Established franchise and leadership position in gold loan segment

MFL has a track record of around two decades in the gold loan business and is Indiau2019s largest gold loan focussed non-banking financial company (NBFC) with a total portfolio of Rs. 56,689 crore (of which 99% is gold loan) as on June 30, 2022; the portfolio grew by 7.7% on a year-on-year (YoY) basis. The consolidated portfolio stood at Rs. 63,444 crore in June 2022 compared to Rs. 58,135 crore in June 2021, of which gold, microfinance and housing accounted for 88.5%, 7.4% and 2.3%, respectively.

As on June 30, 2022, MFL had an extensive pan-India network of 4,617 branches; 60% of its branches are in South India, where it has an established franchise. The strong brand value of Muthoot, its experienced promoters and senior management team, and its efficient internal control and audit systems are expected to support the overall business growth going forward.

Healthy earnings performance; moderation in the recent past

The companyu2019s consolidated net profitability remained healthy, with its return on managed assets (RoMA) at 4.4% in Q1 FY2023, notwithstanding the moderation from 5.5% in FY2022 and 6.1% in FY2021 (6.5% in FY2020). The NIM {as a percentage of average managed assets (AMA)} moderated to 9.1% in Q1 FY2023 from 10.6% in FY2022 and 11.4% in FY2021, notwithstanding the improvement in the leverage, as MFL offered gold loans at lower yields for a short duration (H2 FY2022 and Q1 FY2023) due to competitive pressure.

The operating profitability was also impacted due to the increase in the operating cost ratio to 3.5% in Q1 FY2023 because of advertising costs and higher corporate social responsibility (CSR) expenses from 3.0% in FY2022 (3.3% in FY2021; 4.3-4.6% during FY2017-FY2020). However, the earnings performance remains supported by the low credit costs (less than 1% over the last 10 years and average of 0.5%) in the gold loan business. ICRA expects the net profitability to stabilise at 4.0-5.0% over the medium term.

MFLu2019s (standalone) net profitability was 4.7% in Q1 FY2023 and 5.9% in FY2022 (6.5% in FY2021 and 6.8% in FY2020). The annualised return on average net worth (standalone) moderated to 17.5% in Q1 FY2023 from 23.5% in FY2022 (27.8% and 28.3% in FY2021 and FY2020, respectively)

Capitalisation to remain comfortable over the medium term

u2013 MFL has a comfortable capitalisation profile with the standalone gearing improving to 2.5 times as on June 30, 2022 from 2.8 times as on March 31, 2022 (3.1 times as on March 31, 2021). The improvement was driven by the limited portfolio growth and the moderation in the on-balance sheet liquidity, which led to a net decrease in the external borrowings. The consolidated managed gearing stood at 2.7 times as on June 30, 2022 (2.9 times as on March 31, 2022). The company is expected to be comfortably placed to meet the medium-term capital requirements of its subsidiaries without affecting its own capital structure. ICRA expects MFLu2019s consolidated managed gearing to remain at around 3.0 times over the medium term