Muthoot Finance Limited (MUTHOOTFIN) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Muthoot Finance Limited Q4 FY '24 Earnings Conference Call, hosted by DAM Capital Advisors Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Sanket Chheda from DAM Capital Advisors. Thank you, and over to you, Mr. Chheda.

Hello, and very good evening to all of you. We have with us the entire management team of Muthoot Finance to discuss their Q4 results and the strategy ahead. So from the management side, we have Mr. George Alexander Muthoot, who is the Managing Director; Mr. Alexander George, who is Whole Time Director; Mr. George M. Alexander, who is Whole Time Director; Mr. George M. George, who is also Whole Time Director; George M. Jacob, Full Time Director; Mr. Eapen Alexander, who is ED and Mr. K.R. Bijimon, who is Executive Director; and Mr. Oommen Mammen, who is the CFO. Without further ado, I'll hand the call over to MD sir for their opening remarks followed up by question and answers. So over to you, sir.

Thank you. Good evening to all of you. So we are glad to announce another year of remarkable growth and achievements for the company. Our consolidated loan assets under management crossed the milestone of INR 89,000 crores and stand-alone AUM has crossed the milestone of INR 75,000 crores. The consolidated assets under management increased by 25% year-on-year and the stand-alone assets under management increased by 20%. The contribution of subsidiaries on loan assets increased to 15% from 12% last year, reflecting our strategic diversification efforts. The consolidated profit after tax for the financial year '24 increased by 22% year-on-year and stands at INR 4,468 crores. The contribution of subsidiaries in the consolidated profit after tax also increased to 10% from earlier 6% underlining the resilience of our diversified business model. With a strong focus on Muthoot Finance vision to emerge as a diversified services group, financial year '24 was a year of transformation for us. Apart from consciously pivoting our efforts towards growing our non-gold loan book, we also focused on strengthening our digital strategies for a transformative growth across our product portfolio. Despite the various industry hiccups, we have continued to maintain our position as leader in the gold loan industry and capitalized on the strong growth opportunities in affordable housing, in macro finance, in personal loans, small business loans and vehicle finance. Further, the robust domestic consumption growth growing the middle class segment and rising aspirations provide ample opportunities for future growth. We embark financial year '25 on a positive note and shall continue our vision to grow the share of gold loan subsidiary -- non-gold subsidiaries to 18% to 20% in the next 5 years. We also take immense pride in achieving a loan growth of 20% as against the guidance of 15% in this financial year. In Q4, the stand-alone loan assets under management witnessed a historic high of INR 75,827 crores, driven by the robust growth in gold loan of 3,657 in that quarter low. The stand-alone profit after tax for the financial year increased by 17% year-on-year and stands at INR 4,050 crores. This year, we also achieved the highest ever gold loan advance to new customers of INR 16,415 crores, reinforcing our position as a trusted partner in the gold loan industry. Complementing our core gold loan business, our non-gold loan business offerings continued to gain traction with our micro finance loan, personal loan and home loans paying a pivotal role in diversifying our overall loan book. The housing finance arm achieved a disbursement of INR 815 crores in the financial year as against INR 223 crores in the previous financial year. The micro finance arm also witnessed upward trend, increased loan assets under management by 62% year-on-year, reaching INR 10,023 crores and profit after tax by 161% to INR 340 crores. As part of our transformation journey in financial year '24, we also focused on boosting our digital business adapting new technology savvy millennials and general budget customers. Our phygital strategy has yielded positive results with critical infrastructure already in place. We are confident that the impact of regulatory norm of 20,000 cash disbursal limit on our business and volumes will be limited since it is an industry-wide move. In alignment with strict vigilance from regulators on the NBFC industry, we also remain committed to maintaining the highest standards of corporate governance and compliance. During the year, we raised INR 480 crores through the 33rd public issue of secured renewable nonconvertible debentures. We opened 225 new branches by the group in the quarter of 2024 across regions, including Bangalore, Goa, et cetera. We also received multiple industry recognitions as most trusted bank, great place to work, et cetera, et cetera. So with these words, I would like to now conclude and open the floor for your questions and answers. Thank you.

