Rating Rationale

Strengths
* Established track record in financing against gold jewellery
Muthoot Finance'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 company had market share of around 46% as on March 31, 2018 within NBFC space and this is expected to continue over the medium term. The rich experience gained over this period has helped Muthoot Finance 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 LTV ratios are critical aspects in the assessment process. Backed by extensive business experience, Muthoot Finance has developed a robust model that has helped it maintain strong asset quality, scale up business significantly, and facilitate easy replication over various geographic areas. With its large branch network (4370 branches as on September 30, 2018) and client base and steady geographic diversification, particularly in relatively untapped northern and western regions (accounting for 23% and 19%, respectively, of total advances, as onSeptember 30, 2018), gives the first-mover advantage to Muthoot Finance, leading to improved competitive position over the medium term.

* Adequate capitalization
Capitalization is adequate, with consolidated networth of Rs 8790 crore and gearing of 2.8 times as on September 30, 2018. Large accretion to networth and moderation in growth in the past three years resulted in a healthy capital adequacy ratio of 25.92% as on September 30, 2018. Lower asset-side risk (security of gold, which is liquid and is in the lender's possession) also supports capitalization. The 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 Private Ltd, a microfinance company, CRISIL believes that consolidated gearing will remain below 5.5 times over the medium term.

* Profitability to remain healthy
Profitability has improved with return on assets (RoA) at 5.5% for fiscal 2018 from 4.1% in fiscal 2017 mainly on account of recovery efforts and partly due to favorable movement in gold prices. During first half of fiscal 2019, the RoA stood at 5.9% as against 5.1% during corresponding period of previous year. Though Muthoot Finance charges relatively low interest rates than its peers its operating efficiency enables the company to maintain healthy profitability. With increased focus on collection on interest on regular basis along with revision in its interest rates on different schemes has resulted in higher yields and higher profitability during fiscal 2018. On account of healthy asset quality the credit cost is expected to remain at around 1% over the medium term. In addition, the company is diversifying into other asset segments where its ability to maintain asset quality will remain a key rating monitorable.

Weakness
* Geographical concentration in revenue profile
Muthoot Finance has high geographic concentration in South India, which currently accounts for about 50% of its total loans. While the level of concentration has been declining and is much lower than that of peers, the significant regional exposure exposes the company vulnerable to economic, social, and political situation in the region. Furthermore, implementation of the Kerala Money Lenders Act, 1958, for NBFCs (which depends on the decision of the Supreme Court) could affect Muthoot Finance'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.

Nevertheless, in terms of product segments, Muthoot Finance has steadily diversified its product suite. Housing finance (Muthoot Homefin) and Microfinance (Belstar Investments) has grown their portfolio substantially during last 2 years. As a result, the proportion of non-gold assets has increased to 10% as on September 30, 2018 and is expected to increase to over 15% over the medium term. In addition, the company has also made announcement of acquisition of 'Muthoot Money Private Ltd' which is involved in vehicle finance business. With this acquisition, the share of non-gold segments would increase further. Therefore, the concentration in revenue profile, which currently is on gold loans, expected to reduce with the increase in scale of operations in housing, microfinance and vehicle loan business.

* Challenges associated with non-gold loan segments:
Growth, asset quality, and profitability in the non-gold loan businesses are yet to stabilise. The track record in housing finance segment is relatively short due to which the portfolio is not well seasoned. The company operates in the affordable housing finance segment, and caters to self-employed customers, engaged in small business activities. These borrowers have relatively weak credit risk profiles because of the volatile nature of their income and employment in unorganised segments. Therefore, the delinquencies are likely to increase as the portfolio achieves more seasoning. Similarly, the company is also diversified in microfinance loans which are unsecured in nature. Through MFI loans, the company lends primarily to the weaker sections of the society. Therefore, remain exposed to local level socio political and legislative issues associated with the sector.