Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA/Stable’ rating on the long-term bank facilities of Muthoot Money Ltd (MML).

 

The rating continues to reflect the strategic importance of MML to its parent, Muthoot Finance Ltd (Muthoot Finance; ‘CRISIL AA+/Stable’), and the expectation of continued financial support from the parent. The rating also factors in MML’s adequate capitalisation. The strengths are partially offset by MML’s modest asset quality, which is vulnerable to the underlying risk profile of borrowers, subdued earnings and geographical concentration in portfolio.

 

MML became a 100% subsidiary of Muthoot Finance in fiscal 2019 and commenced vehicle finance operations. Post-acquisition, the parent infused Rs 100 crore and has extended loans to help scale up the business. The overall AUM grew by around 90% to Rs 393 crore as of March 2023 from Rs 207 crore as of March 2022. During fiscal 2023, company diversified its portfolio in the gold loan segment; its portfolio currently, comprised new and used cars (14%), two wheelers (10%), CE and CV (9%) and gold loans (61%). The company, nevertheless, proposes to maintain equal focus on vehicle finance and gold finance segment over medium term.    

 

On the asset quality front, collection efficiency (including overdues but excluding prepayments) have remained above 100% over the last 12 months. Additionally, GNPA improved to 3.7% in March 2023 as compared to 6.6% in March 2022. Company didn’t wrote-off any portfolio in fiscal 2023 as compared to write-off of Rs 29 crore in fiscal 2022. Nevertheless, MML ability to improve asset quality while scaling up in operations in the coming quarters, will remain a key rating sensitivity factor.  

Analytical Approach

CRISIL Ratings has assessed the standalone financial and business risk profiles of MML and has factored in the company’s strategic importance to, and expected strong financial support from, its parent, Muthoot Finance.

Key Rating Drivers & Detailed Description

Strengths:

Strategic importance to, and expectation of continued financial support from, the parent

The parent, Muthoot Finance, will likely continue to support MML, both on an ongoing basis and in the event of distress, given the latter’s strategic importance to the group. The vehicle finance business helps diversify the financial product suite of the parent. Although MML’s loan book has reduced significantly over the past two years, this was a conscious strategy by the management given the uncertain economic environment and pandemic-induced asset quality challenges. The vehicle finance business is scalable over the long term and is expected to grow materially as the company refocuses on specific sub-segments. Having acquired stake in MML in October 2018, Muthoot Finance has already infused Rs 100 crore of equity and will infuse more, if required. MML is funded primarily by Muthoot Finance and the group has extended a line of credit of Rs 400 crore in terms of intercorporate deposits and term loans. Furthermore, the parent has strong presence on the board of MML through Mr. George Jacob Muthoot (joint managing director of Muthoot Finance), Mr Eapen Alexander (son of managing director of Muthoot Finance), Mr George M Jacob (son of joint managing director of Muthoot Finance), and Mr. Bijimon (key management person in Muthoot Finance). Additionally, there is strong moral obligation for Muthoot Finance to support MML given the shared name and brand. 

 

Adequate capital position

MML is adequately capitalised as indicated by strong networth of Rs 103.8 crore as on March 31, 2023 with a gearing of 3.1 times as compared to Rs 103.5 crore in fiscal 2022 as gearing of 1.5 times. Being in its nascent stage of operations in the vehicle finance segment, the company is majorly funded by the Muthoot Finance and Directors with most of the existing borrowings too being provided by them. Company has also applied for additional Rs 400 crore ICD to the Muthoot Finance and its directors. While MML may approach banks for incremental funding as it scales up operations, its capital structure should remain adequate with steady state gearing at 3-4 times over the medium term.

 

Weaknesses:

Modest asset quality vulnerable to underlying risk profiles of borrowers

Over the last 2 years till fiscal 2022, Owing to the challenging economic environment induced by the pandemic, asset quality remained modest and stood at GNPA of 6.6% and NNPA of 4.2% in fiscal 2022 as compared to 8.6% and 5.3% in fiscal 2021. GNPA further rose to 7.5% in December 2022 due to the impact of the Reserve Bank of India (RBI) clarification released in November 2021 with respect to single day NPA recognition and upgradation of NPA accounts only after all dues are cleared. However, with the improvement in the collection and AUM growth, company’s GNPA improved to 3.7% as of March 2023 and is expected to improve further in fiscal 2024. As of June 2023, Company has written off Rs 29 crore of the portfolio in fiscal 2022 and no writeoff in fiscal 2023. Nevertheless, Muthoot Money’s ability to improve asset quality while scaling up operations in the coming quarters, will remain a key rating sensitivity factor

 

Subdue, though improving earning profile

Over the last three years, earnings got impacted owing to higher provisioning and lower interest income due to decline in book. As of March 2022, company reported a loss of Rs 6.6 crore as compared to a profit of 3.7 crore in fiscal 2021. On the other hand, pre-provisioning profit stood at Rs 9.5 crore (3.1% as a % of average managed assets) in fiscal 2022 as compared to Rs 17.8 crore (3.8% as a % of average managed assets) in fiscal 2021. Company credit cost stood at 6.0 % in fiscal 2022 as compared to 3.0% as of March 2021. However, in fiscal 2023, company reported a pre provisioning profit of Rs 2.1 crore and net profit of Rs 0.25 crore (0.1% as a % of average managed assets).

