Muthoot Capital Services Ltd Q1 FY2026 Concall Summary

Key Takeaways

• Impairment spike drives a loss quarter: Impairment jumped from INR4.86 crores to INR26.68 crores YoY, pushing the company into a loss. Management attributes this to a one-off Q1 event and expects credit costs to normalize.
• Collection stress is localized, not systemic: Slippages as a percentage of standard AUM are flat or down YoY, but recovery from those slippages weakened, specifically in Rajasthan, Punjab, and Haryana. The South, West, and East remain robust.
• New businesses are scaling cleanly: Used commercial vehicles and used cars each crossed INR100 crores in AUM with almost zero stress, and are expected to break even by Q3. The portfolio mix target is 30% from these segments by year-end.
• Margin tailwinds are building: Co-lending book reduction and repo rate transmission are expected to improve margins by ~100 bps. The company is also exploring DA transactions and Tier 2 capital to manage gearing.
• What to watch next quarter: Whether the July collection recovery sustains through the festive season, the pace of GNPA reduction toward the 4.5%-5% year-end target, and any capital raise announcement.

Asset Quality: A Tale of Two Geographies

• The core problem is recovery, not underwriting: Slippages as a percentage of standard AUM have not increased and have actually come down YoY. The deterioration is in the recovery rate from those slippages, which remained static when it needed to improve.
• North India stress is concentrated: Collection lag in April, May, and June was driven by specific pockets in Rajasthan, Punjab, and Haryana. The company reduced LTVs and increased rates in those areas, and disbursement there has significantly come down in the last two months.
• Attrition amplified the problem: The national collection manager had 15-17 direct reports, choking bandwidth. In the North, three regional collection managers changed in the last year, and each resignation created a gestation-period disturbance that made April and May slippages more surprising than usual.
• Corrective actions are in place: A specific zonal head now leads collection in the affected location, new agencies have been added, and the sales team is now mandatorily mapped to the first three EMIs, which has resulted in a huge improvement in the first FST pool collection.
• Industry context matters: A rise in GNPA in vehicle finance in Q1 is an industry-wide trend. Muthoot's 90% concentration in 2-wheelers makes the stress much more enlarged and visible compared to diversified peers.

Markose: "And some amount of that stress has indeed spilled over to our collection also, while I would acknowledge that, there's been no increase in the slippages from the pool."

Impairment & Provisioning Mechanics

• The Q1 impairment jump: Impairment rose from INR4.86 crores to INR26.68 crores YoY. Management characterizes this as a one-off, with an initial credit cost expectation of 1.65% that spiked to 3% in Q1, and a revised full-year expectation of 1.65% to 1.75% on the higher side.
• Stage 2 spillover increased temporarily: The percentage spilling from Stage 2 to NPA slightly increased in April, May, and June. Fresh slippages rose in April and May but started declining from June onwards, and total slippages to standard AUM went down in June.
• No ARC sale planned: Management explicitly declined any new ARC deal, stating they are in control. July numbers have been much better, and they expect to recuperate in August and September. The last two ARC transactions were for a COVID-era backlog, not business as usual.
• ARC recoveries are declining: Both the September 2023 and September 2024 ARC portfolios have seen steep reductions, with fair recovery assigned to both based on independent ratings.

New Business Scaling & Portfolio Diversification

• Used car and CV milestones: Both used commercial vehicles and used cars crossed INR100 crores in AUM with almost negligible stress, described as "almost zero." The entire team is in place, systems are live, and productivity is increasing month-on-month.
• Breakeven by Q3: Standalone P&L for these two segments is expected to break even by October or November. Costs for manpower and IT systems are already sunk, and the drag should fade as volumes build.
• Yield vs. net income math: 2-wheeler yields 22%, used car 18.5%, and CV 17.5%. After removing impairment on 2-wheeler, net income is much better on the new businesses, and ROA should be superior over the longer range.
• Portfolio mix target: By the end of this year, about 30% of the portfolio is expected to come from used car and CV businesses. 2-wheeler will continue to be the "warhorse" that compensates for costs incurred in setting up the two new businesses.

Underwriting & Collection Infrastructure Overhaul

• Sourcing channel risk-rating: About 5,000 sourcing channels have been categorized into severe, high, medium, low, and very low risk based on business volumes, profitability, and delinquency numbers. This was launched three months back.
• CIBIL CreditVision integration: A tie-up with CIBIL provides color coding (green, yellow, orange, red) beyond point-in-time scores, enabling dynamic risk assessment at origination.
• Risk-based pricing introduced: Previously, the same scheme got the same LTV and IRRs nationwide. Now pricing is based on the risk profile of the customer, informed by the new analytics.
• Account aggregator adoption: A tie-up with Onemoney pulls account analytics. Customers with average balances above a threshold qualify for better LTVs and pricing under surrogate income; those with moderate balances are pushed to mandatory eNACH.
• eNACH penetration jump: Improved drastically from ~50% to 82% over the last year, with a target of 90%-95% described as imminently possible.
• AI-based automated calling: A bot that mimics human conversation and handles objections can make ~3,000 calls simultaneously, improving customer contactability.
• Data lake platform imminent: The company is on the verge of closing its own data lake platform, with analytics layers being built for pre-delinquency, roll forward, rollback, normalization scorecards, origination scorecards, customer behavior, and propensity modeling for cross-sell and upsell.

Markose: "This bot can almost mimic the human. It talks like a human being, identical to a human being, and it is able to take any kind of objection."

Funding, Margins & Capital

• Cost of borrowing declining: Overall cost of borrowing is down vs Q1 last year in both ROI and XIRR terms. New funding partners added this quarter include Morgan Stanley, Wint Wealth, and Barclays for CP and NCDs.
• Co-lending reduction as margin lever: Co-lending is the only book that came down, by almost 20% in Q1, and now stands at 27% of the book. Its reduction is expected to impact margin positively by at least 100 to 150 bps. Combined with repo rate transmission, overall margin improvement should be close to 100 bps.
• Capital raising underway: The company is already in touch with investors and is exploring subordinate debt for Tier 2 capital to maintain CRAR. DA transactions are being explored from this quarter to bridge the Tier 1 capital gap.
• Promoter stance: Promoters want to remain strong at 62.62%. Even after a large loss three years back, promoter shareholding remained intact. The call on whether to dilute for Tier 1 capital is yet to be taken.
• T-Bill investments for LCR: The company started investing in T-Bills to increase HQLA for LCR compliance. Yield from T-Bills is 5.34% vs FD rates of 5.15%-5.30%, with total investment portfolio yield at 7.18%.

Strategic Direction: Pan-India vs. Regional Debate

• Management's conviction on pan-India growth: The Kerala 2-wheeler market has shrunk from 1 lakh vehicles to 35,000 vehicles since 2018-19. The company is already the second or third player there, and the INR10,000 crores by 2028 ambition requires presence in growing markets.
• The analyst pushback: An analyst argued that if the INR10,000 crores book is not profitable, it amounts to "cold wine in new bottle" heading toward ARC transactions, and suggested being a regional player with good books like Manba Finance, which commands higher valuations.
• Management's rebuttal: Slippages have not gone up; recovery from what has slipped has come down. The issue is not a function of credit underwriting lack of knowledge for the North. The company wants to be a pan-India player, not a fringe player.

Markose: "If I have to remain a fringe player, I can be in the South. If I look at 2-wheeler, 2-wheeler industry overall in South has come down to some 27%, 29%. okay? If I focus only on South, you are right, I will have a very nice portfolio and all that, but I will remain always a fringe player. But our growth ambitions are much larger. We want to be a pan-India player."

Guidance & Commitments

Key Metrics