CRISIL downgrades rating of Muthoot Fincorp's debt

Rating agency CRISIL has downgraded ratings for Muthoot Fincorp Ltd’s (MFL) debt instruments and bank facilities to ‘A-‘, from ‘A’. The rating action factors in leveraging of balance sheet by MFL to acquire real estate properties from partnership firms owned by the Muthoot Pappachan Group.

The rating agency, however, reaffirmed the rating for MFL’s short-term debt at ‘CRISIL A1’.

MFL is part of the Muthoot Pappachan Group, and has two subsidiaries — Muthoot Microfin Ltd (MML) and Muthoot Housing Finance Company Ltd (MHFCL; housing finance). MFL promoters own 75 per cent in Muthoot Capital Services Ltd (MCSL), a two-wheelers finance unit.

MFL, engaged in lending against gold jewllery, has purchased and made advance towards acquisition of real estate assets aggregating to Rs 290 crore in FY16. It is further likely to acquire property worth Rs 250-300 crore. This acquisition will be funded via debt of Rs 200 crore payable after five years, and a mix of long-term debt from promoters, equity, and sale of fixed assets and investments. 

Muthoot Estate Investments (MEI), an MPG-owned partnership firm, was accepting deposits from the public and had investments in real estate properties, mostly within Kerala. At the Reserve Bank of India’s (RBI’s) instance, MEI is planning to pre-pay these deposits (Rs 760 crore dues as in March 2016). 

It also proposes to sell its real estate holdings to MFL, its group companies and directly in the market. The proceeds would be used to repay/prepay the public deposits mobilised earlier.

To facilitate this process, MFL has purchased/made advance towards acquisition of real estate assets aggregating to Rs 290 crore in FY16.

MFL's credit profile will be impacted in this process, as the acquisition brings with it some of the risks associated with the real estate sector.

The rating continues to reflect the extensive experience of MFL's promoters in the loan-against-gold-jewellery business and its moderate capitalisation. These rating strengths are partially offset by the company's modest, though improving, profitability and geographical concentration in its revenue profile, CRISIL said.

Overall assets under management (AUM) of the Muthoot Pappachan Group is expected to reach around Rs 17,000 crore by March 2018, from Rs 11,600 crore as on March 31, 2016. Proportion of gold loans has declined to around 60 per cent of the overall AUM, from around 90 per cent over the past five years. Branch network, too, has grown to 3,645 as on March 31, 2016, from 2,188 as on March 31, 2012.

The net worth and gearing of Rs 1,420 crore and 6.7 times, respectively, as on March 31, 2016, at a standalone level, reflect the moderate capitalisation. At the group level, net worth and gearing stood at Rs 1,580 crore and 7.0 times, respectively, on the same date.