Muthoot Microfin Limited (MUTHOOTMF) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Muthoot Microfinance Q1 FY '27 Earnings Conference Call. [Operator Instructions] Please note this conference is being recorded. I now hand the conference over to Mr. Arun Alkara from JM Financial. Thank you, and over to you, sir.

Thank you. Good morning, everyone, and welcome to the Q1 FY '27 Earnings Conference Call for Muthoot Microfin Limited. First of all, I would like to thank the management of Muthoot Microfin for giving us this opportunity to host this call. From the management side, we have Mr. Thomas Muthoot, Chairman; Mr. Sadaf Sayeed, Chief Executive Officer; Mr. Praveen T., Chief Financial Officer; Mr. Udeesh Ullas, Chief Operating Officer; and Mr. Rajat Gupta, AVP, Investor Relations. I would now like to hand over the call to Mr. Sadaf Sayeed for his opening remarks, post which we can open the floor for Q&A. Thank you, and over to you, sir.

Thank you very much, Arun. Very good morning to all of you on behalf of Muthoot Microfin. I hope all of you would have received our investor presentation, financial results and also the press release. I mean before getting into the numbers, I just wanted to mention that this is a turnaround that we have been talking about the financial -- the quarter 1 performance actually reflects what strategy that we have developed and articulated it is getting into motion and getting into execution. If you look at the industry itself, the industry might have contracted in terms of AUM and numbers. But from the point of view of quality of assets, it has started to improve. The disbursement has started to improve. And there is a clear distinction between the well-capitalized, well-managed companies and some of the companies who are slightly at a lower AUM. So the companies which are slightly larger are getting good amount of support in terms of funds, and they are able to disburse and are growing and which is what is translating and Muthoot is at the outlier. We have had a very good quarter, quarter 1. We did around INR 2,644 crores of disbursement, which is the ever highest disbursement in the Q1 as compared to the last quarter, it is around 50% -- 49% improvement over the disbursement last financial year in the Q1 itself. If you look at from a perspective of the way the asset quality is improving, it's improving rapidly. We are at around 97.97%, almost 98% of overall collection on time. Bucket remains 99.9%. So the loans that we are lending are really performing well. Almost 65% of our book now represents disbursements, which have happened after April 2025. And in that book, the asset quality is very good, 30-plus is just 1.2% and 90-plus is much, much lower. The strategy that we have articulated in terms of strategic diversification that is playing out as of Q1 end, 76% of our assets are income-generating asset JLG loans and around 24% is non-JLG loan. We have focused on individual loans. So that portfolio stands around INR 3,200 crores, and that is really, really performing well. There is absolutely very minimal delinquency, 0.02% is the 30-plus, and there is no 60-plus as of now, no 90-plus. So that portfolio is really performing well. And our strategy is to focus on the creamy layer of the customers that we have. We have around 9 lakh customers in our portfolio, which are 700 score plus. And our effort is to focus on those customers and make sure that we become the #1 priority lender for those customers. And with our technology, our app and our diversified products that are available to the customer will be able to make us top-of-the-mind recall for that customer. And our focus is to create products which cater to their needs. We have an individual loan, which caters to their needs of growing business. We have gold loans, which is also there to cater to their emergency needs. We have loan against property, which is there to cater to their need of expansion and bigger kind of improvement in their business or in their living livelihood, whatever they want to do. So -- and we are soon introducing another product in this Board meeting, we have taken an approval for consumer durable loan, which is also needed for the improvement of living standards. I think from a company point of view, we are at a very sweet spot. Currently, we have a huge amount of liquidity. We have almost INR 5,000 crores of sanction in our hand, and this is without counting the credit guarantee scheme of INR 1,000 crores that is available to us. At the same time, our cost of fund is coming down. In the quarter, we have reduced our cost of fund from 10.27% to 10.14% -- 10.13%, 14 basis point reduction has already happened in the Q1 itself. And this is before the benefit of the rating upgrade. We had a rating upgrade during the quarter. We are now AA- CRISIL rating. And the benefit of that rating will come