Detailed Rationale

CRISIL Ratings has placed its ‘CRISIL A2+’ rating on the short-term bank loan facilities of Centrum Broking Ltd (CBL) on ‘Rating Watch with Developing Implications’.

 

The rating action follows the announcement by Centrum Capital Ltd (CCL), holding company of the Centrum Group on June 18, 2021 with respect to Reserve Bank of India (RBI) issuing an in-principle approval to Centrum Financial Services Limited (CFSL) to establish a Small Finance Bank (SFB). CFSL is the NBFC arm of Centrum group and a step-down subsidiary of Centrum Capital. As per the press release of RBI, the in-principle approval is in specific pursuance of CFSL’s offer with respect to expression of interest sought by Punjab & Maharashtra Co-operative Bank Ltd (PMC). The final approval for the SFB license is subject to the group being compliant to RBI’s requisite conditions. Resilient Innovations Pvt Ltd (BharatPe) will be an equal partner in the SFB.

 

CRISIL Ratings understands that if RBI grants the final approval to the Centrum group for the SFB and the Government of India approves and notifies a scheme of amalgamation of the said SFB with PMC bank as maybe recommended by RBI, the amalgamation will proceed as outlined in the notified scheme of amalgamation.

 

CRISIL Ratings believes that there are many steps and developments, which may potentially need to be considered and approved by regulators and the Government of India before the proposed SFB receives final approvals and amalgamates with the PMC Bank. Further, the Centrum group is also in a process to finalise its strategy around the business, branding and key target segments for the SFB. CRISIL Ratings will resolve the watch and take final rating action once the final approvals are in place and CRISIL Ratings has detailed information with respect to the business strategy and organisational structure of the SFB.

 

The rating continues to factor in adequate capitalisation and well-diversified product offerings of the Centrum group across the financial services domain. These strengths are partially offset by the modest earnings profile and exposure to uncertainties inherent in capital market-related businesses.

 

The Centrum group has presence across the fee-based services such as broking, wealth management, investment banking, and asset management, and fund-based businesses such as microfinance, housing finance and non-banking finance company. Given the nature of business, income from fee-based businesses tend to be volatile in-sync with the capital market activities and hence in the current difficult macro environment, on account of Covid-19, the performance of the group will remain monitorable

 

In line with Reserve Bank of India’s (RBI's) measures for the Covid-19 pandemic, lending business of the Centrum group had given moratorium to its borrowers. While the collection efficiency was impacted during the initial months of the moratorium, collections have inched up since then. However, the second wave of the pandemic has resulted in intermittent lockdowns and localised restrictions. This could lead to some delays in collections in upcoming months due to impact on the underlying borrowers’ cash flow. Furthermore, any change in the behaviour of borrowers on payment discipline can affect delinquency levels.

Analytical Approach

For arriving at the rating, CRISIL Ratings has combined the business and financial risk profiles of CBL, its parent and the group’s flagship company, Centrum Capital Ltd (CCL), and CCL’s other subsidiaries: Centrum Wealth Management Ltd (CWML), Centrum Financial Services Ltd (CFSL), Centrum Housing Finance Ltd (CHFL) and Centrum Microcredit Ltd (CML). This is because of the high degree of managerial, business, and financial integration among the companies, collectively referred to as the Centrum group.

 

Please refer Annexure – List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

* Adequate capitalisation

CRISIL Ratings believes the Centrum group is adequately capitalised for its current and proposed scale up of operations over the medium term. Adjusted net worth of the group stood at Rs 681 crore as on March 31, 2021 (Rs 721 crore as on March 31, 2020). Adjusted gearing increased to 2.8 times as on March 31, 2021, (from 2.4 times, as on March 31, 2020) and with the scale up in operations, adjusted gearing is expected to increase from the current levels over the medium term. Nevertheless, it is expected to remain in line with peers with a steady state gearing for the non-banking financial company (NBFC) and housing finance company (HFC) business at 4-5 times and 6-7 times, respectively. The impact of the group’s earnings on its capitalisation levels will, however, continue to be a key rating monitorable. 

* Well-diversified product offerings across financial services domain

The Centrum group is present across various segments, including institutional business (investment banking, institutional broking), wealth management (private wealth, insurance broking), lending (affordable housing, NBFC and microfinance) and asset management. 

 

The group has a well-diversified business profile, with an established presence in fee-based businesses. It has ventured into fund-based businesses through setting up of CHFL for offering affordable housing loans, a non-banking finance company, CFSL for offering business loans to small and medium enterprises and CML for providing loans to un-served and under-served borrowers operating small businesses in semi-urban areas. This diversification should help the group expand its reach and customer base, providing increased opportunity of cross-selling its offerings.

 

CCL is a merchant banker with presence in the debt capital markets with clients such as public sector units, banks, state-level undertakings, private corporates and provident funds. The groups’ wealth management business has witnessed healthy traction in recent years with assets distributed and managed increasing to ~ 25000 crore as on March 31, 2021 (Rs 23,000 crore as on March 31, 2020).  The wealth management business offers distribution, investment advisory and family office services across asset classes, such as equity, fixed income, real estate and alternate investments. The group also has an insurance intermediation business, which placed new business premium in excess of Rs150 crore in fiscal 2021 (125 crore in fiscal 2020). The group launched the asset management business in fiscal 2018. The equity broking operations (carried out through CBL) remains small with a low market share. However, its broking volume has also witnessed an improvement over the past few fiscals.

