| Muthoot Housing Finance Company Limited | ||||
| Rating reaffirmed at 'CRISIL A/Stable' | ||||
| Rating Action | ||||
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| 1 crore = 10 million | ||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has reaffirmed its ‘CRISIL A/Stable’ rating on the long-term bank facilities and non-convertible debentures of Muthoot Housing Finance Company Ltd (MHFCL).
The rating continues to reflect the company’s strategic importance to, and expected strong financial support from, its parent, Muthoot Fincorp Ltd (MFL; ‘CRISIL A+/CRISIL A-/Stable/CRISIL A1+’), and adequate capitalisation. These strengths are partially offset by average asset quality, modest earnings and small scale of operations.
Assets under management (AUM) stood at Rs 1,256 crore as on March 31, 2021, up 7% on-year. However, the second wave of Covid-19 hit growth momentum in the first half of fiscal 2022. Revival in economic activity thereafter buoyed business activity gradually and the AUM stood at Rs 1,289 crore as on December 31, 2021. Home loans account for 80% of the portfolio and loans against property for the rest. This mix is expected to remain stable over the medium term.
The sharp spike in cases during the second Covid wave and lockdowns imposed by states pulled down collection efficiency (including overdues but excluding prepayments) to 83% in May 2021 from 101% in March 2021. However, collection efficiency improved steadily thereafter and was over 102% in December 2021. Even the disbursement pace that had slowed down since the first quarter of fiscal 2022 has revived'monthly disbursement averaged Rs 32 crore per month in the third quarter of fiscal 2022. Gross non-performing assets (GNPAs) stood at 4.7% as of December 2021, improving slightly from 4.9% as of September 2021. However, reported GNPAs increased marginally to 4.9% as of December 2021 due to the impact of the Reserve Bank of India (RBI) clarification in November 2021 with respect to single-day NPA recognition and upgrade of NPA accounts only after all dues are cleared. However, the recent revised RBI clarification to defer implementation of the NPA upgrade norms till September 30, 2022, will give MHFCL reasonable transition time to recalibrate processes, especially revamp collection infrastructure and teams, and persuade borrowers to align with the new dispensation norms. Ability to increase collections across delinquency buckets and improve asset quality in the coming quarters while scaling up operations, given the challenging environment, will remain a key rating sensitivity factor. |
Analytical Approach CRISIL Ratings has assessed the standalone financial and business risk profiles of MHFCL and has notched-up the rating by centrally factoring in the company's strategic importance to, and strong financial support from, MFL |
Key Rating Drivers & Detailed Description Strengths: * Strategic importance to, and expected strong support from parent, MFL The rating on the debt instruments of MHFCL centrally factors in the expectation of support from MFL which, along with its promoters, jointly owns 100% stake in MHFCL. Given the majority ownership, shared name, and common branding and corporate identity, MFL has a strong moral obligation to continue supporting MHFCL. In addition, the latter enables the Muthoot Pappachan group's diversification into the strategically important and growing affordable housing finance segment. Most of the group's promoters serve as directors on the board of MHFCL and Mr Thomas Muthoot, executive director of MFL, is the managing director of MHFCL. The Muthoot Pappachan group's brand equity helps MHFCL raise bank loans at competitive cost despite a short track record. Moreover, the promoters will provide funding support when needed.
* Adequate capitalisation MHFCL is comfortably capitalised as reflected in its networth of Rs 230 crore as on December 31, 2021 (Rs 220 crore as on March 31, 2021), supported by MFL’s ability to infuse capital. The parent infused equity of Rs 25 crore in MHFCL in fiscal 2019 and Rs 31 crore in fiscal 2020. As a result, adjusted gearing declined to 4.7 times as on December 31, 2021, from 5.0 times as on March 31, 2021. As on September 31, 2021, CET 1 and overall capital adequacy ratios (CAR) were 33.6% and 34.0%, respectively. Given the expectation of financial support from the parent, capitalisation should remain adequate over the medium term, with gearing unlikely to exceed 6.5 times and CAR expected above 20%.
Weakness: * Average asset quality because of relatively weak credit risk profiles of borrowers MHFCL operates in the affordable housing segment and caters to borrowers with relatively weak credit risk profiles. The company finances customers engaged in small businesses such as provision store owners, vegetable and food vendors, drivers, contractors, fabricators and plumbers as well as salaried customers working in organised and unorganised sector. It also finances customers who avail of housing under various government-supported schemes, such as Housing for All and Pradhan Mantri Awas Yojana. These borrowers have weak credit risk profiles because of their volatile incomes and employment in unorganised segments. Also, borrowers generally have limited or nil access to formal housing finance in the absence of proper documentation evidencing income, limited documentation regarding property, particularly in semi urban or rural areas, and lack of credit history.