in the coming quarters. So our cost of fund is likely to reduce. Even the benefit of trade guarantee scheme, we have not yet availed. We have just taken INR 200 crores. Balance INR 800 crores is still available for us to draw down. So I think from a cost of fund point of view, we are at a very sweet spot. The interest -- the cost of fund is reducing for us and incremental borrowing cost is around 9.8%, which was already at 9.9%. We feel that in the financial year, we should be able to come into single digits in terms of our cost of fund and availability of fund is already there. The asset quality is improving very rapidly. What we are seeing the ground, the collection is improving very much. Our overdue collection for the quarter was around INR 53 crores, which is almost 25% higher than what was the overdue collection in quarter 1 last year, though it has a lot of scope even further because in March, we had done INR 70 crores of this collection. We can further improve in coming quarters. But this overall improvement will definitely help us improve the asset quality further. It is improving rapidly as such. Plus diversification is helping us to have a greater wallet share. I think our investment in the app is really helping us to retain our customers. We have around 2.1 million customers who have downloaded the app to Muthoot Mahila Mitra app. And the way we are looking at it is to create an ecosystem on the app where customer can meet her immediate need, long-term needs and sustainability needs through that app, and we will be focusing on the creamy layer of these customers or 100% of the individual loan customers, which we have identified with a score of 700 plus are already on the app, and we are really, really rigorously following that they are using our app regularly and they are not of the app. 100% of the repayments in the individual loan are digital. There is no cash collection. Overall collection also has reached to around 40% digital. And every quarter, we are seeing almost 6% improvement in the digital journey. And the guidance that we have given of around 75% digital collection by 2030, I think we should be able to achieve that much earlier. Overall, I think the performance of the company has been great in terms of income also, we have increased our earnings by 20% if you look at quarter-on-quarter and 5% -- 5% quarter-on-quarter and 20% year-on-year. The improvement can be seen in the PPOP. Our PPOP has improved by 43% year-on-year and around 3% quarter-on-quarter. Our operating cost is coming down. Our operating cost has come down to around 6.3%. I think with the disbursement growth, which we are seeing and the efficiencies that we are building in our operations through using technology, this operating cost will come down further. The credit cost is rapidly improving. We have further reduced our credit cost from last quarter of 2.8% to 2.6% this quarter. And this is even below the lower spectrum of our guidance. And we feel for the remaining half -- remaining year, this credit cost will remain lower. And definitely, this will help us to improve our ROA and ROE. I think from a growth perspective, we have revised our guidance to 20%. We feel that with the momentum that we have in the quarter 1 and looking at the festive season approaching us and the way the liquidity is available to us and the demand that is there at the ground, we definitely feel that 20% is a growth that we can easily achieve. And with the success of the products that we have introduced and the way the customer is appreciating, definitely, that is helping us and giving us the confidence that 20% growth we are able to achieve. We have also done a detailed study on our portfolio and looked at where the customer is moving in terms of borrowing. The thesis that we have initially articulated that now it's a time to look at meaningful financial inclusion. We are progressing in that direction, and we are focusing on providing customers and the household that we are serving products as per their need. We have seen in the industry that secured and unsecured business loan is the number one need of the customer. The number two need is the gold loan and number three need that the customer is the housing loan or a 2-wheeler loan. So all of these products are available with us. and we are catering to the customer. In terms of our overall performance, we have seen the AUM growth of 18% year-on-year. We will continue to build this AUM with quality and look at the customers' need and continue to improvise on products and focus on products which are catering to our customers' needs and also at the same time, make sure that we build efficiencies from our cost of fund point of view, our asset quality and operating expenditure. I think I'll stop here. I'll open up the floor for questions. We look forward to your participation and your support.