[Operator Instructions] The first question is from the line of Digant Haria from GreenEdge Wealth.

Congratulations on this strong growth, especially on the gold loan side. Sir, question is that we are seeing two things. One is gold prices strengthening by the month, by the quarter. And on the other hand, this whole cash disbursement and regulatory scrutiny on the sector has slightly gone up. So in that interplay of these two things, how do you see the growth panning out in FY '25?

And of course, as usual, we would give a guidance of 15% minimum guidance of growth in this year also. Last year, we gave a guidance of 15%, but we were able to achieve almost 20%. So this year also anyway, our guidance would be 15%. We will try our best to better it.

Sir, gold will help you more. You have to -- gold will help you so much this year, the gold price.

Let's see, sir, this is not -- picture [Foreign Language].

Sir. And then generally, how is the discipline in the sector? And because -- see, 2022 and '23, there was too much of indiscipline by a lot of new entrants and all. Do you see those things especially falling in place now?

Yes. I think there is something which needs to be seen also. Most of the gold loan companies were based or working out of Kerala, they were working out also allover India, but they were regulated by the Kerala based or Kerala, Trivandrum regulator. So there was a lot of discipline issues and we -- that we always had good interactions with the regulator here. And I have -- we have never come across any such -- what should I say, indiscipline, as you say, in any of the companies based here. All this has caused because when people see one industry or one sector or one -- a few companies growing well, probably in the gold loan sector, many want to enter, but they don't realize that this is a very operationally intensive business. That is the biggest challenge here, which I have been saying over the last many quarters, just because somebody is just having some funding, et cetera, or things like that, they cannot simply start a gold loan company. The moment they start, initially, it will be good but the moment they reach 300, 400 branches, et cetera, all these challenges come up. And that is what is happening here. And as you said, indiscipline has never been the practice in the Kerala-based NBFCs and I'm sure continuing with that also, we will be maintaining that. Now that you have asked about this, I think the regulation about the INR 20,000 cash limit is applicable to all, and it has not had any significant effect on any of these -- on our disburses and we see quite good traction even in this year -- even in this quarter. So we would see good growth coming in spite of all this because all the companies will have to abide by this INR 20,000. Only customers who definitely want cash, et cetera, may go to unorganized sector. But unorganized sector, I don't know whether they have -- they will be able to tackle to all these things. But I'm sure a sense of discipline will come with the NBFCs as well as the with the people. So to answer your question, we see, with all these challenges, et cetera, also good NBFCs, well run NBFCs will have a great place in this business, and they will continue to.

Perfect. Sir, second question is on the non-gold business. Like in the last decade, we incubated 3 new businesses: The micro finance, home loans and this vehicle finance. Micro finance has grown to a good size. Home loans seem to be turning around. So in this decade, which will be that a large business, which will grow to, say, INR 10,000 crores kind of loan book? Because micro finance has now reached that, which could probably be the next one, say, over next 3, 4, 5 years.

I think we have also started salaried personal loan and SME loans, et cetera, along with this. The vehicle loan business, probably if you ask me personally, we don't see a very big prospect because the because the sector is very crowded and we don't have much strength there. Of course, it will be there, but it will be muted. But we see good growth in, probably, as you said, in the micro finance. In the home loan sector, I think we have a new set of team there. They will definitely grow well in the home loan sector and also in the personal loan sector also. Because in the personal loan sector also, most of these new sectors, we are thinking of maybe giving a cross-sell to many of our gold loan customers. Because whenever we look at our gold loan customers, we realize that they have taken a personal loan or a home loan or a business loan from elsewhere. So why not we retain that customer, we give the same loan. That is the thought behind this non-gold business. So, as I said, as we were saying, we will reach the 20% maybe in 3 to 5 years time, 20% of non-gold loan business.

