May 31, 2021
Muthoot Homefin (India) Limited: Rating reaffirmed
Summary of rating action
Previous Rated Amount Current Rated Amount Instrument* Rating Action (Rs. crore) (Rs. crore) CP Programme 500.00 500.00 [ICRA]A1+; Reaffirmed Total 500.00 500.00
*Instrument details are provided in Annexure-1
Rationale
The rating reaffirmation for Muthoot Homefin (India) Limited (MHIL) factors in ICRA’s expectation of continued commitment from Muthoot Finance Limited [MFL; rated [ICRA]AA+(Stable)/[ICRA]A1+; 100% stake in MHIL as on March 31, 2021] in the form of management-and-board-level supervision, and liquidity and capital support (Rs. 334-crore equity infused till March 2021). This should help MHIL grow profitably while maintaining an adequate capitalisation profile. The rating also factors in the company’s ability to leverage the parent’s vast branch network to expand its geographical footprint, the shared brand name and the combined marketing activities, which help MHIL tap MFL’s large retail customer base and control its operating expenses.
On the other hand, ICRA takes note of the company’s focus on the affordable housing segment, wherein the borrowers are more susceptible to income shocks, the deterioration in the asset quality indicators due to the Covid-19 pandemic along with the seasoning of the portfolio. ICRA also takes into consideration the decline in MHIL’s assets under management (AUM) to Rs. 1,704 crore as on March 31, 2021 from Rs. 1,977 crore as on March 31, 2020 on account of miniscule disbursements, given the disruptions caused by the pandemic. Further, increased balance transfer (BT) outs, prepayments and foreclosures along with the natural rundown led to a decline in the AUM. MHIL continues to tighten its origination processes and collection mechanisms, which should support the quality of fresh originations. Going forward, the company’s ability to manage the business growth and portfolio quality, while maintaining comfortable liquidity and diversifying the funding mix, would remain crucial from a rating perspective.
Key rating drivers and their description
Credit strengths
Strong parentage; committed capital and funding support and board-level supervision from MFL – MHIL benefits from the strong parentage of MFL. MFL has demonstrated strong commitment to MHIL in terms of capital support (Rs. 334 crore of capital infused so far) as well as liquidity support (the parent has committed Rs. 550 crore to MHIL in the form of inter- corporate deposits (ICDs) and term loans available as on-tap facility) and board-level supervision. Continued capital/funding support from the parent over the short-to-medium-term would remain a key rating sensitivity. Also, any change in the parent’s rating could warrant a rating change for MHIL.
Access to MFL’s branch network to enable quicker geographical expansion and operational breakeven – As on March 31, 2021, MHIL operated through 108 branches across 16 states/Union Territories (UTs), with roughly 50% of the operations being conducted from MFL’s branches. MHIL plans to share MFL’s branch network, which will provide it with access to the parent’s
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customer base and reduce its operating expenses. The shared brand name with the parent will also allow the company to leverage the Muthoot Group’s franchise value while expanding geographically.
Focus on affordable housing sector; portfolio qualifies for PMAY CLSS – The company’s focus is on providing loans to the affordable segment. As on March 31, 2021, MHIL’s managed portfolio was Rs. 1,704 crore. Its borrower profile consists of lower-and-middle-income families, who would normally be beyond the ambit of traditional lending institutions due to their limited banking and credit history. The average ticket size is around Rs. 10 lakh. Around 85-90% of the affordable housing loans qualify for subsidies under the Credit Linked Subsidy Scheme (CLSS) under the Government of India’s Pradhan Mantri Awas Yojana (PMAY). This provides the company with ample growth opportunity in the long term.
Comfortable capitalisation profile – MHIL’s capitalisation stood comfortable with a gearing of 2.8 times as on March 31, 2021 against 3.4 times as on March 31, 2020 and a capital to risk weighted assets ratio (CRAR) of 49.9% as on March 31, 2021 against 51.3% as on March 31, 2020. MHIL’s gearing improved primarily because of the decline in its loan book. The company’s regulatory capital adequacy is also supported by the relatively lower risk weights on small-ticket housing loans, which form a major portion of its portfolio. With the incremental business being funded from fresh borrowings, the gearing would increase from the current levels. However, ICRA expects the company to maintain a prudent capitalisation profile over the medium term.
