Muthoot Capital Services Ltd Q3 FY2026 Concall Summary

Key Takeaways

• Profitability reset by impairment spike: Impairment expense surged to ₹54.59 crores in 9M FY26 (vs ₹2.82 crores a year ago), overwhelming operating income and compressing returns even as the company executed a deliberate pivot toward self-sourced, better-yielding assets.
• Self-sourcing pivot reshapes the book: Owned-business disbursements grew ~20-25% while co-lending dropped ~70%, shrinking total Q3 disbursements to ₹625 crores (from ₹845 crores) but improving portfolio yield and control over credit quality.
• Credit quality is turning, management says: Slippage rate fell from 0.91% in Q1 to 0.65% in Q3, the ECL model was rebuilt with a Big 4 firm, and a ₹14.09 crore write-off of 450+ DPD accounts cleared legacy stress; the company holds ₹47 crores of excess impairment over IRAC norms.
• Funding cost relief is material: Overall borrowing cost dropped from 9.66% in Q2 to 8.82% in Q3, bank funding rose to ₹740 crores in 9M, and retail FD book grew 243% QoQ; management expects the downward trend to persist for 12-18 months.
• What to watch next quarter: Whether Q4 disbursements hold near ₹600 crores without co-lending, whether slippages stay at or below 0.65%, and whether management commits to a specific ROA number for FY27 after declining to do so on this call.

Strategic Pivot: Self-Sourcing Over Co-Lending

• Why the shift: Own-sourced loans deliver better yields than co-lending and BC-originated assets, so MCSL is redirecting capital toward its own book and group-company business to improve portfolio returns.
• The trade-off in disbursements: Owned-business disbursements grew ~20-25% while co-lending fell ~70%, pulling total Q3 disbursements down to ₹625 crores from ₹845 crores a year ago; the company is willing to sacrifice headline growth for better unit economics.
• Full-year disbursement reset: FY26 disbursements are now expected at ~₹2,500 crores vs ₹2,900 crores last year, a deliberate calibration after Q1 slippages forced credit-policy tightening and a stabilization period.
• Q4 and FY27 trajectory: Q4 disbursements are targeted at ~₹600 crores without co-lending; Q1 FY27 is expected to step up to ₹750-800 crores, with Q3 next year described as "hammer and tongs."
• AUM guidance held: The ₹10,000 crore AUM target by 2028 is not being revised; FY26 AUM is expected closer to ₹4,000 crores (vs an initial ₹4,500 crores), and next year's incremental disbursement target is ~₹4,000 crores.

Mathews Markose: "Our focus has drastically shifted towards the self-sourcing of Muthoot Capital Services owned business and through the businesses done by our group companies... That is a strategic move to make our capital more effective because we are getting better yields on our own sourcing compared to what we were getting from the co-lending and BC partners."

Credit Quality: Slippage Improvement and ECL Rebuild

• Slippage trend improving: Slippage rate declined from 0.91% (Q1) to 0.80% (Q2) to 0.65% (Q3); management expects it to stay at or below 0.65% in Q4, with denominator growth pulling GNPA lower.
• ECL model rebuilt with external consultant: A Big 4 firm completed a full redo of the ECL model using 8-year data; LGD for 2-wheelers was set at 28% (with a conscious 2% extra buffer), while 4-wheeler and CV LGDs were based on market studies due to limited internal data.
• PCR reduced on improved trends: PCR was cut from ~60% to 50%, a conscious Board-level decision driven by the new ECL model's lower LGD estimates and the improving roll-forward to NPA.
• Write-off clears legacy stress: ₹14.09 crores was written off from the D1/D2/D3 portfolio where DPD exceeded 450 days and no recoveries were expected; static pool analysis showed fresh-flow improvement, with month-5 NPA flow dropping from 1% to near zero and month-12 flow from 7% to 4%.
• Excess impairment buffer maintained: The company holds ₹47 crores of excess impairment over IRAC norms (₹120.91 crores vs ₹72.93 crores required) and intends to keep it until NPA improvement is sustained over the next 12-18 months.
• ARC performance supports recovery confidence: The first ARC pool has been reduced by 72%, the second (September 2024) by 40%; these helped bring GNPA down and attract PSU bank funding.
• Product mix shift lowers portfolio risk: New products (used cars, CV, construction equipment) carry delinquency below 3% vs 7-7.6% for 2-wheelers; the incremental book is being built on safer asset classes, which management argues will reduce impairment and slippages over time.

Ramandeep Gill: "We have taken a conscious call of bringing down the PCR from 60 to 50 percentage, and therefore, the release in the overlay has happened in this quarter."