[Operator Instructions] First question comes from the line of Varun Dubey with Share India Securities.

Congratulations on your strong set of results. I mean your results really display the turnaround that is happening in microfinance industry. I just had a few questions. One -- the first one is on the yield side because the overall incremental cost of borrowing has come down by around 10 basis points and the NIMs are almost flat. So what was the yield for this quarter? If you can throw some light on that? And also on the disbursement side, your company was aiming around INR 1,000 crores of disbursement per month. So that is around INR 3,000 crores of disbursement per quarter. So I mean, this year, this quarter, it was around INR 2,600 crores. So do you think the disbursements could come back to INR 1,000 crores per month in coming quarters? So there would be a substantial increase in disbursement and that could actually lead to a better AUM growth of more than 20% than the 20% guidance that we had given.

Yes. So I think -- thank you very much for your question. INR 1,000 crores per month disbursement will definitely be achieved. Like I was talking about the whole financial year. On an average, if you see the disbursement that we are planning would be in excess of INR 12,000 crores. So INR 1,000 crores per month kind of a disbursement number would be achieved. At a quarterly level, usually, the first quarter is the slowest quarter, but considering the slowest quarter also, we have done INR 2,644 crores of disbursement. I think it's a good momentum that we have built in. Definitely, Q2, Q3 and onwards, you will see these numbers traveling upwards definitely. On the yield part, if you look at our portfolio, the overall lending mix is there. So we are doing group loans at around 24.85%, individual loans at around 23.5%. Then there is a LAP loan, which is between 18% to 22% and gold loan, which is at around 20%. So blended yield, if you look at the portfolio, would be somewhere around 23%. But as we calculate, as the overall yield on the portfolio is calculated based on the denominator, which also includes the NPA portfolio, which is not yielding and which has been a historical portfolio, that's why the yield is slightly flat. But as we see more and more collection coming in and more and more of that portfolio going out, the yields will start expanding. And the more portion of the book would be performing portfolio. So the yield expansion will happen. Already, if you look at from a NIM perspective, as compared to the last financial year, the NIMs have improved. We are -- last financial year, if you look at quarter 4 or the full year, we are flat. But if you look at from a quarter 1 perspective, there is a 50 bps of expansion already has happened. And this expansion will continue, both from the side of the yield as well as reduction in the cost of fund, and that will translate into better profitability, better ROA and also efficiencies will improve. If you look at our per branch AUM which was in Q1 last year around INR 7 crores. It has already reached to INR 8.65 crores. So there's almost a 20% more than like what it was in Q1. So operating efficiencies are also kicking in. So overall, I think the expansion on the ROA would be there. That's why we have revised the guidance on the ROA as well. We definitely think that we will be on the upper spectrum of our guidance in terms of an ROA.

Okay. Okay. Sir, I just wanted to understand one more thing. The company is getting into the consumer durable business. So can you throw some light on that? I mean, what kind of business or AUM are you expecting from the consumer durable side? And what would be the yield that the company would generate from here?

Sorry, come again. What is the business?

The consumer durable business, I think so you highlighted about this in your starting remarks, right?

Yes. Yes, consumer durable business you are talking about.

Yes. So what kind of AUM are you expecting to generate from here? How big this could be? And at what rate, I mean, would you be thinking over here?

Yes. So the consumer durable yield would be similar around 22% to 23%. And we are starting with a pilot of around INR 500 crores. And this is something which we have strategically thought. If you look at our PTC transactions and our CP transaction, they are happening at a rate of around -- coupon rate of around 7.7%. And if you include all the cost, which is involved, it is around 8%, 8.1%, 8.2%. So our idea is the consumer durable loan usually are shorter tenure loan, a 6-month or 9-month kind of a tenure. We will be utilizing CP facility for this. This will really give us a good yield on the portfolio because we will be borrowing at around 8% to 8.1% and building a portfolio, which will give us a yield of around 22% to 23%. So that will really give us good kind of margins on our business. This is at a pilot stage of INR 500 crores. Definitely, as it plays out, we will expand it. We have looked at the industry, the delinquency in this portfolio are around 1%. So -- and 90-plus is sub 1%. So definitely, this is something that is very good and also our customers are wanting to avail these facilities.

Okay. Great, sir. So one last question I just wanted to understand. I mean, recently, we have seen floods in Assam and some other places as well. And I think so your company has just entered the Assam area. So I mean, are you facing any challenges over there? I mean, should we expect some kind of deterioration in your books because of these issues?

So in Assam, the flood or this kind of a water problem is kind of an annual phenomenon. So one is that this is in upper Assam. We have no exposure to that local state. We are at lower Assam. So our portfolio is not affected as of now entirely. And second aspect is we take natural clamity insurance for all our customers. So that impact is not there at all in our portfolio, even if there is some flood that may come, we don't have any impact on our portfolio. Wherever there are excessive rain even in some parts of Kerala, there is no impact on our portfolio as of now.

[Operator Instructions] The next question comes from the line of Prithviraj Patil with Investec. The participant has been disconnected. [Operator Instructions] Prithviraj, can you hear us?

Yes, I can hear you. Yes. So I had a question on the direct assignment. So I see that there were some direct assignments done this quarter. So are we booking that income in the interest income line item itself or that's the first on the recognition policy of that income. And then the second is on the co-lending mechanism and the referral mechanism. If you could just throw some light about how that gold loan referral business is moving? Yes. So these 2 questions.

Sure. On the gold loan perspective, I can say that on the gold loan referral business, we are doing really well. We are disbursing almost INR 100 crores every month since the gold loan -- co-lending guidelines came in and then there was a gold loan guidelines also came in, in April. So in the first quarter, the business was minimal. But post the first quarter, every month, we are disbursing INR 100 crores. Already, we have disbursed around INR 360 crores of gold loans, and it is scaling up really well. On the DA side, I'll ask my colleague, Praveen, to kind of explain that. Praveen?

