Rating Rationale

Strengths:
* Established track record and brand name in gold financing industry
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 4,500 branches - spanning across India, which has continued to support its market share of >45% within the universe of NBFCs carrying out gold loan business over the years. Despite modest volume growth, the company's gold AUM grew by 16% in fiscal 2019 to reach Rs 33,585 crore at the end of March 2019 and further to 34,942 crore as of September 30, 2019. The company's operating efficiency ' indicated in terms of gold AUM per branch ' remains high at Rs 7.5 crore as of March 2019, higher than Rs 6.7 crore - a year ago. Over the same period, gold holding increased to 169 tonnes from 155 tonnes.

Muthoot Finance's extensive branch network and client base, which is relatively more diverse in terms of geographies and is gradually improving further, will improve its competitive position over the medium term. While the company has started to diversify into non-gold segments, its primary focus would remain on gold.

* Strong capitalisation
Muthoot Finance's capital position remains strong in relation to its scale and nature of operations, supported its demonstrated ability to raise capital frequently and large accretions to networth. As of September 30, 2019, the company reported a consolidated networth of Rs 10,805 crore and gearing remained comfortable at 3.1 times. Tier I and overall capital adequacy ratios have also remained comfortably >20% over the last few years owing to moderated growth in business, and stood at 26.7% and 27.1% respectively on September 30, 2019. Over the medium term, the AUM in the gold loan segment is not expected to grow sharply and the share of non-gold segments (affordable housing finance, and microfinance finance) would remain relatively small scale, therefore ' capitalisation is expected to remain adequate. Even after factoring in leverage in the key subsidiaries, CRISIL believes that consolidated gearing will remain below 5 times over the medium term.

* Profitability to remain healthy
Profitability continues to improve reflected in standalone return on assets (RoA) of 5.7% for fiscal 2019 and fiscal 2018 which was higher than 4.1% for fiscal 2017. This improvement can be attributed to dedicated recovery efforts, favorable movement in gold prices and reduction in provisioning requirements after implementation of IndAS. Despite charging yields which are lower than industry average, the company has been able to sustain margins on account of its high operating efficiency.

Over fiscal 2019, increased focus on collection of interest on a regular basis along with revision in its interest rates on different schemes, has resulted in sustenance of margins. Additionally, operating expenses remained low and credit costs reduced after implementation of IndAS. Asset quality as measured by annualised credit costs has also been under control, despite non-performing asset (NPA) levels exhibiting a rise in Q4 of fiscal 2018, though it has since moderated. Stage III assets stood at 3.4% as on September 30, 2019, as compared to 4.4% (GNPA of 7%) on March 31, 2018. Lower asset-side risk (security of gold, which is liquid and is in the lender's possession) helps in controlling credit costs in the gold finance business. Over the last three years, credit costs have remained sub 1% of total assets. Profitability is expected to remain healthy in the normal course of business, supported by sustained margins and low operating expenses and credit costs. As the group is diversifying into other segments, asset quality within non-gold businesses would remain a monitorable.

Weaknesses
* Geographical and segmental concentration in operations
Despite gradual increase in diversification over time, Muthoot Finance's operations have a high degree of geographical concentration in operations. South India accounted for 48% of the company's AUM and 60% of its branches as on September 30, 2019. Significant regional concentration exposes the company vulnerabilities of economic, social, and political disruptions 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.

In terms of concentration across segments, Muthoot Finance has steadily diversified its product suite across housing finance (Muthoot Homefin), microfinance (Belstar Investments), vehicle finance (Muthoot Money) and a few other segments. This expansion into non- gold segments and growth of these businesses has resulted in their share in the consolidated AUM, going up to almost 14% as of September 2019. However, it still remains low ' reflecting high segmental concentration in AUM and revenue profile as majority income flows through the gold loan business.

* Challenges associated with non-gold loan segments
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 unorganised segments. Therefore, the delinquencies from this book may increase as the portfolio achieves more seasoning. Similarly, microfinance loans, 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, which is relatively new, deals with lending against commercial vehicles and equipment ' majority of which are old vehicles. As the growth within these segments has remained limited as yet, the asset quality and profitability in these businesses will be a key monitorable.