Impairment Expense and the Path to ROA

• The impairment shock: Impairment expense rose from ₹2.82 crores in 9M FY25 to ₹54.59 crores in 9M FY26, the single largest drag on profitability and the reason the company missed its profit commitments.
• Management's ROA bridge: A 2% yield improvement on the new book built over 16 months (~₹2,600 crores average) would add ~₹52 crores; raising ₹1,300 crores next year at 0.50% lower cost saves ₹7-8 crores; insurance and cross-sell revenue add to the top line.
• Impairment cost assumption: Management expects to continue with a 1.25% impairment cost on the entire book, citing improved Stage 3 flow (1% at month 5/8), the 28% LGD model, and 76% recovery from the ARC portfolio.
• Analyst pushback on ROA math: Per an analyst's math, NII of ~₹74 crores less opex of ~₹58 crores leaves ~₹60 crores annually; with 2% provisioning on the loan book (~₹60 crores), the path to 2% ROA is unclear. Management did not reconcile this directly or commit to a specific ROA percentage.
• No ROA commitment yet: Management declined to commit an ROA number for FY27, saying it will have a good view at the Q4 call; it expects impairment release of 1-1.5% if NPA continues to decline.
• Recovery tailwind expected: Old-book impairment expense has already been taken; recoveries will start coming and impairment expense will reverse over time.

Funding and Liability Franchise

• Borrowing cost down sharply: Overall cost of borrowing fell from 9.66% in Q2 to 8.82% in Q3; XIRR dropped from 10.30% to 10.09%; NCD rates down 0.53%, CP rates down 0.60%, PTC rates down 0.40% QoQ.
• Bank funding mix improving: ₹740 crores raised from banks in 9M FY26 vs ₹435 crores in all of last year, reducing reliance on higher-cost market funds.
• Retail FD franchise building: FD book grew 243% QoQ to ₹67.28 crores, driven by a new retail liability sales team; the aim is to close above ₹100 crores by year-end.
• Green bond closed: The GuarantCo transaction was completed, bringing ₹150 crores from Axis Bank as part of a total ₹300 crore, 6-year facility; another investor is expected to close next month.
• Cost-of-funds outlook: Management expects the downward trend to continue for the next 12-18 months.

Technology and Collections Overhaul

• MCollect app deployed: A new collection app from FinnOne LMS has been issued to the sales team for first-6-month collections, digitizing a previously manual process.
• AI/ML strategy builder live: An automated system now predicts the optimal customer contact mode (SMS, WhatsApp, calls), replacing manual decision-making; slippages have been declining QoQ since deployment.
• Agentic AI telecalling cuts cost: Bot-based calling has reduced physical telecaller strength; calls that previously took one month now complete in one day; proportionate cost reduction will accrue in financials over coming quarters.
• Technology spend elevated but plateauing: Other expenses rose to ₹28 crores due to technology and software investments; expansion-related spending has now stopped and expenses are not expected to grow much further.
• Results take time: Management acknowledged that technology deployment takes time to show results, and that people problems in the North (higher attrition, lack of established collection setup) compounded the delay, while the South portfolio remains one of the best in the industry.

Mathews Markose: "All the team that used to take about 1 month to reach out to the customers, can be done in just a matter of 1 day because of the bot is capable of making any number of calls."

Product Diversification and Credit Policy Tightening

• New products expanding: By FY-end, the portfolio will span new 2-wheelers, used 2-wheelers (UAT complete, go-live in January), used cars, used CV, used construction equipment (launched last quarter, scaling from Q4), and loyalty loans (top-ups on 2-wheelers).
• Credit policy overhaul: A location risk scorecard now classifies geographies as high/medium/low/severe risk; CIBIL customer color coding (green/yellow/orange/red) uses 36-month bureau track; gate criteria have increased for high-risk locations; LTV was reduced from ~86% to ~79%.
• FY27 ambition for new asset classes: Combined 4-wheeler and CV disbursement target is ₹1,000 crores+ next year; runoff is very slow so disbursement nearly equals AUM addition.
• Insurance income starting: A corporate agency license obtained at the start of FY26 generated ₹2.31 crores in Q3 from Geojit, Lombard, and Across Assist partnerships.
• Underwriting results pending: Management asked for patience, saying "you will see the results in the coming quarters" on the underwriting changes.

Mathews Markose: "If 2-wheeler at 30-plus at an industry level, it's about 7.6% to 7%, these products have a delinquency of less than 3%, okay? So the incremental book that we are building are on a... products which are much safer from a lending perspective."

Management Accountability and Credibility

• Profitless growth acknowledged: Management admitted profitability has lagged but argued it has delivered on diversification, geographic expansion, and AUM growth; the only miss, it said, is impairment and NPA.
• Guidance track record disputed: When an analyst noted an 8-year pattern of missed guidance, management disagreed, citing black swan events and asserting it met delivery numbers; it asked for time to show the "last mile" on profitability.
• DA transaction delayed: The direct assignment transaction did not happen because AUM did not grow to anticipated levels due to the deliberate growth curtailment; management is trying to close one DA transaction in the next two months.
• Commitment to investors: Management made a firm commitment to not fail investors and to correct the shortfalls, while pushing back on the claim that no commitments have been met.

Mathews Markose: "The current management is completely committed towards keeping the integrity and the credibility of the group, and we will not fail the investors. That's a very, very strong and firm commitment from our side."

Guidance & Commitments

Key Metrics