Muthoot Capital Services Limited (511766) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Muthoot Capital Services Limited Q1 FY '27 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I would now like to hand over the call to Mr. Maneet Khimawat from Elara Securities. Thank you, and over to Mr. Khimawat.

Thank you. Good morning, everyone. On half of Elara Securities, welcome to the Q1 FY '27 Earnings Conference Call of Muthoot Capital Services Limited. From the management today, we have with us Mr. Mathews Markose, CEO; and Mr. Ramandeep Gill, CFO. I now hand over the call to the management for their opening remarks. Thank you, and over to you, sir.

Thank you, Maneet. Good morning, everyone, and thank you for joining us today. On behalf of Muthoot Capital Services, let me extend a very warm welcome to all our shareholders, analysts, investors and members of the investment community. I sincerely appreciate your continued confidence in the company and your participation in today's earnings call. So let me start with the highlights of quarter 1 FY '27. I think our FY -- Q1 FY '27 has been an important milestone in our transformation journey, and we believe that Q1, we will remember for the significant strengthening of our balance sheet and franchise. I would like to start by highlighting 3 key achievements that we made during the quarter. First and foremost, we received a CRISIL rating upgrade to AA minus table. We believe that there is a very strong external validation of the transformation that the company has undergone over the past couple of years. And it reflects sustained improvement in our asset quality, governance standards, our funding profiles among many other things. And more importantly, I think it enhances our ability to access diversified sources of capital at a very competitive price because that is a very critical aspect of our NIM and ROA, et cetera, et cetera. And therefore, we'll position us well for our next phase of growth. Second, our public deposit franchise crossed INR 100 crore, while this number may not be very big, but considering that we just recently started scaling up on this, and we recently launched our online FD module and all that, this is a significant achievement. And this is important also from the fact that it gives us a very stable, diversified and granular funding base, and it's a very important pillar of our long-term liability strategy. So this is 1 business that we want to continue to focus on and scale it up to a significantly large amount. Third, I think we delivered a substantial improvement in our asset quality. Our GNPA level reduced to 3.94%, representing a decline of about 182 basis points year-on-year. And this is a function of our disciplined execution on collection, sustained recovery and a successful resolution of the stressed assets. So this is a very clear demonstration of our focus on quality even while we pursue growth. I think these are really foundational measures. And coming to the business performance, external environment has been very favorable. Q1 automobile industry saw good growth, 2-wheeler industry recorded a 14% year-on-year growth. At Muthoot Capital, we delivered a 6% growth, which may be slightly moderate compared to the industry growth. But all our internal analysis indicates that the gap was not driven by market demand but primarily due to the fact that our credit acceptance ratios were kept moderate. We were approving orderly about 35%, 40% of the cases that were getting logged in, and that was as a measure of continuing to focus on our quality. As we go forward, some of the measures that we are taking is that building our own, so we were using different scorecards from partners. Now we are -- our own data analytics team is building our scorecard internally, which will be differentiated for existing to credit and new to credit. And we are also bringing in a multiproduct multi-bureau strategy to enhance our credit profile. And on the -- parallelly, what we have done is that our own retail portfolio has been considerably increasing. So we've reached 84%, which means our co-lending book has been steadily declining. That is a conscious call that we took. So over -- if you compare Y-on-Y, last year, Q1, we had about INR 120 crores of disbursement through co-lending. And this Q1, in the first month, we stopped the only disbursed INR 20 crores. So overall, dip-in numbers Y-o-Y is a function of that, but MCSL has grown. And our yield remains healthy at about 21%. And as we move forward, I think our focus will continue to be on accelerating high-quality retail book, improving credit conversions and expanding our liability franchise. And of course, leveraging technology. I think the last couple of years, we have invested a lot in technology. And now we are continuing to invest in AI-driven technology. We have brought in AI in multiple fields. Now our entire ex bucket collection is being done by AI bots. So AI bots continue to collect about -- so this month, our resolution on with AI bots on the exports is 55%, and we'll continue to expand there. Other use cases of AI has been on our welcome calling, our audit and compliance, our automatic ticket segregation of customer complaints. So we are investing heavily in AI. We've done couple of trainings already for our senior management and all development people on AI. So that continues to be our focus area, and we will continue to invest in that as a technology because we see that consuming a lot of space in the BFSI segment. And we remain on that the investments that we have made so far in strengthening our franchise will enable us to deliver sustainable and profitable growth in the periods to come. So I think with those opening remarks, I'll hand it over to our CFO, Ramandeep, to take you through detailed financial and operational performance of the quarter. Thank you once again. Over to you, Ramandeep.

