Rationale
The rating action considers Muthoot Finance Limited's (MFL)
healthy financial risk profile and the scale-up in its consolidated portfolio,
which was largely led by the gold loan business. MFL's gold loan book has more
than doubled over the last five years to Rs. 54,214.9 crore as of December 2021
and accounted for ~90% of its consolidated portfolio. The ratings continue to
factor in MFL's long track record and its leadership position in the gold loan
segment, its established franchise with a pan-India branch network, and its
efficient internal controls and monitoring systems. MFL's ability to raise
funds from diverse sources and the short-term nature of the loans result in a
strong liquidity profile. ICRA, however, takes note of the performance of the
non-gold segments, which are of a relatively lower vintage; the sustained good
quality growth and earnings performance of these segments would remain a
monitorable. Some of the asset segments, namely microfinance (6% of the
consolidated AUM1 as of December 2021), vehicle finance (0.4%) and affordable
housing (3%) recorded higher gross stage 3 (GS3) of 5.5%, 12.4% and 4.4%,
respectively, vis-à-vis 3.8% in the gold loan segment as of December 2021 (GS3
at 0.9% in March 2021). ICRA takes note of the sizeable gold loan auctions
undertaken by MFL in 9M FY2022 (~Rs. 3,111 crore, largely in Q3 FY2022)
vis-à-vis FY2021 and FY2020, largely on account of the loan origination in
Q1/Q2 FY2021 when gold prices were high. The average portfolio loan-to-value
(LTV) moderated to 69% in December 2021 from 73% in September 2021 (65% in
December 2020 and 61% in September 2020). ICRA expects the auctions to remain
elevated in the remaining part of the current fiscal in case the company is
unable to achieve recoveries from its overdues via normal collections. The credit
costs in the gold loan business have, however, remained under control in the
past, which supported the consolidated earnings performance (PAT/AMA2 in the
range of 5.5-6.5% during FY2018 to 9M FY2022). Improvement in the operating
efficiency also supported the earnings profile in FY2021 and 9M FY2022, while
the company faced a moderation in margins. ICRA expects the consolidated
earnings performance to remain healthy as gold loans would account for 85-90%
of the overall lending portfolio and recoveries from overdues are expected to
be good, which would keep the credit costs under control. MFL's capitalisation
profile, characterised by a consolidated managed gearing3 of 3.0 times as of
December 2021 (range of 3.0- 3.5 times over the last 3-4 years), is expected to
remain comfortable over the medium term supported by the expected healthy
accruals. ICRA takes note of the geographical concentration of the branches and
the loan book in South India. South India accounts for 60% of MFL's gold loan
branches, contributing ~50% to the gold loan book. A demonstrated track record
in the non-gold segments and a steady improvement in geographical diversity
would be key, going forward, from a rating perspective. The Stable outlook
factors in ICRA's expectation that MFL will continue to benefit from its
established operational track record in the gold loan business, which is
expected to account for 85-90% of the consolidated AUM over the medium term,
and its comfortable overall financial risk profile. ICRA has also reaffirmed
and withdrawn the long-term rating on the Rs. 473.63-crore non-convertible
debenture (NCD) programme and Rs. 28.91-crore subordinated debt programme in
accordance with ICRA's policy on the withdrawal of credit ratings as the
instruments have matured and have been fully repaid.
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