Credit challenges
Deterioration in asset quality metrics due to pandemic; impact of recent surge in Covid-19 infections remains monitorable – MHIL’s asset quality indicators deteriorated with gross non-performing assets (GNPA) of 4.8% as on March 31, 2021 on account of stress faced by the borrowers, given the Covid-19-induced disruptions. The recent surge in Covid-19 infections is likely to exert further pressure on the collection efficiency and the company may, therefore, see an increase in its delinquencies in the near term. MHIL’s ability to manage the impact of the second wave of the pandemic and prevent further slippages would remain a monitorable. Ability to diversify funding profile and maintain adequate liquidity position – As on March 31, 2021, MHIL had relationships with 15 banks/non-banking financial companies (NBFCs), forming 51% of its total borrowings, while National Housing Bank (NHB) accounted for around 8%. Apart from this, non-convertible debentures (NCDs) accounted for ~21% of the borrowing profile and the off-book assigned portfolio accounted for ~20%. Over the years, the company has been able to reduce its dependence on commercial paper (CP) with no CP issuance in FY2021 and YTD FY2022. Going forward, MHIL’s ability to further diversify its borrowing profile and raise funds with a longer repayment tenor to maintain a stable asset liability mismatch (ALM) position will be a key monitorable. The liquidity position remains adequate, supported by the Rs. 550-crore line of credit from the promoter group, MFL. Moderate profitability; impacted by higher credit cost – MHIL’s profitability indicators were moderate with the company reporting a profit after tax (PAT) of Rs. 12.55 crore in FY2021 (Rs. 31.78 crore in FY2020), resulting in a return on average net worth (RoNW) of 2.9% in FY2021 (7.7% in FY2020) and a return on average managed assets (RoMA) of 0.6% in FY2021 (1.6% in FY2020). Its net interest margin (NIM) with respect to (wrt) the average total assets (ATA) was 5.2% in FY2021 vis-à-vis 4.4% in FY2020 (5.5% in FY2019)1. Though on average managed assets (AMA) basis, NIM witnessed a reduction of 130 basis points in FY2021. This was on account of lower assignment income and low disbursements, which led to lower processing fee income. Due to the cost rationalisation measures taken by the management and the reduction in disbursement-linked expenses, MHIL’s overall operational expenses reduced in FY2021 to 2.5% of AMA from 3.3% in FY2020. However, its credit cost increased to 2.5% of AMA in FY2021 from 1.7% in FY2020 on account of Covid-19-related provisioning and write-offs.
Relatively vulnerable borrower profile – MHIL’s lending operations are focussed on low-and-middle-income borrowers, comprising a mix of salaried and self-employed professionals, who are relatively more vulnerable to economic cycles and have
1 As per ICRA’s calculation, NIM wrt AMA was 5.4% and 6.7% in FY2021 and FY2020 respectively.
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limited income buffers to absorb income shocks. However, considering the secured nature of the portfolio with moderate loan-to-value ratios, its losses on default are expected to be limited.
Liquidity position: Adequate
MHIL’s liquidity profile remains adequate with a low gearing and sufficient on-balance sheet liquidity. The average behavioural tenor of its advances is around 7-8 years vis-à-vis ~5-7 years for its liabilities. However, the company had adequate cash and bank balances of Rs. 55.2 crore as on March 31, 2021 along with liquid investments of around Rs. 31.58 crore and unavailed lines of Rs. 215 crore to meet its debt obligations of around Rs. 277 crore over the next one year. Additionally, it has a funding commitment of Rs. 550 crore from MFL. MHIL’s ability to raise long-tenure funding will be critical for maintaining healthy long- term liquidity.
Rating sensitivities
Positive factors – Not applicable
Negative factors – Pressure on MHIL’s rating could arise if there is a further deterioration in the asset quality numbers. Given the short-and-medium-term cumulative mismatches in its ALM profile, any deterioration in the company’s ability to raise fresh funds or inadequate support from the parent could warrant a rating downgrade.
