisation and socio political issues in a few states such as Maharashtra, Uttar Pradesh, and Karnataka. The non-gold loan portfolio will remain at 15-20% of the overall portfolio in the medium term; however, performance of asset quality and profitability and scaling up operations of non-gold segments will remain key monitorables.