Muthoot Capital Services Navigates Q2 FY26 with Strategic Turnaround Amidst Market Headwinds

Muthoot Capital Services Limited (MCSL) reported a resilient performance for Q2 FY26, successfully reversing a Q1 loss to post a Profit After Tax (PAT) of INR 3.31 crore. This turnaround comes amidst a challenging macroeconomic environment characterized by a 16% decline in overall retail vehicle sales and widespread monsoons impacting key markets. Despite these headwinds, the company demonstrated strategic agility, with its own disbursements declining by a more modest 12% compared to the broader market.

The quarter saw MCSL's Asset Under Management (AUM) grow by a robust 38% year-on-year, reaching INR 3,284 crore. However, sequentially, AUM growth was a modest 1%. The company's total balance sheet size expanded to INR 3,731 crore. Interest income for the quarter stood at INR 153.54 crore, contributing to a Net Interest Income (NII) of INR 72.16 crore. Operating expenses were INR 53.62 crore, and loan losses and provisions amounted to INR 16.70 crore. The Capital Adequacy Ratio (CRAR) remained healthy at 22.02%, while the Debt-to-Equity ratio was 4.56x.

Strategic Initiatives and Asset Quality Management

Management's proactive measures in Q2 were pivotal. The company implemented significant changes to its credit policy, including dealer and location categorization based on delinquency and perceived risk. This led to a reduction in fresh slippages by 6% and a substantial 69% increase in collections and normalization from the NPA pool. The eNACH penetration saw a remarkable jump to 92%, with 77% of overall collections now flowing through digital channels, enhancing operational efficiency.

Asset quality, however, remains an area of focus. Gross NPA (GNPA) with interest accrual increased to 6.46%, and Net NPA (NNPA) to 3.07%. The impairment cost, though high in previous quarters, was brought down to 2.05% in Q2. The company maintains a Provision Coverage Ratio (PCR) of 60%. Management acknowledged the high gross slippage numbers but expressed confidence in their ability to improve asset quality in the coming quarters through continued recovery efforts and strategic adjustments.

Diversification and Future Outlook

Muthoot Capital Services is actively diversifying its product portfolio beyond its core 2-wheeler business. The company has expanded into used cars, commercial vehicles, and loyalty loans, with plans to launch used 2-wheelers and construction equipment loans by Q3 FY26. This diversification, coupled with the implementation of risk-based pricing, is expected to drive an uptick in yields, with a projected 1-1.5% increment starting Q3. The company's blended yield increased to 20.35% in Q2.

Management has set an ambitious AUM target of INR 4,000 crore for FY26 and a long-term vision to reach INR 10,000 crore AUM by 2028, aiming for a 4% Return on Asset (ROA). To support this, significant investments are being made in technology, including a data lake platform and a digitally run collection strategy, which are expected to go live in phases. The company's outlook was further bolstered by CRISIL upgrading its rating outlook from 'stable' to 'positive' while reaffirming its A+ rating.

Muthoot Capital Services Limited is clearly on a path of strategic transformation, focusing on asset quality, product diversification, and digital innovation. While Q2 presented its share of challenges, the company's ability to return to profitability and its clear forward-looking strategy underscore its disciplined execution and commitment to sustained growth.