Muthoot Finance gains after Moody's rating action

Muthoot Finance rose 1.88% to Rs 1195.10 after Moody's affirmed the company's corporate family rating (CFR) at 'Ba2 CFR' and revised its on the same outlook to 'stable' from 'negative'.

Moody's Investors Service said that the affirmation and change in outlook to stable reflect Muthoot's steady credit profile despite the economic contraction caused by the coronavirus pandemic. In addition, the rating action reflects Moody's expectation that Muthoot's financial performance will remain stable over the next 12-18 months, supported by its leading franchise and track record of providing loans against gold jewellery, superior profitability and strong capitalization.

Over the past 6 months, a surge in gold price - which backs about 90% of the company's loans -- helped improve loan collections and disbursements, with both exceeding their five-year averages in the quarter ended September 2020. Similarly, higher gold prices helped lower Muthoot's gross nonperforming loan (NPL) ratio for the gold portfolio to 1.3% at the end of September 2020 from 3.4% a year earlier.

Nevertheless, the asset quality of Muthoot's non-gold loan segments, which includes home, vehicle and micro finance loans, is susceptible to the challenging operating environment.

Muthoot's profitability has somewhat moderated, with its return on assets down to 5.8% for first half of fiscal year ending March 2021 (fiscal 2021) from 6.6% a year ago as asset growth outpaced net profit growth. Nevertheless, Muthoot remains the most profitable amongst Moody's rated banks and non-bank finance companies in India, the credit ratings agency said.

Muthoot's funding also remains steady as the secured and highly liquid nature of its loans enables it to obtain funding from banks and debt investors. Over the past year, the company has diversified its funding sources to more stable, long-term funding sources -- a credit positive.

Muthoot Finance is the largest gold financing company in India in terms of loan portfolio.

The NBFC's consolidated net profit rose 2.44% to Rs 930.79 crore on 17.36% jump in total income to Rs 2,824.19 crore in Q2 September 2020 over Q2 September 2019.

On a year-to-date (YTD) basis, the stock has added 56.83% while the benchmark S&P BSE Sensex has added 11.89% during the same period.

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