 

The group started its lending businesses (NBFC, HFC and MFI) about 4 years ago  . To scale up these new businesses, the group has a team of experienced professionals and has also inorganically grown through acquisition of portfolios from other players. The group offers various products like supply chain finance, structured finance, mid-corporate finance, real estate finance, MSME business loans, affordable housing finance and micro-finance. The group has slowed down on the disbursements on the wholesale book and is focused on growing the retail and small business loans. Consolidated loan book of the three NBFCs were flat at ~ Rs 1800, crore as on March 31, 2021 (Rs 1,787 crore as on March 31, 2020). Gross NPAs were at 1.7% as on March 31, 2021 (1.4% as on March 31, 2020). However, the portfolio is not well seasoned and asset quality performance as the portfolio seasons further will be a monitorable

 

CRISIL Ratings believes that while the group’s foray into fund-based businesses will provide cross-selling opportunities and diversification to the group, its ability to scale up the same successfully will be a monitorable.

 

Weakness:

* Modest earnings

Overall earnings profile of the group, historically supported by the foreign exchange business which was divested in fiscal 2019, has been muted in the last two fiscals. For fiscal 2021, the group reported a loss of Rs 42 crore on a total income (net of interest expense) of Rs 275 crore. As against this, PAT of Rs 0.7 crore (including an exceptional item of Rs 68 crore) was reported on a total income (net of interest expense) of Rs 282 crore, for fiscal 2020.

 

Revenue and core earnings continue to be muted in fiscal 2021, on account of low growth in the lending business. Revenue of the wealth management business increased to Rs 90 crore in fiscal 2021 (from Rs 77 crore in fiscal 2020) and turned in a small profit as opposed to loss in fiscal 2020. Despite a flat loan book and higher credit costs, all three lending businesses have reported profits in fiscal 2021. Nevertheless, on account of challenging macro-economic environment, the ability of the management to manage the asset quality and limit the credit the cost will remain a monitorable.

 

* Exposure to uncertainties inherent in capital market-related businesses; nascent stage of operations of lending business

The group’s capital market businesses remain susceptible to economic, political, and social factors that drive corporate and investor sentiment. Trading volume and earnings depend heavily on the level of trading activity in capital market. Global events also influence fortunes of the domestic market. Turnover and volume in the broking business move in tandem with market sentiments.

 

Lending businesses of the group are at early stages. However, the group has focused on putting in place sound credit appraisal and risk management processes to support ramp-up, over the medium term. Ability to grow the loan book and manage asset quality, as the portfolio seasons, will be key monitorables.

Liquidity: Adequate

Liquidity is adequate, as on May 31, 2021, with about Rs.400 crore of cash and Bank balance and ~ 100 crore of unutilized bank lines. Against the same, the group has total debt payments of less than 150 crore over the next three months till August 31, 2021. Further, the group had cash and cash equivalents of Rs 472 crore as on March 31, 2021.

Rating Sensitivity Factors

Upward Factors

• Substantial and sustained improvement in market position across businesses while maintaining credit quality metrics
• Improvement in earnings profile with the group reporting RoA>1% over an extended period

Downward Factors

• Deterioration in asset quality leading to increase in the credit costs impacting the capitalisation of the group
• Subdued earnings profile with the group reporting losses at core earnings level (RoA<0%).

About the Group

The Centrum group is being led by Mr. Jaspal Bindra, who is the Executive Chairman of Centrum group. The centrum group has presence across various segments including institutional business (investment banking, institutional broking), wealth management business (private wealth, insurance broking), lending businesses (affordable housing, NBFC and microfinance) and asset management business. As on March 31, 2021, NBFC, HFC and MFI had a loan book of Rs 875 crore, Rs 473 crore and Rs 427 crore, respectively.

 

CBL is the Brokerage arm of Centrum Group that offers brokerage, equity research, portfolio management services, depository participant and financial product distribution services to non- institutional clients. it also offers research, brokerage and placement services to institutional clients. The Company is a member of BSE and NSE (Equities & Currency segments), a Depository Participant (of CDSL), SEBI Registered Research firm and a Portfolio Manager. CCL ultimately hold 96.7% in CBL.

 

Centrum group reported a loss of Rs 42 crore (including an exceptional gain of Rs 68 crore) on a total income of Rs 513 crore in fiscal 2021 as against a profit of Rs 0.7 crore (including an exceptional item of Rs 68 crore) on a total income of Rs 480 crore in the corresponding period previous fiscal.

 

CBL had total income and profit of Rs 53.5 crore and Rs 0.4 crore, respectively, in fiscal 2021 as against total income and loss of Rs 62 crore and Rs 1 crore, respectively, in fiscal 2020.

Any other information: Not applicable