Muthoot Capital Services

Stock Opportunities
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I have prepared a peer comparison of Muthoot Capital Services (MCS) with two peers, namely Shriram City Union Finance (SCUF) and Hero FinCorp. Since MCS is primarily a two wheeler financier, I have compared the company with the peers only from the perspective of a two wheeler book.

Please find the analysis in the link below
Muthoot Capital Services

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171

Seems like stable results from Muthoot capital:

  • Advances have increased about 15%
  • Profit has gone down compared to last year

For NBFCs, where can we see NPA information? Is it not part of financial results?

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Muthoot Capital Q3FY20 earnings call highlights:

Participants:

  • CAO Capital
  • Centrum PMS
  • Abakkus
  • Nirmal Bang
  • AlFAccurate Advisors
  • Marshmallow Capital

Business Overview:

  • Disbursement for the quarter at Rs 466 crore vs Rs 502 crore YoY
  • AUM stands at Rs 2,751 crore vs Rs 2,594 crore YoY
  • Average AUM for the quarter at Rs 2,679 crore vs Rs 2,328 crore YoY
  • PAT at Rs 19 crore vs Rs 24.5 crore YoY

ConCall highlights:

  • Muthoot Capital Services Ltd. (MCSL) has increased the number of collection agents and increased their incentives which led to increase in collection cost during the quarter
  • Inventory of BS IV compliant 2 wheeler likely to be cleared by February and all players will be ready with BS VI by March 2020
  • Employee cost has increased as MSCL has put more employee where required
  • MCSL had Rs 4 crore one time income in Q3FY19
  • Rural economy is improving. Two wheeler sales generally increased during H1
  • Flood impacted the collection in Maharashtra and Karnataka but these market showing some sign of improvement in recent months
  • GNPA looks stretched as the loan book has not grown in recent quarters. GNPA will improve to around 5% in Q4FY20
  • Cost of funds currently 10.25%, improved from 10.32% on sequential basis. Further 10-15 bps will improve by end of Q4FY20
  • MCSL is not looking to raise fresh capital in next 8-9 months as the company is well capitalized and growth rate is muted
  • East is the new market for driving the growth and this market is growing at a very healthy rate
  • 67% of the borrowing is from bank; average tenure is less than 1 year
  • MCSL has 1.67% market share on overall sales basis; on the basis of number of vehicle financed by organized player MCSL has 4.5% market share
  • Cash balance increased during this quarter as the company did some PTC transaction on the last day of the quarter and money came at 7:30 PM. PTC was done at around 9.4-9.5%
  • MCSL will not lend for premium used car and targeting Rs 3-7 lakh segment; will expand the business aggressively in next financial year
  • Company is present in 20 cities in 5 states for pre-owned cars financing
  • Finance penetration for 2 wheelers is around 35-40% and going forward it will increase to 55-60%. Penetration level in metro around 55% currently
  • MCSL has expanded their reach in recent years now targeting to increase counter share
  • Counter share in Kerala-50%, Karnataka- 40-45%; while in North-India it is around 15-20% only
  • Company has made Rs 3 crore additional provision during the quarter
  • MCSL has 8,000 touch points, of which 75% in Tier III and Tier IV town
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Hello friends
I assume in this covid times , all nbsc n bank will reduce unsecured lending. People have to for for gold finance if they need any emergency fundings. And also Prices of Gold have increased 30-40% resulting in increases ticket size. It may result in higher growth in loan disbursements. Considering the fact that PE is in early teen I somehow feel PE rerating is going to happen. Can any one share the opposite views?
Disc Invested

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This company(Muthoot Cap) primarily offers 2 wheeler loans,their parent company Muthoot Fincorp does gold loans but that is not listed.

I think you got confused between this and Muthoot Finance.

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yes confused ā€¦
sorry for wrong listing I meant abt Muthoot Financeā€¦

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To not bump up.price due to surge in volume. Many do it including Dolly Khanna.

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Headwinds galore - hapless situation as the management has explained here -

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We can go through the performance of muthoot capital for the year 2020 so that we can take proper decision for their stock opportunities.

https://finmedium.com/2020/07/muthoot-capital-services-concall-summary/

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Q1FY21 Concall Notes

Monthly collection data
33% apr
53% may
70% jun
75% July

45-50% moratorium in Q1 on average

Company did not avail moratorium from its creditors , moratorium got for securitization alone.

Q1 disbursement muted (17cr) because of understanding lockdown and open up

After August & Diwali will get better, depending on location wise study and micro-economic study.
By Q4 we will get back to 90 % of pre-covid levels of disbursement.

Muthoot cap has 80% centres in tier 3&4 cities, rural economy lesser affected by covid. We are confident going forward.

We operate through 3500 muthoot corp branches , 3000+ dealers.Currently operating with 600 dealers in another 30 days we ll operate with all the 3000 dealers and 3500 Muthoot fincorp branches. No stress with dealers
Fee income generated by commission received for cross-selling gold loans to Muthoot fincorp without any additional opex requirement.