The last question is probably for Oommen. But if you do the same thing this year, you guide 15% and you achieve 20%. What happens on the liability side? Are enough borrowings available at reasonable rate because right now, there's some tightness in the borrowing market?

So in terms of the borrowing, probably you are aware that we have done a U.S. dollar bond issuance. We raised USD 650 million. So that helped in liquidity. Now we are also raising NCDs through private placement in the domestic market. I think now with the financial results are getting announced, I think the bank borrowings also will happen with the newer opening. So bank funding also will come. And certainly, the retail institutions also is going to support in terms of the liability requirement. So, of course, when there is a general liquidity tighten, certainly the interest rates will go up so that we are already seeing that. But I don't think that it's going to have a material impact on return on assets or probably we'll decide to pass on to the customers.

Next question is from the line of Mahrukh Adajania from Nuvama.

Congratulations. Sir, I have a couple of questions. Firstly, if you could explain the movement in provisions for this quarter and Stage 2 loans, because there was a sharp increase. So that's my first question. And sir, my second question is a bit of an extension to what Digant asked that your AUM growth has been good and competitive intensity, especially in the last 4, 5 months has been quite low and there are reports that other than private company, even PSU banks have been pulled up by FM and they've been asked to check their gold lending processes, et cetera. So the competitive intensity just now maybe the lowest in the last 2, 2.5 years. And say if -- I mean, if some private sector players get off their band and start relending, will that change in a big way? And will that impact our AUM growth? That's my second question. And my third question related to AUM growth again is that a lot of growth has also come from gold price movement and tonnage and customer ads have contributed relatively lower compared to gold prices. So does that change? I'm not talking about gold prices, but does the customer acquisition change in a big way or tonnage assumptions change going forward? Because that is the basic driver of growth, right so?

Okay. Mahrukh, on the ECL provisions, primarily the increase in provisions have come because of the increase in the loan assets.

Okay.

Regarding the competitive intensity, yes, of course, I'm glad that you feel that the competitive intensity has waned in the last few months. It's not that -- it is actually, as I was saying in the first half, it is a very operationally challenging business. So everybody who did, what should you say, I wouldn't say reckless, but we thought, thoughtless gold loan business or thoughtless gold loan growth are now finding some skeletons in their cupboard. So that is what is now, I think, what the regulator is also concerned about. So when people -- when companies probably should say for houses that we go in a calibrated manner with the decades of experience in this and our growth has always been maybe in the 15%, 20% range. So we should see quality also not being compromised. That is what is happening there. So probably, as you said, when regulators and the Finance Ministry, et cetera, ask the gold loan lending institutions and banks to really check their things, it is because of lack of, what should I say, the awareness of the intensity of the operations of this business. That is what is causing trouble there. I think now that the people take a step back and look into what is all these things. Probably they will also come to realize that this is not that easy and that we need to do very many things before they think of going forward in a big manner. Regarding the gold price impact, the small thing is that all these loans are short term. So suppose somebody has a gold loan today. He takes it off -- probably he bought it at the rate of maybe INR 3,000 per gram. So he would -- when he closes a loan of INR 1 lakh, he would take away 33 grams. But when he comes for the next gold loan of INR 1 lakh, he need not bring 33 grams. He will bring only maybe 25 grams. So that is the reason because this is churning because we cannot prevent our customers from not taking the gold. And we cannot ask a customer to give more gold than what is necessary. So when gold price increases, the tonnage definitely will come down -- will have to come down to because we can insist on more gold, et cetera.

Participant, please stay connected while we rejoin the management to the call. [Technical Difficulty] Ladies and gentlemen, thank you for your patience. We have the line for the management reconnected. Sir, go ahead.

So where did we stop? The gold price, yes, madam?

