Muthoot Capital Services Limited Q1 FY27 Earnings Call Summary

Event Participants

Executives

2 Mathews Markose, Ramandeep Gill

Analysts

7 Amit Mehendale, Ankur Gulati, Hitansh, Maneet Khimawat, Manish Arora, Sucrit D Patil, Vinay Jadwani

Financials & KPIs

Geographic & Segment Commentary

• Two-Wheeler (2W): 75% of portfolio; stable degrowth of 1% after excluding DA and ARC pools; blended yield 22%; primary driver of retail GNPA (3.5%); 14-month MOB GNPA improved to 1% from 3-3.5%; internal differentiated scorecards for new-to-credit and existing-to-credit being developed.
• CV & CE: Combined ~40% YoY growth (CE up 75%); blended yield 17.5%; GNPA of just 0.35%; longer tenors (48-60 months) support AUM retention vs 22-24 months for 2W.
• Used Car: AUM contribution up from 2% to 8.5% YoY; yield 18.6%; GNPA improved to 1.31% from 1.75%; opex at 6-6.5% expected to fall to ~4% at breakeven targeted in FY27.
• Co-lending: Book reduced to ₹499 crores from ~₹1,000 crores YoY; consciously wound down with zero incremental disbursements.
• Corporate Loan: No origination for 2 years; book degrown 16%; single NPA with security now held as asset for sale; resolution expected in 6-8 months.
• Geography: Portfolio evenly split - South 40%, East/North/West 60%; Tier 2/3 market focus avoids direct head-to-head competition with large banks.

Company-Specific & Strategic Commentary

• Rating Upgrade: CRISIL upgraded Muthoot Capital to AA- (stable) during Q1; validates asset quality, governance and funding profile improvements; expected to unlock 40-50 bps further funding cost reduction.
• ARC Cleanup: Third ARC deal with PARAS - ₹203 crores sold at ~45.6% blended valuation (₹83.18 crore write-off pool + ₹120 crore 600+ DPD GNPA pool); ₹81 crores reinvested in security receipts; prior ARCs recovered 75% (ARC1) and 46.71% (ARC2).
• AI & Technology: AI bots resolve 55% of X-bucket collections; deployed in welcome calling, audit/compliance and complaint ticket segregation; senior management AI training underway.
• Group Synergies: 15-20% of incremental sourcing from group entities (Muthoot FinCorp's 4,000+ branches, Microfin, MHFL, Chits); target 40%; FinCorp branch activation to rise from 25-30% to 50-60% (2,000-2,500 branches); group channel has lower acquisition cost and higher ROA with independent P&L.
• Product Mix Shift: Long-term objective to reduce 2W from ~75% to ~30% of book; 70% from car, CV, CE and tractors; aligned to "turning wheels changing lives" tagline under the Muthoot Pappachan banner.
• Risk-Based Pricing: Internal scorecards and multi-bureau strategy enabling dynamic weekly pricing adjustments vs. vendor-driven quarterly reviews; approval rates currently at 35-40% vs industry 75-80%.

Guidance & Outlook

Risks & Constraints

Q&A Highlights

Portfolio Repositioning & Margin Defense

• Question: How will Muthoot structurally reposition its 2W/retail portfolio to defend margins in a rising cost-of-funds environment while managing rural stress and fintech competition? (Sucrit D Patil)
• Answer: Mathews Markose highlighted: diversification into CE/CV/used cars with sub-0.5% GNPA reduces provisioning pressure; rating upgrade already delivering ~50 bps funding cost reduction; deposit franchise ~150 bps cheaper than borrowing cost; Tier 2/3 focus avoids direct bank competition; internal scorecards enable dynamic weekly risk-based pricing vs quarterly vendor reviews.

Provisioning Discipline & ECL Framework

• Question: What frameworks ensure provisioning discipline while funding digital transformation and maintaining dividend commitments amid regulatory changes? (Sucrit D Patil)
• Answer: Ramandeep Gill cited three pillars: own sourcing lifted total income ₹12.5 crores to ₹160 crores on a similar book; 14-month MOB GNPA improved to 1% from 3-3.5%; ₹2.5 crore additional ECL provision taken in Q1 to pre-empt the impact of the model revision due in ~4 weeks; potential LGD downgrade on used car/CV from 50% to 40-42% recognized but any reversal deferred to Q4.