Provision of 50crs done,additional provisioning will be required
GNPA expected to move from 7% to 10%

Opex reduction from 52% last year to 48-50% now due to digitization of collection which is 7-8% of overall collection.
No downsizing of workforce

Liquidity 600crs , Cost of capital - 9.9% vs 10.17% qoq

Collected 20cr retail deposits so far at 8.5%, planning to ramp up this liability front.

CAR at 25%, will plan to raise cash for expansion.

Please upload presentation if anyone comes across.

Thanks & Regards,
Varun

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Any views on the valuation?

I feel this is a great rerating (2x) candidate due to surge in 2w and used 4w sales. NPAs could stay static in the up cycle I feelā€¦
Disc: halfway through building up my position in this

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I have had a look at Muthoot Capital Services.

Statistically it looks valued reasonably. Book value at 326. Price to Book value at 1.3 .
TTM EPS 37. PE around 11-12.

The 2 wheeler sales has shown strong buoyancy and it is reflected in stock prices of Bajaj Auto at all time highs, and Hero and TVS motors also strong at 52 week highs.

Logically this should rub on to the player largely involved in 2W and used car financing. But somehow stock price has not moved much.

Promoter group is same as Muthoot fincorp and company also cross sells products of Muthoot fin. Management seems reasonably confident of companyā€™s prospects according to q2 fy 21 concall.

disc: invested.

15 Likes
189

Iā€™ve finally managed to get all my thoughts on this company into words. Hopefully this helps anyone interested in this company.
The NBFC sector is notorious for wealth destruction. Itā€™s been a case of the big getting bigger with a lot of the competition disappearing. The major players are trading at high multiples and over the years they have offered an insight into how to grow safely in this sector. I believe that there are greenshoots in Muthoot capital that shows its following their footsteps

Liabilities:

Nbfcs that are forced to borrow from banks alone can end up in a lot of trouble especially if the borrowing is occuring from lower tier banks desperate for growth. While Muthoot capital does borrow a majority of its funds from banks when you delve deeper things get interesting.
Firstly the banks giving them loans include the likes of HDFC(100 crores this latest quarter) so the company is trusted by a big bank. MCS has been slowly but surely increasing funds from other sources including Sub debts, Public deposits, NCDs and Securitization. NCDs and Fixed deposits have beeb slowly increasing the past few quarters which is a very good sign. The more the sources of borrowing the better. Their cost of borrowing has gone down from double digits to 9.4 percent in the latest quarter and is expected to go down further.
What to track:

  1. How dependance on bank loans goes down as a percentage of total borrowing
  2. Increase in FDs and NCDs
  3. If cost of borrowing can break through to the 8 percent level over the next few years

Assets:

Their main call to fame is 2 Wheelers which takes up most of their portfolio. They just began used car loans and are dabbling in the high margin secured small business loan segments. Will be moving towards commercial loans for e-rickshaws etc and consumer durables. Basically the segment of the population they are targetting is the unbankedā€¦ but they are limiting their risk via small ticket items and have the item as collateral in most cases. They also do a lot of cross selling of gold loans with their parent(which il come to later). Whatā€™s interesting is their annual reports and commentary is littered with digitizationā€¦ and apart from making collections/applications easier they are basically doing what bajaj finance did so spectacularly but on a small scale ie they are using the loyal customers for their current 2W customer base to upsell loans for used cars, businesses and soon consumer durables. This letā€™s them capture the entire life cycle of a good client which is what bajaj finance did so successfully. They arenā€™t chasing growth in unfamiliar products too quickly eitherā€¦ ie they run pilot programs for a long time before taking them to market. Note that Their dependance on 2W augmented their problems since the down cycle in auto added to the problems last few years too (liquidity crisis, regulations, covid, natural calamities) and they wonā€™t lose dependance on it for a very long time. They are expanding into new territories slowly but surely and this quarter the contribution from north/east/west finally was noteworthy. However, expansion into new territories means higher opex and npas and this needs to be tracked. Their current product mix gives them a yield of 19 percent which gives them a spread of about 10 percent

What to track:

  1. If the uptrend in the auto cycle continues then they will be on very stable footing. So understanding the auto cycle is very important
  2. Traction from their new segments ie used cars and secured business loans(launched) and CVs and Consumer Durables (Launching soon) and if they can achieve growth without compromising asset quality
  3. If their push to digitilisation works and if they manage to upsell their customers
  4. Opex to NII. This is pretty high at the moment. Growth shouldnt be rushed here.
  5. Will they be able to control and reduce their npas next fiscal year with the help of the auto upcycle?