Thank you, sir. Good morning. We'll start with the asset of the company. So as Mathews has detailed it, the retail portfolio of the company, which was a year back close to INR 3,000 crore. Now we closed at INR 2,851 crores. We have seen a significant growth in the retail portfolio. Co-lending portfolio, which was close to INR 1,000 crores a year back. Now it has been closed at INR 49 crores -- and safe to say that we are having a 0 incremental business on the core lending. And the corporate loan book we are not doing for the last 2 years. That book is -- has been degrown again by 16%. So overall, the focus was on the retail portfolio, we which has shown a significant growth of INR 500 crores year-on-year basis. Of that retail portfolio, we have seen growth in all the parameters, whether we can call 2-wheeler and CV, also Used Car as well. Put together my CV and used car, they have shown a growth of around 40% from year-on-year as compared to the previous financial year. My 2-wheeler since we have excluded that DA and the ARP portfolio, we can see a minor de-growth, which is stable portfolio only at 1%. Other than that, construction equipment, which we have recently started has again shown a very good growth of 75%. And then as we said, corporate loan, we are not doing. The portfolio has been even evenly split cloud, where in south part is containing 40%, and the remaining part has been contributed by East North and Western part of India. That has also been shared within the PPT as well. The business of MCSL stand-alone comes to INR 535 crores as compared to INR 508 crores, which we have done in the Q4. So there is also a growth. Generally, we see Q1 business slightly lower than the Q4. This is the first time in the last 3 years where in Q1 business has picked up specifically the CSL disbursements. Then as Mathews said, the yield on the product has been closely tracked now. We started used to wheeler, which has given a deal of 26% while my 2-wheeler and the loyalty loan and other. The blended yield for the entire 2-wheeler, it comes to 22% while CV having the blended yield of 17.5% and used car is operating at 18.6%. Right now we are almost -- as I said, the co-lending business has already been closed. Entire business on the Q1, except some 4% to 5% has come from colending, which is -- which we have done in the month of April is Other than that, the entire business has come only from the CSL retail. And when I say retail, the digital channel, shown a significant growth as compared to the Q1 of last year, wherein we can see that last quarter -- last 1 of the financial year, we did INR 421 crores from this channel. Now we have concluded INR 465 crore alone on this channel. So there, we are seeing the growth. Coming to the asset quality of the company, 96.06% of the total portfolio of the company remains standard, while 3.4% remains substandard Out of that, there is a stand-alone case of corporate loans, which we already spoke in the last 2 quarters wherein we -- retail GNPA of the company stood at 3.49% only, that 1 case is contributing INR 15 crores to INR 16 crores. That's the reason the GNPA is coming just at 4%. On the bucket wise, the company is having 85% lying in the 0 bucket. Last year, at the same time, it was 78%. On the first bucket, the company having a portfolio of 7.34%. On second bucket, it is 2.76%. And then we have the NPL, which is 3.9%. The segment-wise analysis also we did, which we have already shared, where we can see that GMP from a CV portfolio, along with DC is coming only 0.35% itself. While my used car portfolio is showing a 1.3% only, the remaining GMP contributed by the 2-wheeler portfolio. Last year, at the same time, the GNPA was 5.8% for the retail. Now we are closing a 3.5%. There is no change in the TCR company. It stands at 50% help the NCR healthy NPAs 1.94%. Mathews speak about this asset quality, and then we -- Mathews said, and we have given a detailed note also not lumber 6 with the results. The company has undertaken on ARC deal with Prasaditya ARC. So this deal, the overall objective was to bring down the