Yes, yes, I can hear you, sir.

Where did we stop? When did we get cut?

No, you were talking about the tonnage, sir?

I think When new customers come, the prices [Audio Gap] asking of them to bring more gold. So as what we have seen earlier also when the gold price goes up because these are short-term loans earlier loans get closed and those are higher -- for them the gold price was lower at that time. So they will have given more gold. But the new process takes the same amount of loan, they give only lower amount of gold. So I think that is the relevance there.

Mahrukh, also if you see, between December and March, the number of loan accounts also has gone up by almost 2 lakh numbers. And number of customers also has gone up by about 1.2 lakhs. So that is a significant achievement. No, it is not simply a function of a gold price increase. So the price of the gold increase. We cannot say that, no, we will not give the relative increase unless there is a serious concern from a risk management point of view. So we are not concerned about the price, we have to naturally give a LTV which market expects. And also, everyone asked whether there is a tonnage increase. This time, the tonnage also increased by about 4 tonnes.

Got it. And just a follow-up question on the whole ECL -- sorry, the Stage 2 loan, they've grown a lot?

Yes. so it is about 1,355, of course, there are a couple of factors. As usally, in the gold loan business, there is not a serious concern in terms of overdue accounts. There will be a lot of accounts where we would have collected interest regularly. Some customers would have paid interest regularly. Just that they have not closed the loan. We are also not too much concerned because the price of the gold, the security is adequate.

We're still in the money.

We're still in the money. So we don't mind giving some more extra time to the customer so that he gets time to repay it.

Next question is from the line of Jeet from Pinpoint Asset Management.

My question is on your loan growth guidance of 15% for next year. So how much gold price increase have you baked-in in this assumption? So hypothetically, I'm trying to understand the organic ability of the business to grow without any support from gold prices. So just to frame it the other way, if gold prices don't move for the next year, then what would be your loan growth per se?

I think -- okay, we'll go to historical data. In the last 2 years or maybe 2 years back also, gold prices had not increased as much as this, but still we were able to grow 15%. So I think that should answer that question. Even when the gold price is not moving or going up like this in previous years, we still did 15% to 20% growth year-on-year. So even with gold price rise or not, we were able to grow the 15%.

But then if I look at your active customer growth or your tonnage growth over the last 5 years, that's not a great number, right? I mean that is more indicative of the organic ability of the business to grow without support of gold prices, right? So if I just look at those numbers, then that does not extrapolate to a 15% growth without any support from gold prices.

You cannot compare this lending business with other source of lending business, See, this is a very short-term product. A customer will come and take a loan, he will close it at a later time. The same customer will come back again. So not necessary and the ticket size of these loans are also quite wide. A customer can come and take a INR 5,000 loan also. He can come and take a loan of INR 200,000. He can come and take a INR 500,000 loan also. So the customer addition is not really significant because the ticket size is so wide, unlike in the mortgage business, there is the average ticket size, the deviation from the average number will not be so wide. So the number of customers is not a real factor on this. But for providing more comfort and see how the business is running, we provide this number. In fact, there will be a lot of inactive customers for us who will come and take a loan at different points of time. So just by seeing what is the outstanding number of live customers and does not make a meaningful assessment of the business potential.

Okay. Sure, sir. Just second question would be what would be your plans for branch expansion for the next couple of years?

I think we have -- last year, we have grown about -- last quarter, we have grown about 225 branches. So going forward, we will go -- we will grow our branches maybe 150, 200 every year, yes.

Next question is from the line of [ Gao Zhixuan ] from Schonfeld Strategic Advisors.

Congratulations on the results. Just one question on the margin. So why did our yield go up so sharply quarter-on-quarter? And is that sustainable going forward in FY'25?

Can you repeat your question?

Sorry to interrupt you, but your voice was breaking. Can you come in a better reception area, please?

Am I audible now?

