Moody's affirms Muthoot Finance Limited's Ba2 CFR, revises outlook to stable from negative

Moody's Investors Service has today affirmed Muthoot Finance Limited's Ba2 CFR and changed its outlook to stable from negative.

The affirmation and change in outlook to stable reflect Muthoot's steady credit profile despite the economic contraction caused by the coronavirus pandemic. In addition, today's rating action reflects Moody's expectation that Muthoot's financial performance will remain stable over the next 12-18 months, supported by its leading franchise and track record of providing loans against gold jewelry, superior profitability and strong capitalization.

Over the past 6 months, a surge in gold price - which backs about 90% of the company's loans - helped improve loan collections and disbursements, with both exceeding their five-year averages in the quarter ended September 2020. Similarly, higher gold prices helped lower Muthoot's gross nonperforming loan (NPL) ratio for the gold portfolio to 1.3% at the end of September 2020 from 3.4% a year earlier.

Nevertheless, the asset quality of Muthoot's non-gold loan segments, which includes home, vehicle and micro finance loans, is susceptible to the challenging operating environment.

While loans against gold jewelry are also susceptible to a sharp and sudden decline in gold prices, this risk is mitigated by the short-duration and collateralized nature of the company's loan book, the maximum loan-tovalue restriction under the central bank's norms, and the ability of the company to quickly liquidate the collateral if the borrower is unable to service the loan.

Muthoot's profitability has somewhat moderated, with its return on assets down to 5.8% for first half of fiscal year ending March 2021 (fiscal 2021) from 6.6% a year ago as asset growth outpaced net profit growth. Nevertheless, Muthoot remains the most profitable amongst Moody's rated banks and non-bank finance companies in India. Its superior profitability supports internal capitalization, as reflected by its strong Tier 1 ratio of 24.6% at the end of September 2020.

Muthoot's funding also remains steady as the secured and highly liquid nature of its loans enables it to obtain funding from banks and debt investors. Over the past year, the company has diversified its funding sources to more stable, long-term funding sources - a credit positive.

Shares of MUTHOOT FINANCE LTD. was last trading in BSE at Rs.1173.05 as compared to the previous close of Rs. 1185.2. The total number of shares traded during the day was 81234 in over 4374 trades.

The stock hit an intraday high of Rs. 1199.1 and intraday low of 1169. The net turnover during the day was Rs. 95916752.

Source : Equity Bulls

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