Risk assessment:

The company has become very conservative post 2017 and are now levered at under 5 times.
Their capital adequacy ratio is at nearly 27 percent and they have 788 crores in cash which makes them very comfortable. Their provisioning is pretty good too which means survival isnā€™t much of a problem.
They try to grow slowly regards new products and stay away from high margin risky avenues like housing and development

What to track:

  1. Now that these extraordinary events of past 3 years are behind them they have no excuse from next FY 22 for them to not imrove their NPAs.
  2. Make sure that Expansion into new geographies and upselling into new products should nt lead to massive NPAs

Promoters:

Firstly, having the Muthoot fincorp parent name attached to it makes this investment less risky for us. This is evident by the quality of banks, acceptance of FDs and NCDs as their source of borrowing. Also, Expansion is a bit easier with the help of their parent company. For a sub 1000 MCAP company their quarter presentations and concalls with investors is a thing of beauty.
They are very conservative post the issues theyā€™ve had and spend extra care before pursuing new growth drivers and have accepted digitization into their business model. Theyā€™ve proved their ability to survive what has been a horrible 3 year period

What to track:

  1. If the promoters walk the talk regards product launches and risk assessment etc next few quarters/years
  2. If they can manage growth without compromising asset quality

Overall,
investing in Muthoot capital services is almost like investing in a startup since they are at a nascent stage regards expansion/new products and have a long way to go before the market even considers valuing it at higher multiples.

However, even though there is a lot to track , thereā€™s a long way to go and the risk of things not panning out is very highā€¦
the management quality, decreased borrowing costs, comfortable liquidity position, digitization for upselling, new products and geographies, a possible auto cycle upturn makes this a very interesting long term bet but the journey is by no means going to be an easy one and is definitely not for the faint hearted.

Disc: invested. Not a sebi advisor. Please do your own due diligence

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Donā€™t you think, someone like MCS is late to the party. As we go ahead and competition increases from other NBFCs, MFIs etc MCS may lose out on market share and profitability if it goes ahead and competes aggressively.

On tech as well MCS seems to be late. Some of the startups and Bajaj Fin are way ahead of MCS. I understand that some of these advantages compound over time like it has done for HDFC

Scale implies lower opex and hence ability to compete on price and seek better quality asset. Better quality asset implies lower NPA, better rating and ability to raise funds at lower rate. Lower rate implies better pricing ability / access to better clients and better return.

Bajaj Fin, HDFC Bank may be there. Is MCS there ?

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@Shankar
You are absolutely rightā€¦ MCS isnā€™t close to being near any of the levels of those companies mentionedā€¦ and hence why itā€™s available near book value. At cmp I believe there are more upside surprises than downside. Would I buy it at 2X+ plus book value in its current stateā€¦ no chance.
However Iā€™m banking(lol) on the following

  1. The upcycle of 2W helping them garner growth and profits without compromising asset quality too much
  2. The opportunity size in an unbanked country like India being big enough for a company like MCS to get a decent chunk required for growth.
  3. Opex costs reducing with scale. Theyā€™ve already expanded outside of the south and those branches are slowly contributing meaningfully
  4. Digitization will help them with their new products. Currently they rely on 2W for majority sales. Digitization will help them move into new products(ie consumer durables etc) without much cost and with reduced risk so itā€™s a positive
  5. The main bet for me is the promoters. Theyve managed to survive a tumultuous period surprisingly well and have been very conservative and have infact decreased the cost of borrowing during this period which speaks volumes. They have a clear plan moving forward and their communication is clear(though ironically I still havenā€™t found the Q3 concall so I have no idea if it was cancelled or what happened there lol).

Do I expect them to trade at 3 to 4 times book value in the next 2 to 3 years? Nope.

However, i canā€™t see them trading at near book value for long either if small triggers play out (Borrowing costs decrease/npas decreasing in the upcycle/opex costs decreasing with scale/growth engine running again with the auto cycle) and canā€™t see much downside left after the adversity theyā€™ve had to face the last 3 years which gives me confidence they can handle any more tough situations thrown at them(unlike a PSB the book value here looks to be real and the provisions/capital adequacy ratio/cash in hand looks like a good buffer too). So Iā€™m willing to take a risk here with a small allocation and average upwards as and when the story improves (or exit if it doesnā€™t)
As a bonus technically itā€™s broken out of a multi year downtrend too and The tailwinds should help it recover some steam

Disc: invested. Not a sebi advisor.

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Morgan Stanley also thinking like the group commenting here:

disclosure - i have M&M Fin, L&TFH and Muthoot Capital, in line with this theme. Exited SRTF in the recent rally (at 1400+ i find others to be cheaper). Not a sebi advisor.

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M&M Fin and L&T fin are showing great upmoves for the past few days. Muthoot Cap also going up slowlyā€¦

Disc: invested . Added a little more at lower levels.

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Nice analysis and summary though donā€™t you think that their cost of Borrowing is quite high in comparison to other NBFC - while they such a strong parent.
2 w segment is quite risky as the value of the collateral reduces by 50% if they plan to offload it.

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MuthootCap - Concall transcript - Q3 FY21 (1).pdf (178.2 KB)

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@Malkd
Do u still actively tracking this company??
Companies with poorest of poor fundamentals also movingā€¦but this has become another ITC.

Still not invested.