AUM Growth & ROA Aspirations

• Question: How do you see AUM for FY27 and FY28? Any ROA aspirations? (Amit Mehendale)
• Answer: Mathews Markose confirmed FY27 projection of ₹4,000-4,200 crores intact, with disbursement scale-up from end-Q2 and a bumper Q3 festive season. Ramandeep Gill guided pre-tax ROA of ~2.5% for FY27 vs ~1% currently, with the FY26 impairment overhang behind.

Used Car Profitability

• Question: At 18.6% yield, used car appears ROA-dilutive - what ROA do you expect? (Amit Mehendale)
• Answer: Ramandeep Gill noted used car impairment of ~0.5% vs 2-2.5% for other products, supporting a ~1-1.5% ROA; opex expected to fall from 6-6.5% to ~4% at breakeven in FY27; used car AUM contribution rose from 2% to 8.5%. Mathews Markose added productivity improved from ₹13-14 lakhs to ₹20 lakhs+ per employee, targeting ₹30-35 lakhs, with vertical and region-level P&L monitored weekly.

ARC Transaction Details

• Question: Can you provide details on the current and prior ARC transactions? (Hitansh)
• Answer: Ramandeep Gill detailed: ARC1 (Sept 2023) - ₹235 crore pool at 50% valuation, 75% security receipt recovered; ARC2 (Sept 2024) - ₹100 crore pool at 50%, 46.71% recovered; ARC3 (Q1 FY27) - ₹203 crore pool at ~45.61% blended valuation comprising an ₹83.18 crore write-off pool and ₹120 crore 600+ DPD GNPA pool, with ₹81 crores parked in security receipts.

GNPA/NNPA Guidance

• Question: What is the GNPA/NNPA guidance for FY27 and beyond? (Hitansh)
• Answer: Ramandeep Gill guided retail GNPA sub-4% throughout FY27 (currently 3.49%) and NNPA sub-2%; corporate loan recovery expected within 6-8 months via sale of property security now held as asset for sale; no change in ECL policy.

ARC Accounting Impact

• Question: Can you explain the accounting impact of the ARC sale in simple terms? (Vinay Jadwani)
• Answer: Ramandeep Gill explained: the ₹83.18 crore write-off pool was already fully impaired over prior years; only ₹14 crores recovery has come back, so no gain. For the ₹120 crore GNPA pool, sale price was ₹78 crores vs book value of ₹60.34 crores and ₹59 crores provision; ₹15 crores income was reversed. 85% of ARC proceeds (₹66 crores) held as SR investment requiring mark-to-market if recoveries disappoint.

Equity Raise Update

• Question: What is the status of the equity raising plan discussed last call? (Vinay Jadwani)
• Answer: Ramandeep Gill stated gearing at 4.88x is comfortable till 6x; data has been shared with 2-3 investors; meetings expected in Q2, with a deal only if valuation works.

Branch Strategy & Group Synergies

• Question: What branch infrastructure supports the ₹10,000 crore AUM target, and how will the ₹700-800 crore non-2W book grow 10x? (Ankur Gulati)
• Answer: Mathews Markose outlined: the strategy leverages the group ecosystem - Muthoot FinCorp's 4,000+ branches (25-30% activation, target 50-60% = 2,000-2,500 branches doing 1+ vehicle loan/month), 5,000+ dealer/DSA network, and QR-code digital origination at dealerships; group entities contribute 15-20% of incremental sourcing (target 40%) at lower acquisition cost with independently profitable vertical P&Ls.

Key Takeaway

Muthoot Capital delivered a transformative Q1 FY27: CRISIL upgraded the company to AA- (stable), public deposits crossed ₹100 crores, and GNPA fell 182 bps YoY to 3.94% (retail 3.49%) after a ₹203 crore ARC sale to PARAS. MCSL standalone disbursements grew to ₹535 crores from ₹508 crores QoQ, while total income rose to ₹160 crores from ₹147 crores as own-sourced retail (84% of book) replaced co-lending. PAT was ~₹8 crores on ~1% pre-tax ROA, guided to 2.5% for FY27. FY27 AUM guidance of ₹4,000-4,200 crores and the ₹10,000 crore FY28-29 target remain intact, underpinned by internal scorecards, AI-led collections (55% X-bucket resolution), group sourcing at 15-20% of incremental business, and expectations of 40-50 bps further funding cost reduction post-upgrade. Watch items: macroeconomic conditions, ARC recoveries on the ₹81 crore security receipt, and resolution of the ₹15-16 crore corporate NPA.