| ARKA Fincap Limited | ||||||||
| 'CRISIL PP-MLD AA-r/Stable' assigned to Long Term Principal Protected Market Linked Debentures; Rated amount enhanced for Bank Debt and Commercial Paper | ||||||||
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| Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. | ||||||||
| 1 crore = 10 million | ||||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has assigned its 'CRISIL PP-MLD AA-r/Stable’ rating to the Rs 50 crore Long Term Principal Protected Market Linked Debentures of ARKA Fincap Limited (Arka) while reaffirming the ratings on outstanding debt instruments and bank facilities at 'CRISIL AA-/CRISIL PP-MLD AA-r/Stable/CRISIL A1+'.
The prefix 'PP-MLD' indicates that the principal amount of the debentures is protected, while the returns market-linked. The suffix 'r' shows that the returns on the debentures have significant risks other than credit risk. Also, payments to investors are not fixed and are linked to external variables such as government bond yield, commodity prices, equity indices, foreign exchange rates or equity valuation of the company.
CRISIL Ratings on the bank facilities and debt instruments of Arka continue to factor in the expectation of strong support from the ultimate parent, Kirloskar Oil Engines Ltd (KOEL; rated ‘CRISIL AA/Stable/CRISIL A1+’), because of strategic importance and strong moral obligations. The ratings also factor in adequate capitalisation for the initial stages of operations. These strengths are partially offset by the nascent stage of operations.
As KOEL aims to expand into other financial services business, it has formed a holding company, Arka Financial Holdings Pvt Ltd (AFHPL) which will be the holding company for all financial services businesses of KOEL. KOEL has transferred 100% of its stake in Arka to AFHPL as on March 10, 2022. KOEL, nevertheless, will continue to ultimately holds 100% stake in Arka and will remain the majority shareholder over the medium term. KOEL has infused Rs 782 crores in ARKA till date (Rs 125 crore and Rs 130 crore were infused in fiscal 2021 and fiscal 2022 respectively).
ARKA reported nil GNPAs as on December 31, 2021. Also, under RBI’s resolution frameworks 1.0 and 2.0 for Covid-19-related stress, the company has not restructured any of the borrower accounts as on date. Nevertheless, the impact of a third wave of the pandemic in terms of its spread, intensity and duration on asset quality and earnings, will be closely monitored. |
Analytical Approach For arriving at the ratings, CRISIL Ratings has assessed the standalone credit risk profile of Arka, and factored in the support expected from ultimate parent, KOEL, given the strategic importance of Arka to the former, 100% ultimate shareholding, and the strong moral and financial obligations to support it. |
Key Rating Drivers & Detailed Description Strengths: Strategic importance to, and expectation of strong support from, KOEL Arka derives strong support from its ultimate parent, KOEL, in the form of high strategic importance and strong moral obligations, being its step-down subsidiary. The financial services entity has been identified as a focus area for the parent’s overall diversification plans. KOEL has already infused Rs 782 crores till date (Rs 125 crore and Rs 130 crore were infused in fiscal 2021 and fiscal 2022 respectively), depicting strong financial support towards its subsidiary. KOEL wholly owns Arka and is expected to remain the majority shareholder over the medium term. Moreover, 2 out of 6 directors on Arka’s board are also on KOEL’s board. Promoters of KOEL also have representation in most of the key committees of Arka, viz., credit, asset liability, IT steering, risk management, etc. Arka is expected to benefit from the Kirloskar group’s expertise, especially in small and medium enterprise (SME) lending.
The rating also factors in the strong support from the ultimate parent KOEL, demonstrated by the articulation of its intention to support Arka by way of: (i) its intention to maintain majority shareholding in Arka in the foreseeable future, (ii) Arka, being core to overall business strategy of growth of which diversification into financial services is an integral part, and, (iii) KOEL, making it best efforts to conduct Arka’s business in line with Kirloskar group’s philosophy, so that it meet its obligations on a timely basis.