Analytical approach Analytical Approach Comments ICRA Rating Methodology for Housing Finance Companies Applicable Rating Methodologies Impact of Parent or Group Support on an Issuer’s Credit Rating Parent/Investor: Muthoot Finance Limited (MFL) ICRA factors in the support received by MHIL from MFL in the form of capital, Parent/Group Support liquidity and infrastructure along with MFL’s long-standing track record and leadership position in the gold loan segment, established franchise with a pan-India branch network, and efficient internal controls and audit systems Consolidation/Standalone The rating is based on the standalone financial profile of the company
About the company
MHIL is registered as a housing finance company (HFC) with National Housing Bank. It provides housing loans to the lower- and-middle-income segments. It was incorporated in 2011 and is a wholly-owned subsidiary of Muthoot Finance Limited (MFL). As on March 31, 2021, the Mumbai-based company operated through 108 branches across 13 states and 3 Union Territories (UTs) with roughly half of the operations being conducted from MFL’s branches. The company’s product portfolio includes home loans catering to the salaried as well as self-employed segments. In FY2021, MHIL reported a PAT of Rs. 12.55 crore on a total asset base of Rs. 1,704 crore. Its net worth stood at Rs. 439 crore as on March 31, 2021. Muthoot Finance Limited (MFL)
Muthoot Finance Limited (MFL) is the flagship company of the Kerala-based business house, The Muthoot Group, which has diversified operations in the financial services, healthcare, real estate, education, hospitality, power generation and entertainment sectors. MFL was incorporated in 1997 and is India’s largest gold loan focussed NBFC with total loan assets (standalone) of Rs. 50,391 crore and 4,632 branches as on December 31, 2020. The company derives a major proportion of its business from South India (60% of the total portfolio as on December 31, 2020), where gold loans have traditionally been accepted as a means of availing short-term credit, although it has increased its presence beyond South India over the past few years.
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Key financial indicators (IndAS; audited) Muthoot Homefin (India) Limited FY2019 FY2020 FY2021 Accounting as per IndAS IndAS IndAS Total income (Rs. crore) 226 288 241 Profit after tax (Rs. crore) 36 32 13 Net worth (Rs. crore) 394 426 439 On-Loan book (Rs. crore) 1,901 1,744 1,403 Total assets (Rs. crore) 1,961 1,903 1,704 Return on average managed assets (%) 2.1% 1.6% 0.6% Return on average net worth (%) 11.9% 7.7% 2.9% Gross gearing (times) 3.9 3.4 2.8 Gross NPA (%) 0.7% 1.9% 4.8% Net NPA (%) 0.5% 1.3% 3.4% Solvency (Net NPA/Net worth) 2.2% 5.3% 10.8% CRAR (%) 46.17% 51.26% 49.94% Source: Company, ICRA Research; All ratios as per ICRA calculations
Status of non-cooperation with previous CRA: Not applicable
Any other information: None
Rating history for past three years
Current Rating (FY2022) Chronology of Rating History for the Past 3 Years
Amount Amount FY2021 FY2020 FY2019 Instrument May-31- Type Rated (Rs. Outstanding Apr-30- Mar-12- May-28- 2021 Apr-04-2019 crore) (Rs. crore) 2020 2019 2018
Commercial Short 1 Paper 500 500 [ICRA]A1+ [ICRA]A1+ [ICRA]A1+ [ICRA]A1+ [ICRA]A1+ Term Programme
Complexity level of the rated instruments
Instrument Complexity Indicator Commercial Paper Programme Very Simple
The Complexity Indicator refers to the ease with which the returns associated with the rated instrument could be estimated. It does not indicate the risk related to the timely payments on the instrument, which is rather indicated by the instrument's credit rating. It also does not indicate the complexity associated with analysing an entity's financial, business, industry risks or complexity related to the structural, transactional, or legal aspects. Details on the complexity levels of the instruments are available on ICRA’s website: www.icra.in
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Annexure-1: Instrument details ISIN Instrument Name Date of Issuance / Coupon Maturity Amount Rated Current Rating and Sanction Rate Date (Rs. crore) Outlook
Not CP NA NA NA 500.00 [ICRA]A1+ Placed
Annexure-2: List of entities considered for consolidated analysis – Not applicable
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ANALYST CONTACTS Karthik Srinivasan Sachin Sachdeva +91 22 6114 3444 +91 124 4545 307 [email protected] [email protected]
Jitesh Setia Deeksha Agarwal +91 22 6114 3463 +91 124 4545 833 [email protected] [email protected]
RELATIONSHIP CONTACT L. Shivkumar +91 22 6114 3406 [email protected]
MEDIA AND PUBLIC RELATIONS CONTACT Ms. Naznin Prodhani Tel: +91 124 4545 860 [email protected]
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