The company’s asset quality moderated in fiscal 2021 as indicated by GNPAs of 3.5% in March 2021 compared with 2.8% a year earlier. Reported GNPAs stood at 4.9% as of December 2021 due to the impact of the RBI clarification in November 2021 regarding single-day NPA recognition and upgrade of NPA accounts only post all dues being cleared. However, on a like-for-like basis, the GNPAs stood at 4.7% as on December 31, 2021. Most of the delinquent portfolio is due to the old legacy book. Nearly 69% of the AUM as of December 31, 2021, comprised loans generated after April 2018. Herein, the GNPAs were just 1.5% of the portfolio generated since April 2018.
MHFCL has been taking steps to reduce delinquencies such as revisions in credit policy, focus on bucket-wise collection, and setting up a focused collections vertical and expediting legal action. The company is now focusing on the self-construction home loan segment targeting salaried (formal or informal) customers. It has significantly reduced its disbursements in the builder-led retail housing loan segment. Nevertheless, increase in collection across delinquency buckets over the coming months to bring it back to the historical level will be critical. Maintenance of adequate asset quality with expansion of the portfolio will also be a key monitorable.
* Moderation in earnings on account of higher provisioning because of the pandemic MHFCL’s profit after tax was Rs 20.1 crore in fiscal 2021 compared with Rs 20.6 crore in fiscal 2020 translating into return on managed assets (RoMA) of 1.6% in fiscal 2021 as against 1.8% in fiscal 2020. The RoMA slipped to 1.0% (annualised) in the first nine months of fiscal 2022 owing to higher operating expense and provisioning due to the pandemic. With focus on the self-construction segment, the yield will increase marginally. On the other hand, borrowing cost has declined this fiscal. CRISIL Ratings believes profitability will improve with increasing scale over the medium term.
* Small scale of operations with limited track record AUM, though growing, remained modest at Rs 1,289 crore as on December 31, 2021, as against Rs 1,255 crore as of March 2021. Moreover, despite presence in 11 states (Maharashtra, Gujarat, Tamil Nadu, Kerala, Karnataka, Andhra Pradesh, Rajasthan Madhya Pradesh, Chhattisgarh, Puducherry and Uttar Pradesh), operations are geographically concentrated with the top 4 states accounting for 71% of the portfolio as on December 31, 2021. The company plans to deepen its geographical presence for which it is crucial to understand local business requirements. Performance across economic cycles is yet to be seen as the business scales up further in the current scenario even while the company remained resilient in the past during demonetisation, GST implementation and NBFC liquidity crisis. |
Liquidity: Adequate As per the asset liability maturity profile as on September 30, 2021, the company had no negative cumulative mismatch across all buckets even without considering the unutilised lines of credit. Cash and equivalent, including liquid investments and unutilised cash credit/working capital demand loan lines, were Rs 86.5 crore (excluding term loans and securitisation lines) as on December 31, 2021. Total debt obligation (including operating expenses) was around Rs 86.5 crore between January 2022 and March 2022. The company has adequate liquidity to cover debt obligation and operating expenses for the next three months. Liquidity is enhanced by monthly collection of around Rs 20 crore (excluding prepayments) in October-December 2021. As on December 31, 2021, the company had raised Rs 219 crore of funds in fiscal 2022. CRISIL Ratings believes MHFCL will receive timely financial support from MFL when needed |
Outlook : Stable CRISIL Ratings believes MHFCL will continue to receive strong support from MFL and will maintain adequate capitalisation over the medium term. |
Rating Sensitivity factors Upward factors
Downward factors
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About the Company MHFCL is part of the Muthoot Pappachan group and a subsidiary of the group's flagship company, MFL. The group has presence in diverse businesses such as loans against gold, vehicle finance, microfinance, money transfer, mutual fund distribution, hospitality, real estate and power generation. MHFCL was incorporated in March 2010 and commenced operations in July 2011. It operates in the affordable housing finance segment and provides loans of up to Rs 25 lakh to people with income of Rs 15,000-30,000 per month for purchase, construction, extension of house and other mortgage loans. MHFCL has presence in Maharashtra, Gujarat, Tamil Nadu, Kerala, Madhya Pradesh, Rajasthan, Uttar Pradesh, Karnataka, Andhra Pradesh, Chhattisgarh and Puducherry. As on December 31, 2021, networth was Rs 230 crore and AUM was Rs 1,289 crore. |
Key Financial Indicators
*Annualised |
Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL Ratings' complexity levels are assigned to various types of financial instruments. The CRISIL Ratings' complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL Ratings' 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)
*Yet to be issued |
| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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This Annexure has been updated on 03-Mar-2022 in line with the lender-wise facility details as on 03-Sep-2021 received from the rated entity.
Criteria Details
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