GNPA at the same time, the portfolio, which is not contributing wherein we are not getting as much recovery as we should have got. So therein, the company has taken an average valuation of 45% on our portfolio that we have sold for around INR 3 crores. So that was onetime in the tax we wanted to do in the Q1 itself, so that by Q2, Q3 and Q4, we should have a portfolio wherein we are getting recoveries from the CSL itself. Secondly, part, the portfolio which we have stored in the last 14 months and all, therein, the GLP is only about 1%. So that gave us confidence that, okay, the new portfolio is behaving but that was the sole reason of doing a deal for the ARC of the portfolio, which was 2 year to 3 years and more, which is there in the books of MCSL. So that deal to be -- has also been concluded in this quarter itself. Our source of recoveries, the major source where in last year, as Mathews Matt said, bank and electronic mode, which used to be 75 CR it has now reached INR 100 crores, which is again a very significant achievement. Total income in other income, we have classified from insurance partners from [indiscernible] since the company's holding IRDA.Sothen total insurance income comes at INR 2.47 crores, that is part when the other income as well. On the liability front, we -- the promoter's shareholding remains at 63.33%, and remaining has been contributed by corporate retails and others. While we have acquired a lot of banks during the last financial year, we relied very less on the NBFC. And now the overall cost of funding, which we have already shared, we have seen INR 0.80 down as compared to the last financial year. That change has come only in my term loan, which we have taken from the bank loan. Overall change in the borrowing we can see from the last quarter Q1 to now this Q1 INR 3.43. And that to rating upgrade has happened now. So we are expecting another INR 0.40 to INR 0.50 down in the upcoming deals as well. On the fixed deposit part, the company has INR 100 crores in this year in this month itself. So the liquidity position of the company remains stable wherein the company is always having a balance over and above the LCR balance, which is required to be maintained from the RBI. So when RBI 10, the company is every company having a fund balance of 25% to 113%, which we have already -- always maintained throughout this quarter itself. Over and above the balance wherein the liquidity, which has been classified as in high-quality liquid assets that has been invested in my SLR investments, PTC investment SLR deposits and collateral deposits with the bank, whereas the over and above 100% has been invested in the fixed deposit with the bank itself. The company has taken an overall yield of 6.71% on those investments. Liabilities front, the company has closed the borrowing at INR 3,318 crores at borrowing cost, incremental borrowing costs in the Q1 at 9%. This will going to go down in this quarter as well. That has a very fair mix of banks [indiscernible] and others. In there the last 2 slides, which we have shared with since the overall organization, I think the company is at INR 3,300 crores. Therein, we have excluded the portfolio that we have sold out through DA, and also the GNPA portfolio of 20 has already been sold out to ARC. The company has reported a PAT of close to INR 8 crores, which has taken the shareholder funds to INR 78 crores. The overall balance sheet size of the company has grown by 1% from Q4, which is crores. The Q1 business, as I said, INR 564 crores, which restates our live loans customers to INR 8,000 crores. The flu wheel, which we have shared with the investors as well, where we can see a growth of AUM on 4% the GNPA has gone down by 12 bps. One reason, which is a very specific reason is basically, yes, we have done the ARC. That effect we can also see in the NPA as well. PBT at close to INR 11 crores, CRAR at 22.07 and the debt-to-equity by gearing of the company stood at 4.8x. The total business, which the company has done in this quarter is INR 65 crores. Over to you, Maneet, for the questions now.