Yes. This is Praveen this side. So the income from direct assignment is looked through the net gain on fair value changes. It doesn't go through the interest income portion. It goes through the net gain on fair value changes so that it can be tracked separately. And all the EAS is reported through that account. So last quarter, we did around INR 355 crores. Last financial year, we did around INR 1,600 crores of DA. So it's a consistent borrowing that we do. And mostly, we offload the nonqualifying portion of our portfolio through the DA mechanism so that we can get the benefit of capital adequacy as well as asset on the balance sheet.

And in terms of quantum of DA, I think Praveen, what is the quantum of DA?

INR 355 crores this quarter, last quarter.

Yes. And on the gold loan, one thing I wanted to mention that we have done a propensity analysis among our customer that what is the propensity to borrow what is the first loan after the microfinance loan the customer takes. So gold loan comes as one of the top priority for the customer that after microfinance, the first loan that the borrower takes is a gold loan. So there's a huge potential of doing gold loan business. And we have seen among our customer, Microfin customer itself there is INR 11,000 crores of gold loan outstanding with all various lenders. So definitely, our effort is to bring that to the Muthoot fold. And we have started that journey, INR 100 crores per month we are already doing. I think there's a huge potential of this. And this product will become a unique product for Muthoot Microfin because if you compare to our competitors, not everybody has the capacity to offer gold loan products because this requires a lot of infrastructure investment. But because of our parents association and the network that the parent has created that we are able to offer this product easily. And most importantly, it requires a lot of credibility and trust in the mind of the customer that our precious jewelry or precious gold will remain safe. And being in this business for more than a century, we have built that trust and we have built that credibility as Muthoot. Definitely, we would have the advantage in terms of customer trying to pledge the gold. And with that INR 11,000 crores, which is among our customer itself, we definitely feel that a good amount of 30% to 40% of that portfolio, we should be able to bring into our fold. That has been our effort, and we are focusing at that layer of customers.

So if I can ask a follow-up question. So I just had a question on the branch network. So for the gold loans, we do a co-lending. So are we investing in the branch network or are you using the parents gold branches itself for parking the gold loan or parking the gold?

Yes. So we have understanding between the parent and us. We have an agreement where the storage of the gold and assessment of the gold is done at the parent level. The sourcing of the customer because it's a microfinance customer, we source the customer and we handhold the customer, take them to the branch with the gold and help them to assess gold. And the gold is stored at the Fincorp branch. It's a co-lending arrangement with 60-40, 60% remains on our book, 40% remains on parents book. But in case of referrals, it remains on parents book, but we get an earning from that portfolio of 1.5% of referral that is there. But the idea is to not to invest and duplicate work. So we don't have a gold loan specific branch. It's the parents branch where we do this. And our branch becomes a contact point from the customer. And we are not only focusing on Muthoot Microfin customer, we are also bringing in other customers because gold loan currently works on our referral. So one customer pledges it shells in a neighborhood, the other person also comes in. So we are doing. So it becomes a good mechanism to acquire new customers as well.

The next question comes from the line of Vishal Nerolia with ICICI Securities.

I basically have 2 questions. First is there are some FMCG companies which you were talking about some kind of slowdown in rural construction because of the El Nino and uneven monsoon. So if you can give your take about what is happening on the ground? And in case if there is some impact, will our growth guidance be maintained? And second is what proportion of AUM currently is under CGFMU guarantee?

Thank you, Vishal. Like in terms of the guidance, and we don't see any change happening immediately. We think that we can confidently achieve our -- we have just revised the guidance upwards to 20%. From the El Nino point of view, the deficit of rain, which was there initially was around 43%. Now the latest number shows it's around 12%. So deficit has come down and rains are continuing in northern belt as well as Southern belt. So we feel that ultimate deficit would be not so significant that may impact like crop yield or affect the businesses. But we have done a detailed analysis among the agri or agri allied businesses our portfolio, hardly 2% of our customers are directly dependent on these activities, which are in a sensitive areas, which there could be a shortfall of rain or rain deficit. Some of the parts of Maharashtra, Karnataka that are sensitive to it. So in that, less than 2% of our portfolio is there and majority of the agriculture or activity that people are involved are in animal inventory and in fisheries and other activities. So they are not directly impacted by this. So we don't see too much of impact of this. From a point of view of inflation because of low supply and global macroeconomic event, I think rural inflation is slightly higher than the urban inflation. But what we see generally in this scenario that offtake of loans increases, people generally take more borrowing. But overall, we have seen even cash flows improve in rural area. That is what we are witnessing in our collections as well. The collection efficiencies are improving every month, and that is why we are able to reach around 98% collection efficiency overall. And because of the rural cash flow improving, we don't see any challenge as of now. And for any sort of impact of El Nino, we also have the natural clamity insurance, so even drought is covered there. So from that point of view, we would be insulated. I think your second question was pertaining to -- sorry, can you repeat that?

