Fitch Ratings has revised Muthoot Finance Limited's (MFL) Long-Term Issuer Default Rating from 'BB+' Rating Outlook Stable to 'BB' Rating Watch Negative and accordingly, ratings on the MTN programmes and foreign-currency senior debt stands revised from 'BB+' Rating Outlook Stable to 'BB' Rating Watch Negative.
The downgrade and RWN reflect the weakening operating environment and the related operational challenges. Slower economic activity will dampen MFL's business growth prospects, while its branch-led distribution model for gold-backed loans, which form 89% of MFL's total loans, will be affected by disruptions from measures to contain the pandemic. Fitch expects delinquencies to rise as borrower earnings are affected by the slower economic growth, while recoveries of the gold collateral backing the loans may be delayed as auctions may be affected in the near term.
MFL's ratings nonetheless remain at the higher end of rated peers, reflecting the strength of its established franchise in niche gold-backed financing, its history of low credit losses, satisfactory leverage and adequate liquidity coverage. These are counterbalanced by high exposure to operational risks in the business and MFL's concentration in gold loans.
The IDR may be downgraded if operational risk losses exceed Fitch's expectations, if asset quality or the price of gold collateral deteriorates sharply, or if liquidity coverage or funding access were to weaken. The rating may also be downgraded if leverage were to increase and debt/tangible equity were to exceed 4.5x for a prolonged period (September 2019: 2.8x), or if aggressive expansion in new lending segments leads Fitch to significantly weaken our assessment of MFL's risk appetite and future asset quality.
An upgrade of MFL's Long-Term IDR would hinge on an improvement in the operating environment - including a strengthening in the domestic financial system, which is unlikely in the near term - together with a steady record of expansion in its franchise beyond the niche gold loan market. The latter is also only likely in the medium to longer term, if at all, as the company appears focused on its core niche markets in which it performs generally well.
Shares of MUTHOOT FINANCE LTD. was last trading in BSE at Rs.622.3 as compared to the previous close of Rs. 606.5. The total number of shares traded during the day was 108149 in over 4326 trades.
The stock hit an intraday high of Rs. 687.75 and intraday low of 607.35. The net turnover during the day was Rs. 69622449.