[Operator Instructions] The first question is from the line of [indiscernible] Limited.

I have 2 questions. Mathews, just beyond the headline disbursement growth to understand how are you planning to structurally reposition Muthoot Capital 2-wheeler and retail lending portfolio over '28 financial defend margins in a rising cost of funds environment, while still maintaining strength against rural stress and identifying competition from other fintech companies. That's my first question. I'll ask the question after this.

So first of all, our portfolio, you would see that quarter-on-quarter, we are diversifying our portfolio. So the 2-wheeler used to be our war horse for a long, it was actually the single product for us for a long time. Now we have diversified and our other 2 -- other 3 businesses, is consumer -- construction equipment, commercial vehicles and car is steadily growing against that. So this diversifies our portfolio and the portfolio that is growing is at a much significantly lower GNPA levels by the basic nature of that -- those products. You have slightly more qualified customers, you get more documents, you do direct personal discussion, people need -- contrary to a 2-wheeler when a customer walks in resin 5 minutes and all that. So it's a completely different profile that we are catering to. And there is even on our existing portfolio, we can see that the GNPA levels are sub-0.5% and all that. So that reduces the pressure on us on keeping higher provisions, et cetera, et cetera. Two, we have got a rating upgrade, which will significantly alter our funding, okay? So as it is, we already started seeing, I think Ramandeep has already taken you through that bit we already started seeing at least a 50 bps reduction in our borrowing cost and which will continue to happen. On the third side, we are also aggressively building our liability franchise, which is at almost 150 bps lower than our borrowing costs. So that will also come in handy. Fourth is that our geographical distribution also is in such a manner that we are not maybe in direct head-to-head competition with the large banks where the rates are disproportionately low. So our markets are largely the Tier 2, Tier 3 player. And we have a very nuanced approach of the competition whom we face. And the competitors that we face in these markets operate broadly in the same interest rate range as we do. So I don't see a significant pressure on the top line in terms of NII as a drag as of now. And we are steadily watching the portfolio. As I mentioned in my opening remarks that we are also coming up with our own originations for card where our data analytics team is working on. We are looking to rework on our risk-based pricing also where we will be your pricing the higher-risk customers significantly higher so that it covers the possible credit loss that we will incur. So -- and then this risk-based pricing will be a very dynamic 1 which we will continue to monitor on a weekly basis. And wherever we see that every portfolio is coming down on the race, we'll be able to alter those rates. Because it's our internal scorecard. Till now, we were dependent on a vendor to do that and vendor would review it every quarter, et cetera, et cetera. But now with our own internal data analyst team doing it, we will be able to do it on the same day itself, but of course, we will monitor it on a weekly basis.

My second question is to Mr. Gill. With credit costs showing some early signs of pressure and capital adequacy moderating what frameworks are you putting into place to sustain provisioning discipline along with the funding digital transformation and maintaining that dividend commitment?

Especially pertaining to any regulatory compliances that may keep on changing over the coming quarters.

Sure. Sir, I think is that we have done, and this is what I wanted to share while -- and this sort of everybody have the call, sir.

First thing is, while we see the total AUM growth is not that much on the book. The best part, what we have done over the last 1 year is we stopped co-lending almost. Now how this has helped us, which we can see in the results. I'm not talking about now ECL. I'm not talking about any impairment of the world. Our total income -- so the overall growth was only 1%, 2% on the. Our total income on the same book, which was INR 147 crores has now has gone up to INR 160 crores. This is substantially because we are doing our own sourcing. While the GNPA remains the same as per the Q1 of last year. If I exclude the ARC portion that we have done, -- so which means there is a INR 12.5 crore increase in the revenue. Why? Because the blended yield is going up as NCFL is sourcing on its own, number one. Number two, the finance cost of the company as I have also explained and Mathews also explained, it has already gone down by 0.5%. Now there comes the third action, which is the impairment of the company. See, we are retracting it. So what we have done is, as I said, last 14 months MOB. So the wheeler is somewhere around 75% of the book -- so wherein we need to see that entirely impairment will come from air itself. On 14-month MOB, we are seeing a GNPA of 1%, which used to 3% and 3.5% when we spoke in the last year. So therein, we are seeing a reduction, but at the same time, macroeconomic sectors has also been taken. So we have -- last year also, we engaged this year also, we have engaged EI. Therefore, if you see the note number which we have placed, we have additionally taken INR 2.5 crores on the impairment because we know that in Q2, when the ECL -- so ECL model is something which we are going to revise every year. So that we should know that any macroeconomic factor, which as you have asked is impacting the impairment, how it would be done. So we have done an analysis in the Q1 itself. For us, so last time when we did this analysis in the Q2 of last year, that gave us a reversal of INR 5 crores. We don't want that factor. We just thought okay, let us see how it is impacting my PD and LGD of the world. So LDD remains same. We were expecting okay with late companies access some probability of default sector may go up -- but at the same time, the GMP on the book has gone down from 3% to 1% we kept around INR 2.5 crores as an additional impairment, which I have also shown in the note. So therefore, that gave us extra space that whenever we revise our model, which is due now in the next 4 weeks or so, therefore, we don't have to take additional PGI for the entire year. And number three, last time, if you see my AC, the impairment that we have taken, though the company at 50% PC as a whole, my used car in CV during last year, we have taken an LGD of 50%, which was very -- it was on the higher side, while their GNPA remains static throughout the year itself, rather used car GNPA has gone down from 1.45% to 1.36%. Therefore, we are expecting some downgrade -- some revision in the LGD as well, where in 50 will become. So there is also some advantage might come, but we are not going to take it because we want to see this through whole financial year that how it's going to pan out. Therefore, we are providing additionally, if required, we will take a final call on the -- in the Q4 that if required, we need to -- we need any reversal, we'll take that reversal. Other than that, whenever we see any profits are happening. And if we are able to provide further more for impairment, we'll do that. I hope, sir, I have been able to answer.