Yes, sorry, we can hear you, but your voice is breaking. Can you check if you have a proper reception at your end?

Anyway, please try, please try to ask.

Okay. So my question is on the yield. Why did our yield go up so much on a quarter-on-quarter basis? And is that sustainable going forward? How should we think about it by margins?

So in terms of the yield. So in third quarter, the yield was 17.79%. And in the fourth quarter, it is 18.27%. So the differential interest is about 40 basis points. See in gold loan business, as we always say, it is a smaller ticket size loan. We disbursed about 65,000 loans in a day, a similar number comes back also as a collection. And we operate it across the country and different parts, we follow different schemes. And this scheme now carries a higher rate. We keep -- there will always be a fluctuation and changes in the rates. And sometimes, we regularly offer rebates to the customers when they come and remit the interest. So when there is a delay, the discounts given to the customers is lower. So when you consider all these factors, the 40, 50 basis points variation is quite normal. So for example, in the first quarter, the yield was 18.08%. It came down to 17.65% in the second quarter. Third quarter, it went up to by about 14 basis points to 17.79%. And in the fourth quarter, it is 18.2%. So these fluctuations are quite normal for this kind of a business.

So when you say that we -- it's partly because of smaller discounts or lower discounts that are given to a customer, is it a quarterly phenomenon or going forward because of gold price or because of easier competition, are we going to give less and less discounts? How we should think about that?

No, it is not that -- see, we have different schemes. We have a 12% interest scheme. We have 14%, 16%, 18%, 20%, we have all sorts of interest schemes. So if one geography, the interest scheme of 16% is going up. So the yield would be better. So if one quarter [Audio Gap] and the yield will be lesser. So overall, the geography, there will always be some ups and downs where people take higher rate loan or low interest loans, et cetera. That is why it is because and also it is short term, the average tenure is 4 months only. It's not that we give a 5-year loan and 10-year loan and we increase the interest, no, it is given for a very short period. The average tenure is only 4 months.

Got it, sir. And on the cost of funds, how should we think about it? Should we expect further increase on what's our incremental cost of fund?

No, this quarter, the average borrowing cost is somewhere around 8.45%, 8.5%, which is what the number we had discussed of course there is some averaging impact also. I think that cost of borrowings would be somewhere around 8.65%. The incremental cost of borrowing is almost around 8.8% to 9%. So I think in the coming quarters, I think the overall borrowing costs will move towards 9%. But given the fact we have a wide -- larger return on assets, the impact on the -- impact because of such increase, 25, 30 basis points is not material, we can always decide to pass on this incremental cost to the borrowers also.

Next question is from the line of Abhijit Tibrewal from Motilal Oswal.

Sir, congratulations on a good quarter. Sir, first thing is, I mean, in your stand-alone book, the non-gold portion of the book, I mean, I think it's on a very low base, growing very, very fast. So just wanted to understand, I mean, in addition to salaried personal loans, what other products are we doing there? And what is the yield maturity of these loans? Also, I mean, the product of personal loans that is often bundled with the gold loan, is it also sitting in the stand-alone book?

Okay. The loans probably the personal loans are 2 years, 3 years product. The home loans are definitely 5 years, 10- year 15-year product. These are all stand-alone. Nothing is bundled with any gold loan. We only get the data of a customer who has been -- who has dealt with us -- a customer who has dealt with us, we know the customer is there. So we offer him, yes, you have dealt with us with a gold loan, you have taken a gold loan earlier with us, et cetera, why don't we offer because all these customers take similar loans from elsewhere.

