Muthoot Capital Services Ltd Q2 FY2026 Concall Summary

Key Takeaways

• Mixed quarter, profit restored: PAT swung back to positive after Q1’s loss, but macro conditions remained unsupportive and disbursements fell short of plan.
• Asset quality turned a corner: Fresh slippages dropped 6% QoQ to INR42 crores, slippage rate fell from 0.99% to 0.67% of standard pool, and impairment cost halved from 3.43% to 2.05%.
• Yield levers are loading, not yet firing: Blended yield inched to 20.35% with risk-based pricing now live on 2-wheeler and used-vehicle mix rising; management expects a 100 bps yield jump in Q3.
• The growth engine is being rebuilt: Credit policy tightened sharply (location grading, dealer categorization), co-lending scaled back, and new products are still loss-making, all of which suppressed near-term AUM growth.
• What to watch next quarter: Whether the INR800–1,100 crore Q3 disbursement target materializes, whether the promised 100 bps yield lift actually lands, and whether the data lake and Resolve collection platform start showing in credit cost.

Asset Quality & Credit Performance

• Slippage improvement was real: Fresh slippages fell from INR46 crores to INR42 crores QoQ; as a percentage of the standard pool, slippages dropped from 0.99% to 0.67%. Monthly slippage rate has structurally declined from 1% of AUM two years ago to 0.6–0.65% currently, with Q1 called out as an aberration at 0.85–0.87%.
• Recoveries surged: Collections and normalization from the NPA pool improved by about 69% QoQ, and agency-led recoveries hit their highest level in five quarters. Q1’s collection issues were fully addressed in Q2.
• Impairment cost halved: Impairment cost fell from INR26 crores (3.43%) in Q1 to INR16 crores (2.05%) in Q2, driven partly by a management overlay reduction from INR14.4 crores to INR3 crores. PCR of 60% on Stage 3 remains intact; if NPAs reduce further, excessive impairment reverses.
• GNPA/NNPA optically rose because AUM was flattish QoQ, so the denominator did not help. Management stressed that standard asset quality actually improved in Q2 and expects a bigger improvement in Q3 and Q4.
• Repo recovery is a weak spot: Recoveries from repossessed accounts are running at only 40%, with many cases involving accidents or assets not in saleable condition. A targeted effort to improve repo numbers begins in Q3.
• Credit cost vs target gap: Credit cost at 2.05% remains above the 1.65–1.85% band needed to hit desired ROA; management expects it to stay at or below the Q2 level in coming quarters.

Markose: "Our Q2 was a mixed bag for us. When I say mixed bag, the reason why I call it a mixed bag is because while we were able to reverse the trend of loss that we had done in Q1 and get back into profits, many of the macro fundamentals were not so conducive for business."

Disbursements & Demand Environment

• September was a setback: Industry 2-wheeler sales dropped to 12 lakh units on GST announcement impact, and Muthoot Capital’s disbursements were also hit. Q2 AUM growth was subdued as a result.
• Navratri delivered a sharp rebound: Disbursements over the nine-day Navratri period grew 26% YoY versus the same period last year, and the momentum carried into October. Management called the trend “very good.”
• Q3 disbursement target is wide: Conservative case is INR800–850 crores; aggressive case is INR1,000–1,100 crores. The outcome depends on whether the festive momentum sustains past Diwali and on broader industry factors.
• Credit policy tightened deliberately: Dealer and location categorization (A through E) was introduced based on delinquency and perceived risk. Business was stopped entirely in E-category locations and restricted in C and D categories, which suppressed volumes but was a conscious derisking move.
• Market share dynamics diverged: Pan-India market share improved from 2.36% to 2.47%, but share in locations where the company is present dipped from 7.67% to 7.24%, a trade-off that was factored into business planning.

Markose: "We did a comparison of last Navratri versus this Navratri and our numbers have been up 26% Y-o-Y during the same 9 days period. And that trend is continuing. We are seeing very good momentum in October, and we see Q2 to be a very good Q3."

