Muthoot Fincorp NCD: Review and Should you invest? [April 2023]

Muthoot Fincorp Limited is coming up with their public NCD issuance – April 2023, they have filed a draft prospectus on SEBI. Let’s understand the profile of Muthoot Fincorp group & its group entities, its business model, and competitive analysis. 

About Muthoot Fincorp

The company was incorporated on June 10, 1997, as Muthoot Debt Management Services Limited as a public limited company under the provisions of the Companies Act, 1956. Subsequently, the name of the Company was changed to Muthoot Fincorp Limited, and a fresh certificate of incorporation dated March 19, 2002, was issued to the Company by the RoC. 

The Company was registered as a non-deposit accepting NBFC with the RBI pursuant to the certificate of registration No. 16.00170 dated July 23, 2002, issued by the RBI under Section 45 IA of the RBI Act. 

About Muthoot Fincorp Group

The company is part of the Muthoot Pappachan Group (MPG), also popularly known as the Muthoot Blue Group. Founded by Shri Pappachan Muthoot, the group have evolved over the three decades and more into a business conglomerate that has the well-being of the people at the lower levels of socio-economic strata, at the very centre towards empowering the human ambition of these under-served masses in India.  

Group offers an extensive array of financial products & services, like gold loans, small business loans, affordable housing Loans, two-wheeler loans, used car loans, domestic money transfer, international remittance, foreign exchange, insurance products & services, wealth management services, etc. 

Currently Muthoot Blue has over 26,000 employees, serving around 5 million customers through its 4200+ branches, other offices, and team on the ground, across the country. Overall managed AUM of MPG group is around ₹ 29356 Crore as of 30^th September 2022. 

Muthoot Fincorp Group History:

The group takes its name ‘Muthoot’ from their family, which is a branch of a traditional Orthodox Christian family, based in Kozhencherry, a small town in the erstwhile primary state of Travancore (Kerala). In the year 1887, Muthoot Ninan Mathai (Patron founder of the group), started as a retail and wholesale trader of grains at Kozhencherry. The wholesale goods were supplied to the large estates owned by British companies. Later, understanding the needs of the estate’s workers and at the request of the British owners, who appreciated the values & principles of Mr Nanan Mathai, he started a form Chit Fund. The aim was to provide selfless service for the workers, who were not able to manage their cash and would tend to lose and/or misspend the same. Functioning out of a single office in Kozhencherry, Muthoot Ninan Mathai entered the gold loan business in the 1950s. He soon went on to become the largest player in Chits & gold loans. 

The late Muthoot Ninan Mathai had four sons, Ninan Mathew (Muthoot Ninan Group – Muthoot Mercantile), M. George (Muthoot Red Group – Muthoot Finance), M. Mathew (Muthoot Yellow Group – Muthoottu Mini) and Mathew M. Thomas (Muthoot Pappachan – Muthoot Blue Group) who were involved in the business from their childhood and later took over the family business. In the late 1980s, the business was most amicably split four ways and Shri Muthoot Pappachan founded the Muthoot Pappachan group. 

The partition had another unprecedented element to it: Common ownership of the building in Kozhencherry. On Monday and Tuesday, all transactions through walk-ins accrue to the eldest brother (Red Muthoot). The business of the next two days goes to the second brother (Muthoottu). And Friday and Saturday are for the youngest one—Blue Muthoot. 

Muthoot Fincorp Group Companies

The company has 48 group companies including 5 partnerships/LLPs. Three companies are subsidiaries of the company – Muthoot Housing Finance Company Limited, Muthoot Microfin Limited, and Muthoot Pappachan Technologies Limited.

Group’s other NBFCs are involved in the following businesses:- 

• Muthoot Capital Services Limited – Involved in Vehicle Finance. 
• Muthoot Microfin Limited – Involved in Microfinance. 
• Muthoot Housing Finance Company Limited – Involved in Housing Finance. 

Business Model of Muthoot Fincorp

Muthoot Fincorp is one of the prominent gold loan players in the Indian market. From FY2016 to FY2022, Muthoot Fincorp has shown a significant increase in its Gold Loan Portfolio at a compound annual growth rate of around 15%.

The Gold loan portfolio of the company as of December 31, 2022, comprised approximately 32.89 lakhs loan accounts. As of December 31, 2022, the company operated out of 3,627 branches located across 24 states. The company has a total AUM of ₹ 17388.11 Crore out of which the gold loan portfolio has ~96% share. 

Gold loan industry: 

Gold loans (also known as loans against gold) refer to short-term loans sanctioned by banks, non-banking financial companies (NBFCs) and other lenders against the pledge of gold ornaments and jewellery and are popular with farmers looking to meet agricultural expenses and individuals or households who need to meet planned or unplanned expenses. Indians regard gold as a vital symbol of social status, financial security, and intergenerational legacy, and such is the emotional and cultural attachment to gold that households prefer to use gold as collateral for financing for key life goals like healthcare, farming, small business, education, and weddings, rather than liquidate the metal outright for cash.

The gold loan is therefore a historically popular instrument, and the overall gold loan market consists of the organised sector (with regulated players such as banks, NBFCs, and Nidhi companies) as well the unorganised/informal finance sector (run by pawnbrokers and moneylenders). The World Gold Council (WGC) estimates that the overall gold loan market (organised and unorganised) in India has grown from Rs. 600 billion in FY2009-10 to Rs. 9,000 billion in FY2019-20, at a CAGR of 31.1 per cent. 

Company’s Financials: 

Standalone

Consolidated 

Credit Rating: 

Note: In 2016, the company’s rating was downgraded to A- (Stable) from A (Stable) due to the acquisition of real estate properties from group companies worth of ₹ 250-300 Crore. The company still holds real estate assets on its books – ₹ 540 Crore (2.2% of total assets) as on 30^th June, 2022. 

Borrowings of the Company: 

As of 31st December 2022, company has total o/s debt of ₹ 17326.75 Crore, as follows: 

The company has 28 bank lenders on its balance sheet, however, large private sector banks – ICICI and Kotak are missing and HDFC also has only ₹ 200 Crore of exposure. 

Top 5 lenders: Top 5 lenders forms ~38% of total borrowings (Sep’22). 

Comforts/Concerns on the Entity: 

Comforts: 

• The company is the fourth largest gold loan NBFC in India. 
• The majority of the portfolio is backed by gold which is highly liquid. 
• Comfortable portfolio quality at Standalone level – Gross NPA stood at 3.67% and Net NPA at 2.23%. The credit cost for FY22 was 0.3%. 

Concerns: 

• High group level leverage – Group level leverage is at 6.14x. 
• Portfolio Concentration – Southern states hold 62% of the portfolio as of 31st March 2022. 
• Group level portfolio quality – The gold portfolio is performing well, however, the group has portfolio quality issues in Microfinance (Muthoot Microfin had 90+ DPD at 3.49% as of 31^st December 2022) and Vehicle Finance (Muthoot Capital had 90+ DPD at 21.86% as of 31^st December 2022). 
• Real estate exposure – the company has real estate exposure of 540 Crore (2.2% of total assets) as of 30^th June, 2022. 

Source of data: Draft Prospectus, Annual Report, Rating Rationale, Quarterly results, etc.