Muthoot Finance Limited's Long-term ratings upgraded to 'CRISIL AA+/PP-MLD AA+r /Stable', short-term rating reaffirmed

CRISIL Ratings has upgraded its ratings on the long-term debt facilities of Muthoot Finance Limited (Muthoot Finance) to 'CRISIL AA+/CRISIL PP-MLD AA+r/Stable' from 'CRISIL AA/CRISIL PP-MLD AAr/Positive' and reaffirmed its 'CRISIL A1+' rating on the company's commercial paper.

The upgrade is driven by Muthoot Finance's demonstrated ability to profitably scale up its core gold loan business while maintaining its strong financial risk profile. Between June 2020 and December 2020, the gold loan assets under management (AUM) has grown by 22.5% (non-annualised) despite increasing competition from banks and, having a regulatory Loan to Value (LTV) disadvantage during this period. The gold loan AUM stood at Rs 49,622 crore as on December 31, 2020, registering a 3 year CAGR of ~20%. CRISIL Ratings expects the company to grow at 18-20% over the medium term and, retain its leadership position among gold loan financiers.

Asset quality for gold loans, as better measured by credit costs, has also been sound, except for the fourth quarter of fiscal 2018 when non-performing asset (NPA) levels increased after change in NPA recognition norms. Standalone stage III assets stood at 1.3% as on December 31, 2020 and have remained below 2.5% for the last 7 fiscals (except for fiscal 2018).

The non-gold portfolios have faced asset quality challenges especially in the aftermath of the pandemic. The pro-forma gross NPAs (GNPAs) have increased significantly over the first nine months of fiscal 2021 and this will have an impact on the respective earnings profile of subsidiaries over the next few quarters. The management remains cautious and has strategically decided to curtail disbursements resulting in de-growth in the housing loan and vehicle finance business. The housing loan portfolio (under Muthoot Homefin India Limited [Muthoot Homefin]) has registered a negative growth of 6% (annualised) whereas the vehicle loan portfolio (under Muthoot Money Limited [Muthoot Money]) has shrunk by 23% (annualised) during the nine months ended December 31, 2020. The microfinance portfolio (under Belstar Microfinance Limited [Belstar]) grew at 13% (annualised) over the same period. Nevertheless, the non-gold business is relatively small and contributes to only 10% of consolidated AUM. CRISIL Ratings believes that the gold loan AUM will continue to account for 85% of the consolidated AUM and over 90% of consolidated profit over the medium term. Consequently, the consolidated credit profile has the ability to absorb asset quality and earnings risks in the microfinance, vehicle or housing finance businesses in the near term.

The company's earnings profile has remained healthy over the years, and has improved further in the last 2-3 fiscals. Muthoot Finance reported a consolidated return on managed assets (RoMA) of 6.6% for fiscal 2020 and of 6.1% (annualised) for nine months through December 2020, which is the best among lending entities such as banks and NBFCs. This superior earnings profile is supported by high interest margins and, low operating and credit costs.

The company has maintained strong capital position while ramping up operations over the years. As on December 31, 2020, its reported networth was Rs 14,493 crore (consolidated), tier I capital adequacy ratio was adequate at 25.3% (standalone) and gearing low at 3.6 times (consolidated). Over the past six fiscals, gearing (consolidated and standalone) remained below 4 times whereas standalone tier I capital adequacy ratio remained above 20%.

CRISIL Ratings believes that strong internal cash generation from the gold finance business will strengthen Muthoot Finance's standalone capital position and, allow the company to prudently capitalise its subsidiaries and provide timely need-based liquidity support.

In terms of standalone funding, while a larger proportion of borrowing has been sourced as funding lines from banks and financial institutions (42%), the company's resource profile remained diversified across avenues such as non-convertible debentures and subordinated debt (30%), commercial paper (10%), external commercial borrowing (16%) and other sources (2%) as on December 31, 2020.

On the liability side, the Reserve Bank of India (RBI) announced regulatory measures under its Covid-19 Regulatory Package, whereby lenders were permitted to grant moratorium on bank loans for three months ending May 31, 2020, which was later extended by another three months till August 31, 2020. However, Muthoot Finance (standalone) had not availed moratorium on its borrowings.

After the slowdown witnesses in the immediate aftermath of the pandemic outbreak, the monthly disbursement rate of Muthoot Finance revived at a good pace. While initially, majority of the disbursements happened in the form of renewals of existing loans with a higher loan amount against the same collateral due to rising gold prices, with eventual resumption in business activity across segments - the share of fresh loans disbursed to new customers has started to increase. The increase in renewals over first nine months of fiscal 2021 was also driven by appreciating gold prices.

The company's liquidity profile remains strong, it has been able to roll over existing working capital lines and also raise incremental funds at competitive rates over the last few quarters. Over nine months ended December 2020, the company has raised over Rs 24,000 crore of funds from various avenues. Over the last 3-4 quarters, Muthoot Finance has been maintaining about 10-12% of its balance sheet as liquidity balance, on December 31, 2020 - this balance stood at Rs 9519 crore.

Shares of MUTHOOT FINANCE LTD. was last trading in BSE at Rs.1315.35 as compared to the previous close of Rs. 1321.3. The total number of shares traded during the day was 102665 in over 4907 trades.

The stock hit an intraday high of Rs. 1343 and intraday low of 1308.75. The net turnover during the day was Rs. 136345956.

Source : Equity Bulls

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