 

Company operating cost has increased in fiscal 2023, owing to increase in the number of branches to support the expansion plan of the company which has led to increase in the operating cost from 7.6% in fiscal 2022 to 12.7% in fiscal 2023. However, company is expected to benefit from these branches in the current fiscal. MML strategy to focus on high yielding products such as used cars, 2 wheelers and gold loans, along with improvement in the credit cost will support the profitability of the company. Nevertheless, company’s ability to manage the earnings profile would be a key rating sensitivity factor.

 

Geographical concentration in portfolio

MML started vehicle finance operations in May 2018 using existing Muthoot Finance branches in Andhra Pradesh and Telangana. As on March 31, 2023, five years after the company forayed into vehicle financing, portfolio remained concentrated only in two states with Telangana accounted for 54% of the portfolio and Andhra Pradesh for the balance 37% in the vehicle financing. Company has expanded its vehicle financing operation in Karnataka and Tamil Nadu as well in fiscal 2023. However, from Q4 2022 onwards, company has diversified its portfolio in the gold loan segment. As of March 2023, company has 141 gold loan branches spread across multiple states. Going forward, the company is further expanding its the gold loan portfolio at the Pan India level and expanding its vehicle loan portfolio in two wheeler and used cars segment in the southern region.

Liquidity: Strong

The liquidity is supported by timely financial and liquidity support from Muthoot Finance. On a standalone basis, as on March 31, 2023, there were cumulative positive gaps in the up to six months bucket. The company had Rs 23.97 crore of cash and equivalents, including liquid investments and unutilised cash credit/working capital demand loan bank limits, as of June 30, 2023, against debt obligation over the three months through September 2023, with liquidity cover (assuming nil collections) of 3.0 time for the three months. Liquidity is further supported by steady collections. Liquidity is cushioned by the funding line of Rs 400 crore from Muthoot Finance. CRISIL Ratings understands that Muthoot Finance will provide support to ensure timely servicing of debt, if needed.

Outlook: Stable

The outlook on the rating of MML reflects the outlook on the rating of its parent. CRISIL Ratings believes MML will continue to receive strong support from Muthoot Finance and will maintain adequate capitalisation, over the medium term.

Rating Sensitivity factors

Upward factors

• Upgrade in the credit rating of Muthoot Finance
• Significant scale-up in operations while maintaining steady state asset quality with adjusted 90+ days past due (dpd) remaining under 5% and comfortable earnings

 

Downward factors

• Downgrade in the rating of Muthoot Finance or change in the support philosophy of the parent
• Significant and prolonged weakening in asset quality with 90+ dpd rising beyond 8.0% on steady-state basis and affecting earnings

About the Company

Registered as a private limited company in 1994, MML received the non-banking financial company (NBFC) licence in 2007 and initially provided loans against shares. In fiscal 2019, MML became a wholly owned subsidiary of Muthoot Finance and commenced vehicle financing operations. The company now disburses loans for new and used cars, and new two-wheelers. It uses the branch network of Muthoot Finance to expand operations. As on March 31, 2023, MML vehicle financing business had presence in Andhra Pradesh, Telangana Karnataka and Tamil Nadu.

 

The company reported a profit of Rs 25 lacs on a total income of Rs 56.4 crore in fiscal 2023 as compared to Rs  6.6 crore loss on a total income of Rs 45.6 crore in fiscal 2022.

Key Financial Indicators

Particulars	Unit	Mar-23*	Mar-22*	Mar-21*	Mar-20*	Mar-19
Total assets	Rs crore	434.2	226.8	388.8	538.4	335.2
Total income	Rs crore	56.4	45.6	69.7	70.3	15.6
Profit after tax	Rs crore	0.25	-6.6	3.7	2.7	0.3
Gross NPAs	%	3.7	6.6	8.6	4.8	Nil
Adjusted gearing	Times	3.1	1.1	2.5	4	2.2
Return on assets	%	0.1	-2.1	0.8	0.6	0.2

*As per IND-AS

Any other information: Not applicable