Axis Finance Limited Ratings Reaffirmed
Rating Action
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 reaffirmed its ‘CRISIL AAA/Stable/CRISIL A1+’ ratings on the debt instruments of Axis Finance Limited. CRISIL Ratings has withdrawn Rs 953.6 crore of non- convertible debentures as the same has been repaid as on date. Withdrawal is in line with CRISIL Ratings' withdrawal policy.
The rating on the perpetual bonds reflects the comfortable buffer consistently maintained by AFL over the regulatory capital adequacy requirements, and high financial flexibility due to Axis Bank Ltd's (rated 'CRISIL AAA/CRISIL AA+/Stable'/CRISIL A1+) ownership. AFL has maintained a cushion of >5% over the regulatory minimum capital ratio over the last seven years and CRISIL Ratings believes that it will maintain a comfortable cushion going forward (see CRISIL publication 'CRISIL Criteria for Rating Hybrid Instruments Issued by NBFCs/HFCs' dated December 2016 for details on CRISIL's approach for rating such instruments).
The ratings continue to reflect AFL’s strategic importance to its parent Axis Bank Ltd. The shared name and logo enhance the moral obligation of Axis Bank to support AFL. The ratings also factor in the company’s comfortable capitalisation and healthy earnings. These strengths are partially offset by its exposure to concentration risks inherent in the wholesale lending business model.
Under the RBI August 2020 and May 2021 Resolution Framework for COVID-19-related stress, the company has implemented restructuring on accounts amounting to Rs 15 crore as on March 31, 2023. AFL’s ability to manage collections and asset quality will remain a key monitorable. |
Analytical Approach For arriving at the ratings, CRISIL Ratings has assessed the standalone credit risk profile of AFL and continues to factor in strong managerial and financial support from the parent Axis Bank. CRISIL Ratings believes AFL will receive distress support from the parent for timely repayment of debt, considering its strategic importance to, and the high moral obligation on, Axis Bank on account of 100% shareholding and shared brand. |
Key Rating Drivers & Detailed Description Strengths:
The ratings centrally factor in the support AFL receives from Axis Bank. The company is of strategic importance to the bank as it enhances the customer reach of the bank. AFL benefits from the operational and managerial support from the parent in formulation of credit policies, portfolio monitoring, and collection practices. The company’s board comprises senior functional executive from Axis Bank, which ensures strong supervision of its performance by the bank. The company also benefits from regular capital support from the bank, which infused Rs 1475 crore cumulatively in the past nine years. CRISIL Ratings believes the close operational, managerial, and financial linkages, and sole ownership of AFL by Axis Bank imply a strong moral obligation on the parent to support AFL.
AFL’s capital position is comfortable, supported by absolute networth of Rs 3,172 crore as on March 31, 2023 (Rs 1,442 crore as on March 31, 2021), and regular capital infusion by Axis Bank. Axis Bank has infused Rs 400 crore each in fiscal 2022 and fiscal 2023. Further infusion of Rs 300 crore from Axis Bank is planned in fiscal 2024. Tier I and overall capital adequacy ratios were comfortably above the regulatory minimum, at 14.8% and 20.1%, respectively, as on March 31, 2023 (14.0% and 19.2%, respectively, as on March 31, 2022). Gearing has declined to 6.3 times as on March 31, 2023 from 6.7 times as on March 31, 2022 and is expected to remain under 7.5 times on a steady state basis. However, adjusted gearing[1] works out to 6.9 times due to off book transactions amounting to Rs 2026 crore. Networth coverage for net stage 3 assets increased to 54 times as on March 31, 2023 from 31 times as on March 31, 2022. CRISIL Ratings expects healthy accretion to reserves and capital support from the parent to keep AFL’s capital position comfortable over the medium term.
Earnings are marked by healthy net interest margin (NIM) and low operating expenditure. AFL reported profit after tax (PAT) of Rs 579 crore in fiscal 2023 as against PAT of Rs 346 crore in previous fiscal. Profitability is supported by growth in the loan book, income from direct assignment transactions and lower provisioning cost in fiscal 2023.
As the company was primarily engaged in wholesale lending, its operating expenditure has remained low. With diversification into retail finance from fiscal 2020, expenditure related to setting up of employee base and other infrastructure has resulted in, operating expenses increasing to 1.3% of average managed assets in fiscal 2023 as against 0.7% in fiscal 2019. Nevertheless, with ramp-up of the loan book, operating efficiency is expected to kick in over the medium term.
On account of decrease in stage 3 assets in fiscal 2023, the company’s credit cost improved to 0.3% from 0.5% in fiscal 2022. Nevertheless, given the challenging macroeconomic environment and wholesale nature of the business as well as expansion into vulnerable retail segments, the ability of the management to limit credit costs will be a monitorable.
