Muthoot Capital Services Ltd Q2 FY2024 Concall Summary

Key Takeaways

• Clean-up quarter, growth restart: An ARC sale of INR235 crores slashed GNPA to 11.67% and H1 PAT surged 210% YoY, but the real story is that Q2 was the first quarter where disbursements (INR328 crores) exceeded collections, ending a long stagnation.
• AUM reset masks underlying build: Reported AUM fell because of the ARC derecognition, but business jumped from INR200 crores in Q1 to INR330 crores in Q2, and management guided INR600 crores of disbursement in Q3.
• A new operating model is being wired in: Four independent SBUs, a business correspondent partnership with Muthoot FinCorp, and a digital sales unit are being built simultaneously, a heavy lift that management calls a potential "game changer."
• Profitability optics are noisy: Q2 PAT of INR16 crores (ex-exceptional) was lower than Q1's INR24-25 crores because the ARC transaction reduced impairment reversals; without it, PAT would have been around INR28 crores.
• What to watch next quarter: Whether the INR600 crores Q3 disbursement target materializes after a weak Onam, and whether the SBU build-out stays on track for a Q4 operational launch without inflating opex.

The ARC Clean-Up & Its Profitability Distortions

• The transaction: Sold an INR235 crores NPA pool to Phoenix at 50% valuation, covering 60% of the total NPA portfolio. A decision on selling the remaining INR160 crores pool may come in Q4, contingent on feedback from banks and PSUs on NPA reduction progress.
• GNPA trajectory: Reduced from 25% in March 2022 to 11.67% (with interest accrual) or 10.81% (excluding interest). Absolute GNPA fell from INR435 crores to INR194.44 crores.
• The PAT distortion: Q2 PAT of INR16 crores excluding the exceptional write-back looks weak against Q1's INR24-25 crores, but that is because the ARC sale reduced the impairment reversal that would have otherwise lifted the quarter. Without the ARC, PAT would have been around INR28 crores.
• Sustainable ROA framework: Management pegs sustainable ROA (excluding impairment) at 7% to 8%, while quarterly ROA for the next two quarters is guided at 12% to 15% as recoveries continue to flow.

Gill: "Sustainable, if we talk about that in the last 18 months, what we are doing is, firstly, we are speaking about NPAs, NPR is higher, right? Then we are taking the steps of recovering this amount from all our clients and all, and we are putting all the efforts. Last step was to do the ARC sort on the books. Now since we have done with all sorts of things, if you exclude the impairment from our financials, our ROA would be somewhere around 7% to 8%."

Disbursement Ramp-Up & The Growth Restart

• The stagnation broke in Q2: For several quarters, collections matched or exceeded disbursements (INR100 crores/month each), a pattern driven by management change inertia and the short two-year tenure of two-wheeler loans. Q2 was the first quarter where disbursements (INR328 crores) exceeded collections (INR318 crores), though total volume remained low.
• Q3 target is a step-change: Management guided INR600 crores of disbursement in Q3, with October closing near INR150 crores and November crossing INR200 crores on Diwali and festive demand. This compares to INR300-400 crores in the same quarter last year.
• Q4 and normal run-rate: Q4 disbursement is guided at INR500-600 crores with collections of INR300-350 crores. On a normalized basis, management expects INR450 crores of business per quarter.
• Productivity as the lever: Staff productivity jumped from 4.5 units per staff in Q1 to 8 in Q2, with a Q3 target of 12 and a Q4 target closer to 15. The existing team is already built for INR2,500-3,000 crores of annual business, so opex (INR40 crores/quarter) should not rise significantly.
• Onam weakness: Q2 was slower partly because Onam in Kerala was one of the lowest in recent years; the market itself did not grow, so Muthoot did not capture expected volume despite gaining market share.
• Market share recovery: Share in operating areas rose from 5% in April to 7% now, after a period of pullback.

The New Operating Model: SBUs, Partnerships & Digital

• Four independent SBUs: Two-wheeler, used car, LCV, and digital sales & retail liability are being created, each with independent sales, credit, and collections teams. Sales teams are already hired; credit and collections are being added gradually. Full independent operation is targeted by end of Q4.
• Decentralized by design: Each business will be based out of a different city, LCV out of Chennai to tap the talent pool around Shriram, Chola, and Sundaram, two-wheeler elsewhere. The intent is to hire market specialists for each vertical.
• Business correspondent model with Muthoot FinCorp: Moving from a DSA arrangement to a direct collection model where FinCorp branches handle the entire loan lifecycle (sourcing, collection, NOC, foreclosure) in exchange for AUM-based recurring income rather than a one-time payout. The insight: 40% of collections happen in cash at FinCorp branches because customers treat them as a neighborhood bank.
• Digital sales unit: Being set up with partnerships on Bajaj Marketplace and BharatPe to generate leads and capture online demand.
• Product mix ambition: The Chairman's vision is a INR10,000 crores company in three to four years, split as INR4,000 crores two-wheeler, INR3,000 crores used car and LCV, and INR1,000 crores personal loan. Used car will remain slow (4-5% of portfolio) until March.

Markose: "That is going to be really a game changer for our organization in terms of growth of business, growth of AUM."

Markose: "We make them a partner because there are multiple times -- when they become a partner, what happens is cater to the entire life cycle, which means customer walked in for a gold loan if household, two-wheeler loan and from there, he continues to think he is the neighbourhood customer."

Funding Cost & Yield Dynamics

• Cost of funds improving: Incremental funding raised in Q2 brought overall funding cost down by 0.10%, and management expects a further drop in Q3. Fixed deposit rates were raised to competitive levels to attract more FD funding, but the overall FD cost will not exceed 9.4% on an ex-IRR basis.
• Yield decline is a mix story, not a pricing one: Overall yield declined because the co-lending portfolio (which carries zero NPA) has a lower yield, and its share in the mix is rising. Management attributed the decline entirely to this mix shift, not to rate pressure.
• Co-lending share: Of the incremental disbursement, roughly 60% is on MCSL's own book and the remainder is co-lending, with used cars at 4-5%.

Guidance & Commitments

Key Metrics