Adequate capitalisation for initial stages of operations Arka benefits from funding support from the ultimate parent and has adequate capitalisation for initial stages of operations. KOEL has already infused Rs. 782 crores till date (Rs 125 crore and Rs 130 crore were infused in fiscal 2021 and fiscal 2022). Capital support from the parent, is expected to keep capitalisation of Arka adequate (Net worth of Rs 830 crore and Capital Adequacy ratio of 35.7% as on December 31, 2021), with low gearing of 1.5 time in the initial stages of operation.
Weakness: Nascent stage of operations As operations have only commenced in April 2019, they are still in the initial stage. The total loan book stood at Rs 1904 crore as on December 31, 2021 (Rs 1124 crore as on March 31, 2021, Rs 456 crore as on March 31, 2020) with a mix of corporate (56%), real estate (34%) and SME/micro-SME exposure (10%). Going ahead, Arka plans to build a loan book with a healthy mix of corporate, real estate and MSME segments. The company’s ability to scale up operations with a healthy loan book, while maintaining its asset quality over the medium term would be a key monitorable. |
Liquidity : Adequate Arka had overall borrowings stood at Rs 1275 crore as on December 31, 2021. The company’s liquidity is adequate with around Rs 128 crore of cash/cash equivalents and liquid investments and Rs 130 crore of unutilised bank lines as on February 28, 2022. Against this, outflow on account of debt repayments in next three months (March till May’22) is ~ Rs 227 crore. Liquidity is further supported by expectation of financial assistance from ultimate parent, in case of any requirement. |
Outlook: Stable CRISIL Ratings believes Arka will remain strategically important to KOEL and will continue to benefit from its strong support and high moral obligations from the ultimate parent over the medium term. |
Rating Sensitivity Factors Upward Factors:
Downward Factors:
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About the Company Arka is a non-deposit taking systemically important non-banking financial company (NBFC). It is promoted by the Kirloskar group and is a step-down subsidiary of KOEL. Arka was originally incorporated as Kirloskar Capital Ltd, however, the name was subsequently changed to Arka Fincap Ltd in August 2019. In January 2022, KOEL transferred its 99.41% stake in Arka to AFHPL (wholly owned subsidiary of KOEL) and the remaining stake was transferred in March 2022. Arka commenced its operations from April 2019. It has senior leadership and experienced management team on board and has also put in place various policies for smooth operations of its business. Arka aims to build a loan book with a mix of corporate, real estate and SME/MSME segment. |
About the Group : KOEL KOEL, one of the flagship companies of the Kirloskar group, manufactures and services diesel engines (primarily between 2.5-740 horsepower) and diesel generator sets (mainly between 2-1,010 kilo-volt-ampere). The company also makes diesel-, petrol-, and kerosene-based pump sets. It has manufacturing units in Pune, Kagal, and Nashik (all in Maharashtra). KOEL caters to the agriculture, power generation, and industrial sectors. On August 01, 2017, it acquired 76% stake in La-Gajjar Machineris Pvt Ltd and is likely to acquire the balance stake in the next five years, in line with the share purchase agreement. KOEL has set up an NBFC business through ARKA, with equity infusion of Rs 782 crores till date.
For fiscal 2021, on a standalone basis, net profit was Rs 170 crores on revenue of Rs 2694 crores, against Rs 170 crores and Rs 2877 crores, respectively, in the previous fiscal. |
Key Financial Indicators
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Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
@Term loan facility is as per outstanding as on February 28, 2022 #Working capital facility is based on sanctioned amount *Yet to be issued ^Includes undrawn bank lines of Rs 25 crore from State Bank of India ^Includes undrawn bank lines of Rs 50 crore from Bank of Baroda ^Includes undrawn bank lines of Rs 50 crore from Aditya Birla Finance Ltd |
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| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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This Annexure has been updated on 15-Mar-22 in line with the lender-wise facility details as on 15-Mar-22 received from the rated entity
@Term loan facility is as per outstanding as on February 28, 2022
#Working capital facility is based on sanctioned amount
^Includes undrawn bank lines of Rs 25 crore from State Bank of India
^Includes undrawn bank lines of Rs 50 crore from Bank of Baroda
^Includes undrawn bank lines of Rs 50 crore from Aditya Birla Finance Ltd
Criteria Details
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