What kind of -- what is the proportion of AUM under CGFMU guarantee?

Yes. So we have applied for CGFMU guarantee. We are yet to get that in effect. The portion that we are looking at is around 20% to have that CGFMU guarantee.

The next question comes from the line of Nilesh Patil with Share India Securities. As there is no response, we'll move on to the next question. It's from the line of Chintan Shah with [indiscernible].

Am I basically looking at the presentation we are uploading in which I am seeing the active customer -- active clients, which is actually year-on-year and Q-on-Q degrowth. There is a reason because the asset quality was not that good in that time. And will it improve in Q2 and Q3 onwards? That is my question, sir.

Yes. So definitely, I think from a customer point of view, if you look at from an industry perspective, industry at peak had around 8 crore customers, which have reduced to around INR 6 crores now. So almost 25% reduction in the customer base. If you compare from that perspective, we have had a minor kind of a Q-on-Q reduction of 0.6%. So -- but we have taken a step in terms of recruiting new customers. So the products that we are offering now like gold loans, consumer durable loans, also like from the traditional...

Yes, sir. Sorry to interrupt, the line of the management has been disconnected.

I'll take that while you join. So I think we have introduced the new customers, new products such as consumer durable, we have gold loans. And we have also expanded our network to the Northern and East and Western geographies where we are acquiring more new customers. So we are expecting this to be improving from Q2 onwards. It is not that we are adding customers, but at the same time, there are certain customers we are either through write-off or closure we don't want to renew, they are moving out of the system. So the Q2 onwards, the customer base will start improving.

Okay. Just a second question, sir. Any from the branch point of view, there is a decline in Y-o-Y basis, so it will improve in Q2 and onwards?

Yes. So on the branch network, we have focused on 2 areas, which is Andhra Pradesh and Assam, which are the newer comparatively. So where the expansion is. Andhra Pradesh, the expansion is more. So the focus is to have a deeper penetration with our customer, have a larger wallet share. So we will be focusing on that at the same time, expanding our branch network as well. We will look at some of the newer territories that we are exploring. But definitely, in the coming year, we will open more branches. So this branch number will go up.

Okay. Any idea for the FY '27 total number of branches you will add or something like that?

So we will be in the range of 1,750 to 1,740 branches. We are right now around 1,670 branches.

The next question comes from the line of Ashlesh Sonje with Kotak Securities.

Sir, first, a couple of questions on the MFI business.

Sorry to interrupt. Mr. Ashlesh, your voice is coming very low. Could you please use your handset or speak a bit louder?

Is this better?

Perfect.

Sir, first, a few questions on the MFI business. Have you taken any price hikes recently on the MFI portfolio? And are you considering any hikes going forward in the rest of this year? And secondly, within MFI, what are the key areas which are being discussed at the SRO level today?

Yes. So on the price hike, we had increased the rate at the end of the quarter. So we had increased the rate by around from 23.5% to 24.85%. So there has been an increase in the yield definitely because of the risk and the credit cost that was there last year. This year, we may evaluate if there is a requirement of increasing rate, we will increase. But at the moment, we don't see that. In fact, we are getting larger kind of funding at a cheaper cost. So we may share some bit to our customer. But largely, I think it will go into expanding of our NIM. On the SRO bit, I'm not the official spokesperson, but I can tell you from my interaction, SRO has taken initiative to ensure that the multiple lending and overlending is avoided. I think that is playing out well. If you look at our customer base itself, we are now around 46% of our customers are absolutely unique to us and another 30% of the customer are us plus 1. So I think that is what is playing out in terms of overall overleveraging customers are moving out of the system. So that's a good trend and overall delinquency of the industry is also reducing. Another important role that SRO is playing is to provide liquidity to the sector. So there is a INR 20,000 crores of credit guarantee scheme that is available with the government. The offtake in that scheme is slightly slow. But definitely, SRO is engaging with the government and the lenders as well and ensuring that, that fund is sufficiently utilized. So those are the 2 most important initiatives right now SRO is doing. But apart from that also, the most important activity is to ensure that they monitor what is going around in the industry and evaluating that if there is anybody who is indulging in a deviant behavior that remains an ongoing activity. So I think that is an important role that SRO is playing currently.