The next question is from the line of Amit Mahale from RoboCapital.

Thank you. My first question is on AM, where we had aspiration of about INR 10,000 crores area. So how do you see AUM as at FY '27 and '28. And also, if you could indicate any aspirations we may have budgeted.

Yes. Thank you. So on the AUM growth, as I had mentioned earlier, -- we are -- in the Q1 of this year, our credit acceptance rates were far below the industry number. So where industry gives about 75% to 80% approval rates, you were only at about 35%, 40% approval rate. So that was being cautious -- now we've seen now the last 1.5 years portfolio has behaved and now, therefore, we are bringing in a scorecard-based model, which is getting built internally. And we are going to -- from Q2 -- end of Q2 to the rest of the year. And of course, Q3 happens to be the biggest time of the year. And you, of course, have a proper Q3 because of Diwali and the entire festivities coming in. So that is the time when we want to be ready for the market and take advantage of that quarter and scale up our numbers. This year, the AUM projections that we had given was around INR 4,000, 4,000 -- INR 4,000 to INR 4,200, and we will reach those numbers this -- that's the projection yes. And Ramandeep, can you take on the ROA part, please?

Yes. So as of now -- so in this year, as I said, the last also -- we have taken a pretax ROA of around 2.5% for this financial year. And we are going to work on that. As of now, we have reached a stage of 1%, but there are now from the next quarter itself, where we are expecting the business to grow. Therefore, we are also expecting, as I said, in the interest income, we have already seen a growth -- so we are expecting that this impairment piece, which was -- which was an issue for us in the last financial year, that has been over now. So we are not expecting much increase in that cost during this financial year. So we are on track. This is what I want to say on the ROE.

Sure. My second question is on the for used car book because the yield there is significantly lower at 1.6%. So can you provide ROA fee for that? Or what ROE do we expect for this product?

Sorry, can you just with me to your question? I missed it. ROA for used car. Sorry.

Used car, because see the yield is significantly lower -- and if I take cost of fund of say 10, 10.6 and there's some amount of OpEx, the product will be dilutive to -- so I just wanted to hear your thoughts on what we expect to be in a near term, like FY '27/'28?

Yes. So we track that this vertical is profitability of rather for used car as well for CV as well because CVC also it is on the same line, 17.5% to 18% itself. The best part about these 2 is the impairment factor, while CV is hovering around only 0.36%, the rate 1.3% whereas as compared to 2-wheeler, which is around close to 3.5%, right? And productivity is something which we are -- which we need to see for all this. So therefore, the last quarter we have prepared the vertical-wise P&L -- and there, we have seen the ROA for used car. The 8% and 8.5% was the total income, which I am receiving from the used car on that, I am having a minimum expense which we pay for the impairment. I'm excluding the finance cost, which you have already said, though we are 50% lower only, but still by taking your finance costs and then there is an impairment cost of around 0.5% compared to seats for the other product we have. So therefore, we are expecting an ROA of around 1%, 1.5%, but at the same time, used car is going to have a breakeven in this financial year. So we look for that. Then we will set up a loans range these are the number of units which used car has to do. So as to make a profit of this the whole month. So that formula also has been provided to the respective businesses as well. So they are working on that. And sir, even if you see the used car business, as I have shown in my portfolio as well business has also been grown. If you see the last year -- last year to this year, there is a significant growth in the used car business as well. And on the total contribution to the AUM, used car alone has gone up to 8, 8.5% for the company, which was only 2% in last year. So as the business is growing, we are expecting good numbers in the top line from the used cars...

