Detailed Rationale

CRISIL Ratings has reaffirmed its 'CRISIL A-/Negative’ rating on the long-term bank facilities of ITI Finance Ltd (formerly Fortune Integrated Asset Finance Ltd – 'ITI Finance'; a part of Investment Trust of India Ltd [ITI]).

 

The rating continues to reflect adequate capitalisation and expectation of strong support from the ITI group. These strengths are partially offset by the groups’ weak albeit-improving asset quality, modest earnings profile, and limited diversity in the resource profile.

 

The ‘Negative’ outlook factors in the lack of diversification in the overall funding profile and lower scale of business compared to peers in this category. This is because the company has stopped further disbursements to certain loan segments, thereby offsetting growth in target segments. Earnings profile and asset quality should improve at the group level with growth in assets under management (AUM).

 

Capitalisation remains adequate, with tangible networth of Rs 406 crore as on March 31, 2023, against Rs 389 crore a year ago. The tangible networth stood at Rs 423 crore as per September 30 2023 provisional numbers. The company also benefits from need-based support from the group in the form of borrowing and capital infusions. The entities within the group also benefit from common management and operational synergies.

 

Gross non-performing assets (GNPA) stood at 2.8% as on September 30, 2023 , 3.5% as on March 31, 2023 and 3.6% a year ago. GNPAs were elevated as compared to the 90+ days past due (DPD) of 2.5% as on March 31, 2023, due to the implementation of revised income recognition and classification norms issued by the Reserve Bank of India (RBI). However, cumulative GNPAs for all the lending businesses of the ITI group remains high at 5.4% as on September 30, 2023, even as it reduced from 6.9% as on March 31, 2023.. We note that, around 65% of total GNPAs come from the micro small and medium enterprises and microfinance segments housed under Fortune Credit Capital Ltd (FCCL, another subsidiary of the ITI group). The group is simultaneously winding down these loan books as well. Earnings profile was modest with profit after tax (PAT) of Rs 25 crore in the first half of fiscal 2024, 26 crore in fiscal 2023 against PAT of Rs 12 crore in fiscal 2022, translating into return on assets (RoA) of 1.8% in H1FY24 and 1.1% in fiscal 2023. The group’s ability to maintain asset quality and improve earnings profile as the portfolio scales up will be a key monitorable.

 

Resource profile was concentrated with 59.3% of the borrowing being intra group as on March 31, 2023. Ability of the group to bring on board new banks and diversify their incremental funding needs to be demonstrated.

 

The group had revised its lending strategy from fiscal 2022 and identified, used private vehicles, small and light commercial vehicles, electric three wheeler, housing loans and gold loans as their focus businesses for growing AUM in these segments to Rs 941 crore in fiscal 2023 to a total of Rs 1,168 crore. AUM of ITI Finance increased to Rs 1146 crore as on September 30, 2023 against Rs 850 crore as on March 31, 2023 and Rs 499 crore a year ago. Growth in the focus segments was partly offset by continued downsizing in the underperforming segments such as three-wheeler loans, tractor loans, education loans, loan against shares (LAS), nano loans (unsecured small ticket personal loans) and unsecured small and medium enterprise loans. Of these, education loans and LAS are fully run down and exposure towards the remaining defocused segments cumulatively amounts to Rs 100 crore as on March 31, 2023 (down from Rs 158 crore a year ago).

Analytical Approach

CRISIL Ratings has analysed the standalone credit risk profile of ITI Finance and factored in the strong support received from the ITI group on an ongoing basis, even in the event of distress. This is because ITI Finance and the group have common promoters and share high operational, managerial and financial linkages. The group is likely to continue providing support to the company considering its strategic importance.

Key Rating Drivers & Detailed Description

Strengths:

Adequate capitalisation

Capitalisation has been adequate, with tangible networth at Rs 406 crore and adjusted gearing of 2.2 times as on March 31, 2023, against Rs 389 crore and 1.5 times, respectively, a year ago. Tangible networth was Rs 423 crore as on September 30, 2023. Networth coverage of asset side risk (networth to net non-performing assets) was healthy at 14.4 times. Given the expected support from the group and the growth plans of the company, gearing should remain well below 3 times over the medium term. Capital adequacy stood comfortable at 29.5% as on March 31, 2023, against 38.7% on March 31, 2022. At the group level (excluding ITI Finance Ltd), networth stood at Rs 646 crore and adjusted gearing at 0.3 time as on March 31, 2023 against Rs 601 crore and 0.2 time a year back. The networth was Rs 655 as on September 30, 2023 with a gearing of 0.4 times.

 

Benefits from linkages with the ITI group

ITI Finance is strategically important to the group’s business plan of having retail financing presence. The company along with other group companies have common shareholders and directors, and operational linkages. The company should continue to receive operational and managerial support from the group on an ongoing basis, and funding support when in distress. The group houses many other businesses such as broking, asset management and insurance in addition to their lending businesses and has historically shown its support via timely infusions of funds in subsidiaries.

