Muthoot Finance Limited 'CRISIL AA+/Stable' assigned to Non Convertible Debentures
Rating Action
1 crore = 10 million Refer to annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has assigned its ‘CRISIL AA+/Stable’ rating to Rs 3000 crore Non-Convertible Debentures of Muthoot Finance Limited (Muthoot Finance). The ratings on existing debt instruments have been reaffirmed at 'CRISIL AA+/CRISIL PP-MLD AA+r/Stable/CRISIL A1+'.
CRISIL Ratings has withdrawn its rating on non-convertible debentures of Rs 604.1 crore (see the annexure, 'Details of rating withdrawn', for details) on receipt of independent confirmation that these instruments are fully redeemed, in line with its withdrawal policy.
The ratings are driven by Muthoot Finance’s demonstrated ability of profitably scaling up its core gold loan business while maintaining its strong financial risk profile. It also factors in the company’s strong market position within the gold loan segment of India, bolstered by promoter experience. These strengths are partially offset by geographical concentration in operations and low market share in the non-gold segments and, asset quality challenges relating to these non-gold segments.
Between June 2020 and March 2021, the gold loan assets under management (AUM) has grown by 28.2% (non-annualised) despite increasing competition from banks and, having a regulatory Loan to Value (LTV) disadvantage during this period. The gold loan AUM stood at Rs 51,927 crore as on March 31, 2021, registering a 3 year CAGR of 21.6%. However, this growth momentum was disrupted by the second pandemic wave and following suppression of demand. Resultantly, nine monthly growth for fiscal 2022 in gold loan AUM declined to 5.9% (annualized).
With revival in demand and uptick in gold prices, CRISIL Ratings expects the company to grow at 15-17% over the medium term and, retain its leadership position among gold loan financiers. However, in the long term, ability to maintain this growth momentum alongside increasing competition from banks, will be a monitorable.
Asset quality for gold loans, as better measured by credit costs, has also been sound, except for the fourth quarter of fiscal 2018 when non-performing asset (NPA) levels increased after change in NPA recognition norms. Standalone gross stage III assets, having remained below 3.0% for the last 7 fiscals (except for fiscal 2018), have increased to 3.8% as of December 31, 2021 – on account of lagged improvement in repayment capacity of certain borrowers. However, ultimate credit costs for 9M fiscal 2022 remain low at 0.4%, supported by the highly liquid nature of the collateral. In fiscal 2021, cumulative auctions done by the company were Rs 171 crore however, in 9M 2022 – the cumulative auctions done have increased to Rs 3111 crore. Nonetheless, the overall auction proceeds have been higher than the principal component of the collateral against which the loan was extended.
The non-gold portfolios have faced asset quality challenges in the aftermath of the pandemic. The gross NPAs (GNPAs) have increased significantly over the last 6-8 quarters and this has had an impact on the respective earnings profile of subsidiaries. The management remains cautious and has strategically decided to curtail disbursements resulting in de-growth in the housing loan and vehicle finance business. Over 9M 2022, the housing loan portfolio (under Muthoot Homefin India Limited [Muthoot Homefin]) has registered a negative growth of 9.8% (annualised) whereas the vehicle loan portfolio (under Muthoot Money Limited [Muthoot Money]) has shrunk by 47.4% (annualised). The microfinance portfolio (under Belstar Microfinance Limited [Belstar]) grew at 21.7% (annualised) over the same period. Nevertheless, the non-gold business is relatively small and contributes to only 10% of consolidated AUM.
CRISIL Ratings believes that the gold loan AUM will continue to account for 85% of the consolidated AUM and over 90% of consolidated profit over the medium term. Consequently, the consolidated credit profile has the ability to absorb asset quality and earnings risks in the microfinance, vehicle or housing finance businesses in the near term.
The company’s earnings profile has remained healthy over the years, and has improved further in the last 2-3 fiscals. Muthoot Finance reported a consolidated return on managed assets (RoMA) of 5.7% (annualized) for nine months ended December 31, 2021, which is the best among lending entities such as banks and NBFCs. This superior earnings profile is supported by high interest margins and, low operating and credit costs. The company has maintained strong capital position while ramping up operations over the years. As on December 31, 2021, its reported networth was Rs 17,773 crore (consolidated), tier I capital adequacy ratio was adequate at 29.0% (standalone) and gearing low at 2.9 times (consolidated). Over the past six fiscals, gearing (consolidated and standalone) remained below 4 times whereas standalone tier I capital adequacy ratio remained above 20%. CRISIL Ratings believes that strong internal cash generation from the gold finance business will strengthen Muthoot Finance’s standalone capital position and, allow the company to prudently capitalise its subsidiaries and provide timely need-based liquidity support.