Yield, Margins & Profitability

• Yield improvement is underway but gradual: Blended yield stood at 20.35% for H1, with 2-wheeler at 22% and loyalty loans at 25%. Risk-based pricing on the 2-wheeler portfolio is now live, replacing the old scheme-based model where all customers were priced identically; about 50% of 2-wheeler customers are new-to-credit and fall into higher-risk buckets that can now be priced up.
• Used-vehicle mix is a structural yield driver: The share of used car and used CV business is increasing, and these carry better yields. The used 2-wheeler launch, originally planned for September, was postponed to November/December due to credit policy and BRE changes requiring vendor work.
• Co-lending was deliberately scaled back: Yield on co-lending was low and management judged it an ineffective use of capital. ICE partnerships are being reduced while EV partnerships continue where own business is low and impact funding is available.
• Funding cost improved: Overall cost of funds fell from 9.94% to 9.69%, with bank term loans replacing higher-cost NCDs. NCD rates dropped 24 bps, CP rates 12 bps, and bank term loan rates 24 bps.
• Opex is elevated by design: Two factors are at work: sourcing incentive schemes were launched in Q2 ahead of the festive season, and all new lines of business (used car, CV, construction equipment) are being subsidized by the core 2-wheeler product. None of the new businesses are making a standalone profit.
• Technology spend is treated as investment, not cost: Significant investments over the last two years in LOS platforms, a data lake (through EY), and the Resolve collection strategy platform are “eating into profitability” but are framed as the foundation for the INR10,000 crore, 4% ROA target.

Markose: "None of these businesses that we have started are making standalone profit. So 2-wheeler is doing the heavy lifting and subsidizing all those products."

Digital & Collections Infrastructure

• eNACH penetration jumped: From 75–80% to 92% over the last two months. Digital collections now account for 77% of total collections, with only 23% in cash.
• Data lake platform is imminent: Being set up through EY; the first phase goes live by November, starting with HR, operations, and credit. Enterprise-wide rollout will take another 2–3 months.
• Collection strategy is moving to a digital platform: Signed up with Resolve to run collection strategy digitally; previously, strategy was defined manually by the collection team. This is expected to improve recovery efficiency.
• GFF participation yielded a pipeline: Several use cases were identified at the recent GFF event and are slated for implementation over the next 6–12 months.
• Collection fees are a point of tension: Agency collection fees rose sharply from INR8–8.5 crores to INR21.60 crores in Q2. Muthoot FinCorp branches charge only 0.50% on recoveries, but the analyst question on whether total fees exceed total recoveries was not directly answered.

Product & Portfolio Strategy

• The long-term vision is INR10,000 crores AUM by 2028: Management wants to finance “everything on wheels” and hit 4% ROA at that scale. The portfolio mix at that point is expected to be roughly 50% 2-wheeler and 50% larger-ticket, better-quality products (used car, CV, construction equipment).
• New products are being built now, profits come later: Used car, CV, and construction equipment (launching October) are all in investment phase. Used 2-wheeler is expected by December and could eventually scale to 30–40% of new 2-wheeler volumes.
• Portfolio mix is the ROA engine: Used car carries GNPA of 1.2% and CV just 0.31%, far below 2-wheeler’s naturally higher GNPA. As these products scale to half the book, the blended credit cost should structurally decline toward the 1.65–1.85% target.
• DA transactions are a near-term top-line lever: Management expects INR100–200 crores of dealer advance transactions split across Q3 and Q4, which will boost income and reserves. If DA deals close in Q3, fresh capital raising can be pushed to Q1.
• LTV is being tightened: Average LTV reduced from 84–85% to 80.22%, consistent with the broader credit tightening theme.

Markose: "We want to be a INR10,000 crore AUM company by 2028. And that's the direction which we are moving into."

Capital, Funding & Ratings

• Rating outlook upgraded: CRISIL upgraded the outlook from stable to positive while maintaining the A+ rating. Management believes that with 1–2 quarters of good results, the rating could move up by one notch.
• Tier 2 capital raised: Sub-debt in the form of Tier 2 capital was closed with PhillipCapital in Q2.
• Debt-to-equity target: Management expects to operate around 4–4.25x.
• Fixed deposit book is growing: FD book stood at INR46.07 crores, with INR7.52 crores in new FDs and INR2.91 crores in renewals during Q2.

Guidance & Commitments

Key Metrics