So just to clarify. So it's not that we have started this business, and we are growing aggressively. Personal loan, we have started almost 8 years back or 8 or 10 years back. And we have been gradually building this book, and we have been gradually building the expert, and we have scaled it up in a calibrated manner. So now we have a good team in place to scale up this activity. We have a proper credit assessment process, there's a continuous engagement. I think we have engaged McKinsey also in terms of refinement of our underwriting process, and in terms of fine-tuning our operational process. So it's not that we are scaling it overnight. It is almost like 8, 10 years of hard work behind this. And there is a committed team working on this business. And also, we have a business loan book of around INR 500 crores. So [Audio Gap] and we are scaling up. So it's not that we are -- probably you might feel that we are all of a sudden scale up, but we started, if you look at our financials in the past, there is always another loan book, which was always there. It is the -- the initial proprietary mode preparation work, which was done in the earlier years. Now we are getting the benefits of those hard work.

Got it. Sir, but almost INR 3,000 crores of non-gold book that we have in the stand-alone, even that is unsecured, right, largely unsecured?

Some of it is -- the housing loans are secured...

Okay. No, there is a INR 500 crores loan given to wholly owned subsidiary, group company, wholly owned subsidiary. Other than that, it is almost unsecured.

Second question that I had is, I mean, a lot of discussion has already happened on gold prices and how it can help gold loan growth? Rather than dwelling on that, I just wanted to understand, I mean, maybe fourth quarter or these 2 months that you have seen, what proportion of our disbursements are in the nature of top-up loans that are happening?

Okay. So customers have taken a loan, he may close the gold loan and take a take fresh loan or he may ask for top-up also. So there is a top-up definitely happening because people -- some people who are aware that he is able to get some more money certainly comes and take it. We don't go after the person.

Got it. So sir, where I was coming from is, I mean, across the industry since gold prices are up, right? Very often, we hear a lot of players who voluntarily reach out to customers, given that the effective LTV comes down, we are deep in the money. So a lot of players effectively reach out to customers suggesting that they can pick top-up loans now given that gold prices have moved up is what I was trying to understand.

Even today also, the average LTV on the gold loans is around 63%. So if customer wants certainly he come and take a loan of up to 75%. Then the average LTV should have been 75%. Now the customer is not coming because he may not have a requirement probably the service level people or the branch level people might reach out to the customers and ask them whether they need a loan. So somebody pledges a chain of 20 grams, he may not need a loan for the entire 20 grams. He might take a loan for INR 20,000. And later when he has a requirement he will come and take another INR 20,000. So that cannot be treated as a top up. It is just that when his need increases, he will come and take a load. And unlike other lending products, it's so convenient that he can get a loan taken in 5, 10 minutes.

The most important thing is still our loan to value is only 63%.

Just one last question. Oommen sir, you have explained, maybe there's some averaging thing, which is why the cost of borrowings look lower. But from what you were guiding essentially is that over a course of time, cost of borrowings should increase towards 9% which would suggest that going forward, can we look at some margin compression in FY '25?

If the rates are growing up very slightly, only a few basis points, we try to absorb it. Otherwise, if it is going up, we'll pass it on to the customer because customer will take a loan from elsewhere. If the overall rates are going up whatever loan is taking from any bank et cetera the rates would have gone up and certainly, they will be -- we will justified in charging higher rates also. So small fluctuations we will try to absorb it but if it's higher, we just pass it on to the customer.

And 25, 30 basis points increase, our return on assets can easily absorb. If we want, we can pass on to the customers also. That is the point.

Next question is from the line Raghav Garg from AMBIT Capital.

I just have one question. So I think this year, the total growth in the customer base has been about 7%. You've added about 3.5 lakh customers. Now going into FY '25 with one of the larger players being out of the market, do you anticipate that your customer base growth could be say in the range of 9%, 10% or higher than 7% what is delivered in '24. That was my only question.

Raghav, we don't give a guidance in terms of customer addition. We reach out to the market, the amount of marketing spend that we have, it's quite significant. So the objective is to reach out to as much as new customers. There is a lot of market potential is there. There is a lot of untapped customer base is there. So we try to reach out to all sorts of marketing mechanism. So we don't want to give a specific number in terms of the customer addition.

We have given a guidance of 15%.