In terms of standalone funding, while a larger proportion of borrowing has been sourced as funding lines from banks and financial institutions (52%), the company’s resource profile remained diversified across avenues such as non-convertible debentures and subordinated debt (27%), commercial paper (2%), external commercial borrowing (16%) and other sources (3%) as on December 31, 2021. |
Analytical Approach CRISIL Ratings has combined the business and financial risk profiles of Muthoot Finance and its subsidiaries, including Muthoot Homefin, Belstar and Muthoot Money.
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:
Muthoot Finance has sustained its leadership position in the gold financing segment, supported by the long and established track record of 80 years of its promoter family. The company has a large operational base of over 4,600 branches across India, which has supported its leadership position among NBFCs carrying out gold loan business over the years. Despite moderate volume growth and increased competition from banks due to LTV relaxation benefit extended to them until March 31, 2021, the company’s gold loan AUM grew by 27.4% over fiscal 2021 to reach Rs 51,927 crore on March 31, 2021. This was a factor of appreciation in gold prices, new disbursals made at marginally higher than average LTV and, expansion of active customer base through reactivation of old inactive customers and increase in the number of new customers. Following the second pandemic wave and the liquidity constraints within certain borrower segments thereafter, nine monthly growth in gold loan portfolio was arrested at 5.9% (annualized).
Historically, the company’s operating efficiency – indicated by average gold loan AUM per branch – has been higher than that of peers. As at the end of December 31, 2021, the average AUM per branch stood at Rs 11.7 crore, almost double of that for fiscal 2013.
Muthoot Finance’s extensive branch network and client base, which is relatively more diverse in terms of geographies and is gradually improving further, should support the further strengthening of its competitive position over the medium term. While the company had started to diversify into non-gold segments, its primary focus would remain on gold loans over the medium term in light of the challenges being faced by other asset classes after the pandemic.
Muthoot Finance’s capital position remains strong in relation to its scale and nature of operations, supported by its demonstrated ability to raise capital frequently and large accretions to networth. As on December 31, 2021, the company reported a consolidated networth of Rs 17,773 crore and a comfortable gearing of 2.9 times. The gearing has remained below 4 times for several years now. Tier I and overall capital adequacy ratios on a standalone basis have also remained comfortable over 20% over the last few years driven by stable growth in business, and stood at 29.0% and 29.9% respectively on December 31, 2021. Strong internal cash generation from the gold loan business will allow Muthoot Finance to prudently capitalise its subsidiaries and provide need-based liquidity support, apart from strengthening its standalone capital position. Even after factoring in leverage in the key subsidiaries, CRISIL Ratings believes the consolidated gearing will remain below 5 times and capital adequacy ratio above 20% over the medium term.
The company’s earnings profile has been healthy in the past and, has improved further over the last few fiscals to outperform NBFCs and banks. For fiscal 2021 and 9M 2022, the consolidated RoMA stood at 6.1% and 5.7% (annualized), respectively – which is higher than almost all lending entities operating in India. This superior profitability can be attributed to the company’s ability to generate high interest margins while keeping operating expenses and provisioning requirements low. Over the past 2-3 fiscals, increased focus on collection of interest on a regular basis and revision in interest rates on different schemes helped sustain margins. Asset quality as measured by annualised credit costs has also been under control, except a one-time deviation in the fourth quarter of fiscal 2018 when NPAs rose due to change in NPA recognition norms from account-wise to borrower-wise.
Stage III assets, which have remained below 3% on a steady state basis in the past, increased to 3.8% as on December 31, 2021 due to the overhang of pandemic imposed challenges. However, ultimate credit costs have remained within 1% on account of low asset-side risk (security of gold, which is liquid and is in the lender’s possession) in the gold finance business. Even in fiscal 2021 and 9M 2022, despite the expectation of a marginal uptick in credit losses of non-gold businesses due to Covid-19-related disruption, consolidated profitability is expected to remain healthy. As the group diversifies into other segments in the long run, asset quality and profitability of the non-gold businesses will remain monitorables.
Weaknesses:
Despite attempts for gradual diversification, Muthoot Finance’s operations have a high degree of geographical concentration - South India accounted for 50% of the company’s AUM and 60% of its branches as on December 31, 2021. Significant regional concentration renders the company to vulnerabilities of economic, social, and political disruptions in the region. An instance of this nature was witnessed last year in the form of strikes called by a group of employees associated with Centre of Indian Trade Unions (CITU) which resulted in momentary disruption of operations of a few branches in Kerala. However, as per the management, none of the existing branches in the state are facing any disruptions on account of this event. As of December 31, 2021, the company had a small exposure of <3% to Kerala and as part of its branch rationalisation strategy, this exposure may get reduced further.
