Muthoot Capital Services Ltd Q3 FY2024 Concall Summary

Key Takeaways

• Disbursements surged, AUM growth muted: Disbursements hit INR479 crores in Q3, up from INR330 crores in Q2, but AUM grew only INR180 crores to INR1,944 crores because a one-time ARC transaction of INR235 crores masked the underlying build.
• Asset quality improved sharply, but at a cost: GNPA halved YoY to 10.69% and NNPA fell to 3.55%, driven by own recoveries and the ARC sale. However, a repossession loss of ~INR3 crores and stage migration within stage 3 pushed provisions up to INR5.5 crores.
• Yield compression is the core profitability drag: Blended yield dropped from 23% to 17% as the mix shifted toward lower-yield, zero-NPA co-lending partnerships. Core PBT halved YoY to INR13 crores.
• Management is hiring ahead of a multi-product expansion: A full top management team is now in place, frontline headcount has been built over two quarters, and used car, LCV, and retail liability businesses are being stood up, all before the revenue arrives.
• What to watch next quarter: Whether the INR600 crores Q4 disbursement target is met, whether yield reaches the promised 18%-18.5%, and whether the new LOS delivers the productivity jump from 7-8 to 15 units per executive.

Disbursement Growth & the AUM Puzzle

• Disbursement trajectory is steep: Volumes rose from ~INR200 crores in Q1 to INR330 crores in Q2 to INR479 crores in Q3, driven by aggressive partnerships and a new Loan Origination System that cut turnaround time to 30-45 minutes.
• AUM growth is structurally slow despite high disbursements: Two-wheelers, the core product, have a 24-month average tenure with fast runoff: disbursing INR100 crores but collecting INR115 crores means AUM barely moves. New products (used car, LCV) carry 48-60 month tenures and are expected to drive faster AUM growth.
• The Q4 bet is INR600 crores: Management is "extremely bullish" because Q4 is seasonally strong for auto, the new LOS stabilized only in December so its full impact lands in Q4, and the used car business is picking up. Month-on-month two-wheeler sales are already increasing.
• The 25% growth target is on sales, not AUM: The INR600 crores Q4 target represents a 25% increase over Q3's INR480 crores disbursement. Management expects to reach INR200 crores-plus per month next year.

Markose: "I think we are extremely, extremely bullish for Q4 and the time to come."

Asset Quality: Clean-Up Progress & Residual Drag

• GNPA halved, but the clean-up is not complete: GNPA fell 51% YoY to 10.69% and NNPA fell 2% YoY to 3.55%, achieved through own recovery efforts and the INR235 crores ARC transaction. 98% efficiency was reached in 0-bucket cases.
• Provisioning jumped despite stable slippages: Provisions rose from INR2.7 crores in Q2 to INR5.5 crores in Q3. Management attributed INR3 crores of this to a repossession loss from selling vehicles with 450+ DPD, and the rest to assets migrating from doubtful-1 to doubtful-2/3 within stage 3, which increases provisioning requirements.
• A residual COVID-era NPA pool remains: ~INR160-170 crores of legacy NPA is still on the book. Management is hopeful a call will be taken on its resolution after Q4.
• Collection strategy has been scientifically rebuilt: A pre-delinquency scorecard now runs on the 22nd/23rd of each month, splitting the portfolio into "never bound" and "ever bound" to identify customers with the highest probability of bouncing. Rigorous recalling continues till the 5th (EMI date). Scorecards for each subsequent bucket identify customers with the highest roll-forward probability, and collection allocation is now based on a BAT (scientific) process rather than random allocation.
• Focus has shifted to early buckets: Previously the team focused on bucket 3; now the goal is to ensure no more than 2% flows into bucket 1 from bucket X, making the end funnel manageable.

Gill: "This shows that management still believes that conservatism in terms of asset quality is required."

Yield Compression & Profitability Pressure

• Blended yield collapsed from 23% to 17%: The drop is driven by co-lending partnerships, which carry lower yield but zero NPA. The book also shrank from INR2,200 crores to INR1,944 crores, compounding the NII impact.
• Core PBT halved YoY: PBT fell from INR27 crores to INR13 crores, and Q3 PAT was INR10.26 crores, hit by lower book size, lower yield, and higher opex from appraisals.
• NII was flat despite AUM growth and spread improvement: Under Ind AS 108, interest accruals on the INR235 crores ARC-written-off portfolio were reversed, offsetting the benefit of AUM growth.
• Appraisal costs hit Q3 opex: The appraisal cycle shifted to October-October, incurring an additional INR2 crores-plus in arrears from April onwards, all landing in Q3.
• Yield recovery is promised within two quarters: Yield moved from 16.5% in Q2 to 17.5% in Q3. Management expects 18%-18.5% in one more quarter, and by Q1/Q2 next year, yield will surpass last year's 19.5% blended level as the MCSL business share rises.

Gill: "yield is important for everyone. At the end of the day, how long you are able to take that yield without turning asset into the NPA, that is most important, sir."

Multi-Product Expansion: Used Car, LCV & Liabilities

• Used car business is live and scaling: Launched in Kerala and Karnataka, currently disbursing INR5-7 crores. Pan-India expansion is underway in Q4, with recruitment for North and East completed. The target is a INR2,000 crores book in three years.
• LCV business is next: A business head has been shortlisted, and the launch is targeted for April or Q1 of next year. Management noted the P&L broke even by the 11th month in its first year.
• Retail liabilities are being built from scratch: A Head of Retail Liability joins on 5th February, and the business is expected to start kicking in from the following month. Fixed deposit rates were revised in October, sourcing INR5 crores in additional FDs since then.
• The long-term aspiration is a INR10,000 crores book: 40%-50% (~INR4,000 crores) two-wheeler, INR2,000 crores each in used car and LCV, and INR2,000 crores in liabilities, over the next 3-4 years.

Markose: "the general direction that we want to take this company in the next 3 to 4 years is to a INR10,000 crores book, where 40% would be two-wheeler -- 40% to 50%, about INR4,000 crores will be two-wheeler, INR2,000 crores each on used and LCV businesses, and about INR2,000 crores of liability book, that's the broad aspiration that we have."

Operating Levers: Productivity, People & Funding

• Frontline productivity is expected to nearly double: Currently at 7-8 units per counter sales executive, the target is 15 units, enabled by the new LOS. Since employees have spent three months in role, productivity is expected to rise in the next 3-6 months.
• Headcount has been front-loaded: Employee expenses jumped because the company has been building strength over the last two quarters in anticipation of MCSL business expansion. These employees are already hired and will not need to be hired again. No significant opex growth is expected beyond used car and LCV expansion.
• The top management team is now complete: A Head of HR, Head of Compliance, and Head of IT all joined in Q3.
• Liquidity remains comfortable: INR314 crores was sourced in Q3 (securitization INR83 crores, CPs INR56 crores, NCD INR100 crores, term loans INR75 crores), and INR570 crores of working capital demand loans were successfully rolled over. Fund balances are expected to stay at ~INR313 crores.
• Co-lending partnerships are the chosen path for new products: The company now works with about 7 partners and prefers to learn from their expertise rather than risk its own capital on unfamiliar asset classes.

Gill: "we don't want to burn our hands wherein we'll be investing our own money and then we will say, 'oh, we had a loss, but that loss is only for one time'. No. We want to invest the funds, and we want to learn from their expertise also."

Guidance & Commitments

Key Metrics