Weakness:
The assets under management (AUM) grew by 47% in fiscal 2023 and stood at Rs 24,995 crore as on March 31, 2023 (Rs 17,059 crore as on March 31, 2022) whereas assets under finance (AUF) grew by 35% in fiscal 2023 to Rs 22,969 crore, out of which around 57% is towards wholesale lending. The loan book, although chunky, is backed by adequate collateral with only 9% being unsecured in wholesale book. However, with a view to further increase the granularity in the overall book and focus on SME/MSME segment, AFL launched ‘Emerging market’ segment in fiscal 2022 under which it offers secured loans with ticket size ranging from Rs 5 crores to Rs 25 crores. The AUF for this segment remains modest compared to other segments at Rs 1,704 crores (8% of the overall AUF) as on March 31, 2023, albeit higher than 4% as on March 31, 2022. The management is targeting this segment as one of the growth areas for AFL over medium term. Scalability of this business segment remains a monitorable.
As a part of its strategy to increase proportion of cash-flow backed exposures, the company has reduced its exposure to real estate financing to 6% of the loan book as on March 31, 2023 from 27% as on March 31, 2020. The current loan book is well diversified across sectors (including conglomerates, logistics, steel, pharma, cement, auto components, healthcare) and is primarily towards operating level companies and/or adequately backed by contracted/demonstrated cash flows. The rating distribution of the top exposures has remained stable as reflected in 96% of disbursements in fiscal 2023 being towards companies rated A- or above and cash flow backed deals. Furthermore, the company has increased its focus on collateralised loans (Lease Rental Discounting (LRD)/Loan against Property (LAP) exposures) to add granularity and further diversification in the wholesale book.
AFL has been investing in building up the retail franchise over the past 3 years and has diversified into retail finance segments such as LAP, home loans, personal loans, business loans etc. in fiscal 2020 to create a granular consumer lending franchise. The retail segment formed 43% of the AUF as on March 31, 2023 (33% as on March 31, 2022), the share is expected to increase further over medium term. Recently, the company has entered Affordable Housing Loans and Micro LAP segments. CRISIL Ratings believes AUM growth will remain steady over the medium term supported by improving geographical reach and a gradual increase in product offerings.
Overall asset quality improved in fiscal 2023 with stage 3 assets decreasing to 0.60% as on March 31, 2023, from 1.23% as on March 31, 2022 partly on account of lower slippages amounting to Rs 98 crore and higher write offs amounting to Rs 46 crore done during fiscal 2023 (vs. Rs 110 crore and Rs 31 crore respectively for fiscal 2022).
While AFL has put in place adequate risk management systems and processes, the ability of the management to limit slippages and recover stage 3 assets will remain a monitorable. The retail portfolio is largely unseasoned; thus performance of the same remains to be seen. [1] CRISIL Ratings adjusted gearing number for non-banks includes all forms of on-balance sheet debt and fully derecognized off-book securitised assets (including direct assignment transactions). As per IND AS, direct assignment transactions qualify for complete derecognition due to their true sale nature |
Liquidity: Superior As on May 31, 2023, company has total debt obligation of ~Rs 1,905 crore, till August 31, 2023, of which Rs 410 crore comprises commercial paper. Against this, AFL had adequate liquid investments and unutilized bank lines as on the same date. AFL is active in raising resources from lenders and investors. Liquidity is also supported by the parent, Axis Bank, if required. |
Outlook: Stable CRISIL Ratings believes AFL will continue to benefit from the strong financial, managerial and operational support from Axis Bank. AFL is likely to maintain its comfortable capitalisation and adequate profitability.
In addition, the rating on the perpetual bonds remains sensitive to the capital buffer maintained by AFL over regulatory capital requirements and rating transition on these instruments could potentially be sharper than those on other debt instruments. |
Rating Sensitivity factors Downward factors
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About the Company AFL was incorporated as Kalpataru Hire Purchase and Leasing Pvt Ltd in 1995 and was acquired by Enam Securities in fiscal 2009 and renamed Enam Finance Pvt Ltd. It became a wholly owned subsidiary of Axis Bank as part of Enam Securities’ merger with the bank in 2012, and got its present name. The company started full-fledged operations in fiscal 2014. It is a non-deposit-taking non-banking financial company based in Mumbai, with AUM of Rs 24,995 crore as on March 31, 2023 (Rs 17,059 crore as on March 31, 2022). Its key product offerings in the wholesale segment include corporate loans, collateralised loans, loan against property, lease rental discounting, real estate inventory backed financing etc. AFL diversified into retail segments with products such as LAP, home loans, business loans and personal loans in fiscal 2020. AUM in the retail segment stood at Rs 9,495 crore as on March 31, 2023. In fiscal 2022, AFL launched a new segment named as ‘Emerging Markets’ where the company offers secured loans to MSME/SME segment. AUM for this segment stood at Rs 1,704 crore as on March 31, 2023.
Profit after tax (PAT) stood at Rs 579 crore and total income (net of interest expense) stood at Rs 1130 crore in fiscal 2023, against a PAT of Rs 346 crore and total income (net of interest expense) of Rs 736 crore in fiscal 2022. |
Key Financial Indicators
*As per CRISIL Ratings calculations |
Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
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Annexure - Details of Ratings withdrawn
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