Muthoot Finance had started to diversify its product suite across housing finance, microfinance, vehicle finance and a few other segments. This expansion into non- gold segments and growth of these businesses led to an increase in their share in the consolidated AUM, to almost 13% by the end of fiscal 2020. However, none of these businesses command good market share. Furthermore, in the aftermath of the pandemic, the management took a conscious call to curtail disbursements over the next few quarters. Consequently, the housing loan and vehicle finance businesses saw a decline (annualised) of 9.8% and 47.4%, respectively over nine months ended December 31, 2021; while the microfinance portfolio registered a growth of 21.7% during the same period. As a result, the share of non-gold businesses has declined to 10% in the consolidated AUM of Muthoot Finance. Over the medium term, as the focus on these segments will remain low – high segmental concentration in AUM and revenue profile will remain a key monitorable.
Given the low track record and seasoning in the non-gold loan segments, the growth, asset quality and profitability in those segments are yet to stabilise. Within the housing finance segment, Muthoot Homefin operates in the affordable housing finance segment, catering to self-employed customers engaged in small business activities and thus, have a relatively weak credit risk profile because of the volatile nature of their income and employment in un-organised segments. Similarly, microfinance loans (under Belstar Microfinance), through which the company intends to cater to weaker sections of the society, are unsecured in nature and are rendered to borrowers with a weak credit risk profile. This segment also exhibits high subjectivity to local socio-political issues. The vehicle finance business (under Muthoot Money), which is relatively new, deals with lending against commercial vehicles and equipment – majority of which are used/pre-owned vehicles.
With respect to impact of covid-19, the non-gold businesses have faced asset quality challenges in its aftermath. While collections across most of these segments, after dropping drastically in Q1 2021, had started to revive in the second half of the fiscal, the second wave has prolonged the improvement. Consequently, the GNPAs have increased significantly. As on December 31, 2021, the GNPA for the microfinance business (Belstar) was 5.54%, for the vehicle loans (Muthoot Money) was 12.42% and, for housing loans (Muthoot Homefin) was 4.43%. In light of prevailing asset quality challenges, the standalone earnings profile of non-gold businesses is expected to remain weak over the next few quarters. From a longer term perspective, as the growth within these segments has remained limited as yet, the asset quality and profitability in these businesses will be a key monitorable. |
Liquidity: Strong The company’s standalone liquidity position remains strong with a liquidity balance of Rs 7,727 crore as on February 18, 2022 (excluding un-utilized portion of existing term loans, including un-utilized portion of Cash Credit and Working Capital Demand Loans). Liquidity cover for debt obligations arising over the following 2 months, without factoring in any roll over or incremental collections, was at 1.0 time. Over the last 4-5 quarters, Muthoot Finance has been maintaining about 8-10% of its balance sheet as liquidity balance. The company has also been able to roll over existing working capital lines and also raise incremental funds at competitive rates over the last few quarters. Over nine months through January 31, 2021, the company has raised over Rs.17,997 crore of funds from various avenues.
ESG Profile CRISIL Ratings believes that Muthoot Finance’ Environment, Social, and Governance (ESG) profile supports its already strong credit risk profile.
The ESG profile for financial sector entities typically factors in governance as a key differentiator. The sector has reasonable social impact because of its substantial employee and customer base, and it can play a key role in promoting financial inclusion. While the sector does not have a direct adverse environmental impact, the lending decisions may have a bearing on environment.
Muthoot Finance has a continuous focus on strengthening various aspects of its ESG profile.
Muthoot Finance’s key ESG Highlights:
There is growing importance of ESG among investors and lenders. Muthoot Finance’s commitment to ESG principles will play a key role in enhancing stakeholder confidence, given the sizable share of market borrowings in its overall debt and access to both domestic and foreign capital markets. |
Outlook: Stable CRISIL Ratings believes Muthoot Finance will sustain its strong capitalisation and healthy profitability. Asset quality in the gold business, which accounts for a majority of the AUM, will remain sound, supported by increased frequency of interest collections and the highly liquid nature of the underlying security (gold jewelry), which should keep credit losses low. For non-gold segments, maintenance of asset quality and profitability alongside growth remains a monitorable |
Rating Sensitivity factors Upward factors
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About the Company Muthoot Finance, an NBFC, was originally set up as a private limited company in 1997 and was reconstituted as a public limited company in November 2008. It provides finance against used household gold jewellery. The promoter family has been in this business for over seven decades. During the initial days, the business was carried out under Muthoot Bankers, a partnership firm. Muthoot Finance is the flagship company of the Muthoot group (promoter of Muthoot Finance), which is also in the hospitality, healthcare, media, education, information technology, foreign exchange, insurance distribution, and money transfer businesses. |
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Annexure - Details of Instrument(s)
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Annexure - Details of Rating Withdrawn
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Annexure – List of entities consolidated
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