 

Weakness:

Ability to manage asset quality and improve profitability as the portfolio scales up needs to be demonstrated

The asset quality of ITI Finance improved slightly with the 90+ DPD reducing to 2.5% as on March 31, 2023, from 3.6% a year ago. However, GNPAs stood at 2.8% as on September 30, 2023 and 3.5% as on March 31, 2023, and 3.6% on March 31, 2022, reducing from 5.1% as on March 31, 2021. GNPAs were higher than the 90+ DPD as on March 31, 2023 due to the implementation of revised income recognition and classification norms issued by the RBI. The increase in delinquencies in fiscal 2021 was a consequence of the Covid-19 pandemic, which severely impacted the three-wheeler segment. The company is winding down its three-wheeler loan book, which accounts for ~10% of the overall loan book as on March 31, 2023, as compared with 35% a year ago. Financing of used private cars, electric three wheeler and used commercial vehicles (small, light and medium and heavy), are the focus areas under the new strategy, and their proportion in the portfolio may increase over the medium term.

 

Restructured assets of ITI Finance came down to Rs 39 crore as on March 31, 2023, from Rs 88 crore a year ago. However, out of the total restructured assets, Rs 12 crore slipped into non performing assets in fiscal 2023; this was mainly in three wheeler segment contributing Rs 8.6 crore and used private car contributing Rs 2.6 crore while the balance came from the commercial vehicle segment.

 

ITI Finance reported PAT of Rs 16.6 crore (return on managed assets [RoMA]: 1.3%) as on March 31, 2023, driven by increase in the net interest income due to growth in AUM as well as lower reduction of credit cost (to 2.5% of average assets in fiscal 2023 from 3.4% in fiscal 2022). PAT was Rs 16.8 crore (RoMA 2.2%) as on September 30, 2023.

 

Operating expenses remain high, at 9.6% of average assets with employee costs forming 41% of total operating expenses. Furthermore, PAT of Rs 16.6 crore in fiscal 2023 was offset by the loss of Rs 16.2 crore in fiscal 2023 and Rs 1.3 crore in fiscal 2022 incurred in the wind business owing to the merger of Wind Constructions Ltd (WCL) with ITI Finance in December 2021. Excluding the impact of the WCL losses, RoA would have been higher at 2.4%.

 

Asset quality remains vulnerable as the borrower profile is highly sensitive to business disruptions, for with which the company has worked towards necessary risk underwriting, monitoring and collection efforts. Thus, while the company is well-capitalised, the ability to profitably scale up operations in focus segments, while managing asset quality, is a key monitorable.

 

Limited, albeit improving, diversity in the borrowing profile

Total borrowings increased to around Rs 1,544 crore as on September 30, 2023, from Rs 1,167 crore March 31, 2023, as the company gradually increased its book size. Of these borrowings, 59.3% were from group entities and rest from other non-banking financial companies (NBFCs). While the group support is sufficiently available in the form of inter corporate debts, it will be critical to avail funds from multiple avenues such as banks as well as through capital market instruments to scale up the business hereon. The group is in discussions with various banks and other lenders and is making efforts towards diversifying their fund sources. Progress on this front is a key monitorable

Liquidity: Adequate

Liquidity is managed on the level of each entity, however if required, companies can receive liquidity support from group entities. Liquidity for lending entities was adequate as on November 30, 2023, with Rs 135.1 crore in the form of cash, bank balances, and unutilised bank lines, as against repayment of Rs 72.9 crore in the next five months.

Outlook: Negative

Sustainable improvement in asset quality and earning performance are yet to be demonstrated by the ITI group under its revised strategy.

Rating Sensitivity Factors

Upward Factors

• Upward revision in CRISIL Ratings credit view on the group
• Material improvement in asset quality of the group, leading to enhanced profitability with RoA over 2%
• Scaling-up of AUM (of the group) on sustained basis

 

Downward Factors

• Change in the extent of the ITI group or promoter’s ownership of ITI Finance or weakening of expected support from the group
• Deterioration in group’s asset quality in fiscal 2024
• Weakening of the earnings of the group, with RoA falling below 1.0% on a continuous basis
• Further contraction of the group loan book.

About the Company

ITI Finance is a Mumbai-based, non-deposit-taking systemically important NBFC that majorly operates in the three-wheeler passenger, used private, and commercial vehicle financing segments. Its AUM stood at Rs 864 crore as on March 31, 2023 and it has increased to Rs 1146 crore as on September 30, 2023. The company has been reducing its exposure to three-wheeler and heavy commercial vehicles and will focus on used private and light commercial vehicles over the medium term.

 

ITI Finance commenced operations in 2012, and operated as a subsidiary of ITI (formerly, Fortune Financial Services (India) Ltd), a holding company of the ITI group. In 2015, Mr Sudhir Valia (the group’s key promoter) and his family members increased their stake in ITI Finance to around 75%, while ITI Ltd retained 25% ownership. Mr Chintan Valia, son-in-law of Mr Sudhir Valia, is the managing director.

 

For fiscal 2023, group-level PAT including the PAT of ITI Finance was Rs 26 crore on total income (net of interest expense) of Rs 494 crore, as compared with adjusted PAT of Rs 12 crore on total income (net of interest expense) of Rs 477 crore in the fiscal 2022. RoMA was 1.1% and 0.6% during the same time periods. The PAT was Rs 25 crore in first half of fiscal 2024 with a RoMA of 1.8%.

Key Financial Indicators

	Unit	H12024	2023	2022	2021
AUM	Rs crore	1146	864	499	691
Total tangible managed assets	Rs crore	1676	1443	1059	1,248
Total income	Rs crore	145	248	233	246
PAT	Rs crore	16.8	16.6	14.9	-14.4
GNPA/loans	%	2.8	3.5	3.6	5.1
RoMA	%	2.2	1.3	1.3	1.4

The above ratios are calculated as per CRISIL Rating methodology

Any other information: Not Applicable