Just to what Ramandeep said, I think now we are tracking vertical-wise, not vertical wise but also region level P&L. So every regional head -- area head has a P&L and vertical-wise. So that gets monitored and reviewed every week every month, so that and it's bottom up. So therefore, everybody knows, understands how the P&L needs to be managed. Yes. I'm just looking to clarify the numbers.

So what type of OpEx are we forecasting for this used car business?

One thing, sir, I have just opened my used car business only. So sir, I am expecting at a breakeven level of around 4% of OpEx, which the company has to operate. Right now, we are at 6%, 6.5%. Yes. So you are expecting some reduction in fact because you are sourcing it your quarter 4% is OpEx -- so OpEx will go down as and when productivity will increase, which we are seeing now. So last year, the team has come here, the business has started growing from the same team itself.

As I said last year, from the same team, the -- it was contributing 2% of the AUM. Now the same team is contributing 8.5%, add some number to that, what Ramandeep said, so last year of average productivity for car and CV used to be 134 live. Right now, it is INR 2 million plus, and we are expecting it to go to 3 cuts. So that's where the entire dynamics of this business will change.

Right. Perfect. And the last question is on the LTV. Whenever we calculate LTV for 2-wheelers, how is the LTV calculated? Is it on 1 road basis? Or is it on an off-road basis?

On-road price clear on the oral side.

[Operator Instructions] Next question is from the line of [indiscernible] Securities.

My first question is regarding the ARC transaction, can you just provide me a brief about the transaction? What are the numbers? And what was the number previously and the current number? And is there any amount written off from their side as well? And can you just provide about it? One second, sir. I'll just give you the entire numbers on the Yes. Susan, -- so when we did an ERC of INR 203 crores this time. This is the third AIC of the company. So you wanted to be specific on the third RP you wanted to know the numbers of first in second as well. Yes, pertains -- well, okay. So I'll take it. So this is the third ARC of this something. The first we did in September wherein the company has sold a pool of around INR 235 crores. The second ARC, the company has done in September 24, where in a pool, close to INR 100 crores have been sold. So these are the 2 ARCs. The first TRC Felix, there in the first year in the valuation, which the company has got on that pool was 117, which comes to 50% on back, the company was having a security receipt of INR 102 crores. That security received from the first ARC has been gone down by 75%, which means that company is able to recover 75% of that ARC in a span of 2.5 years. Coming to SEDAR, which was close to INR 100 crores. Again, the company has got a valuation of 5%, wherein the security receipt comes to INR 48 crores of that, the investment from Muthoot Capital comes to INR 4.73 crores. From that half also, we have been able to -- we have been able to bring down that ARC by 46.71%, which means that 46.71% has been recovered by the company. Now this -- there comes the third ARC. So third ARC has 2 components, where write-off pool of the company, which was there were we have started getting recoveries as we have a specific focus now -- so that tool was -- comes to INR 83.18crores. And then there is a normal GNPA pool of the company, which has a DPD of around more than 600 days. So that pool has also been sold to ARC. So in totality, INR 203 crores have been sold in the ARC at a valuation of around 45.61%, which I have already shared in the note. So there after this -- during this valuation exercise, what we have done, we have taken a blended valuation. Unlike the first 2 deals wherein the valuations were coming at 50%, 55% with the same ARCs and therein also the company has shown a significant reduction in the balance of the security receipt. We don't want that higher kind of valuations of those. So we have taken a blended valuation of the entire pool, which comes to 46.51%. Of that 46.51% the company has parked at INR 81 crore as an investment in the security reset in this year's financials. So this is what the 2 transaction is...

Okay. And my second question is what are the guidance for GNPA and NPA for FY '27 and going further?