Incred Financial Services Limited ‘CRISIL PPMLD A+ r/Stable’ assigned to Long Term Principal Proteted Market Linked Debentures; ‘CRISIL A+/Stable’ assigned to Non-Convertible Debentures; ‘CRISIL A1+’ assigned to Commercial Paper programme Long-term rating of erswhile KKR India Financial Services Limited downgraded to ‘CRISIL A+/Stable’, removed from ‘Watch Negative’
Rating Action
*Previously rated CRISIL A/Watch Positive; transferred from erstwhile Incred Financial Services Ltd which has been renamed as Incred Prime Finance Ltd
# Facilities pertaining to erstwhile KKR India Financial Services Ltd which is now renamed as Incred Financial Services Ltd after corporate reorganization
* Previously rated CRISIL A/ Watch Positive/ CRISIL A1; transferred from erstwhile Incred Financial Services Ltd which has been renamed as Incred Prime Finance Ltd
1 crore = 10 million Refer to annexure for Details of Instruments & Bank Facilities # Facilities pertaining to erstwhile KKR India Financial Services Ltd which is now renamed as Incred Financial Services Ltd after corporate reorganization |
Detailed Rationale CRISIL Ratings has assigned its ‘CRISIL PPMLD A+ r/Stable’ rating to the Rs 600 crore long-term principal protected market linked debentures, ‘CRISIL A+/Stable’ rating to the Rs 975 crore non-convertible debentures and to Rs 3000 crore bank loan facilities, and ‘CRISIL A1+’ rating to the Rs 200 crore commercial paper (CP) programme of erstwhile Incred Financial Services Ltd (previously rated CRISIL A/ Watch Positive/ CRISIL A1; now renamed as Incred Prime Finance Ltd), which have now been transferred to the merged entity called Incred Financial Services Ltd (erstwhile KKR India Financial Services Pvt Ltd), and on receipt of the letter of novation.
CRISIL Ratings has downgraded its ratings on debt facilities of erstwhile KKR India Financial Services Pvt Ltd now renamed as Incred Financial Services Ltd from ‘CRISIL AA/ Watch with Negative implications’ to ‘CRISIL A+/Stable’. The rating on its commercial paper programme has been reaffirmed.
CRISIL Ratings has also withdrawn its rating on Non-Convertible Debentures of Rs.100 crores (See annexure 'Details of Rating Withdrawn') as CRISIL Ratings has received independent confirmation that these instruments have been redeemed. The withdrawal is in line with CRISIL Ratings withdrawal policy.
The rating action is driven by the final culmination of the scheme of corporate reorganization inter alia involving the demerger of the retail lending portfolio of erstwhile Incred Financial Services Ltd (now renamed as Incred Prime Finance Ltd) into KKR India Financial Services Limited (KKR India). The resultant merged entity has been renamed as Incred Financial Services Ltd (Incred), in line with the original plan of the transaction structure.
For erstwhile KKR India, the outstanding ratings of ‘CRISIL AA/Watch Negative’ factored in support from KKR & Co. Inc (KKR; rated ‘A/Stable’ by Standard & Poor’s [S&P]). However, following the conclusion of the corporate reorganization, the merged entity has been assessed on a standalone basis as the merged entity no longer shares the brand name of KKR and the shareholding of KKR consortium in the resultant entity has reduced. The resultant entity is held by the shareholders of erstwhile Incred Financial Services Ltd to the extent of ~67% and remaining ~33% is held by the KKR consortium including KKR, Abu Dhabi Investment Authority (ADIA) and Teacher Retirement System of Texas. Further the management control of the merged entity now rests with management of erstwhile Incred Financial Services Ltd. Therefore, the analytical approach no longer factors in benefits from KKR parentage and now, ratings on the debt instruments and facilities reflect the above developments and the standalone credit profile of the merged entity.
Following the scheme of corporate reorganization, the resultant entity’s capital position has improved – as reflected in an increased networth of Rs 2,260 crore and a comfortable gearing of 1.5 times as of June 30, 2022. The company’s earnings profile has also improved evidenced by an annualized return on managed assets (RoMA) of 2.8% for Q1-FY2023. For fiscal 2022 however, the RoMA was lower at 1.1% owing to one off expenses like ESOPs, merger related legal expenses and loss on sale of two-wheeler portfolio, incurred during the year. Upon adjusting for these one-time outflows, the company’s RoMA for fiscal 2022 would be ~1.6%. The rating also factors in steady improvement in Incred’s asset quality metrics with a reduction in the level of stressed assets. Gross non-performing assets (GNPAs) stood at 2.4% as on June 30, 2022 (2.8% as of March 31, 2022) whereas net non-performing assets (NNPA) were at 1.2% on the same date. On June 30, 2022, the company had a restructured portfolio of Rs 113 crore of which 13% was in the 90+ dpd bucket.
This resultant entity is led by the leadership team of erstwhile Incred Financial Services Ltd (now renamed as Incred Prime Finance Ltd) and the investors of Incred Prime hold ~67% stake in the entity while KKR Singapore – as a strategic investor in the entity – holds ~33% stake. The ratings continue to reflect Incred’s experienced leadership team, strong capitalisation with healthy gearing, backed by a high pedigree investor base and diversified loan portfolio. These strengths are partially offset by the moderate scale of operations and profitability constrained by one-time special provision/expense and moderate asset quality.
Having commenced operations in February 2017, Incred has built a diversified portfolio with assets under management (AUM) of Rs 4,676 crore as on June 30, 2022. The company provides a wide range of loan products that include personal loans, small and medium enterprise (SME) business loans, education loans, school financing loans and loans to financial institutions (FIs). After the amalgamation, erstwhile KKR India’s wholesale lending book has also become a part of the overall AUM of Incred. However, this book is expected to run down fully over the next 3-4 quarters. |
Analytical Approach For arriving at the rating, CRISIL Ratings has evaluated the business, financial, and management risk profile of Incred, factoring in the changes post implementation of the corporate scheme of arrangement |
Key Rating Drivers & Detailed Description Strengths:
Incred is well-capitalised, with networth of Rs 2,260 crore with a low gearing of 1.5 times as on June 30, 2022. This marks a significant improvement from Rs 595 crore of networth as on March 31, 2019. The company commenced its operations with a networth of around Rs 500 crore, mainly contributed by the founder’s company – Bee Finance Ltd (Mauritius). In fiscal 2019, Incred raised optionally convertible debentures (OCDs) in fiscal 2017, and converted them to equity in fiscal 2019 (April 2018) to the tune of Rs 116 crore from Investcorp (IDFC Private Equity) and Paragon Partners. Furthermore, during April and May 2019, Incred raised compulsorily convertible preference shares (CCPS) of Rs 427 crore from institutional investors such as FMO (the Netherlands Development Finance Company), OAKS Asset Management (Formerly known as Alpha Capital), Moore Strategic Ventures, and Elevar Equity. Most recently, the company’s networth increased from Rs 1112 crore on March 31, 2022 to Rs 2260 crore as of June 30, 2022 – benefitting from the implementation of the scheme of corporate reorganization and internal accretions over Q1 FY 2023.
CRISIL Ratings believes Incred’s capital position is strong with regards to its scale and nature of operations, supported by its demonstrated ability to raise capital from existing as well as new investors.
Incred was promoted in 2016, by Mr Bhupinder Singh, Whole Time Director and Chief Executive Officer. Having been associated with Deutsche Bank with his last stint as head of the Corporate Finance division and the co-head of the Fixed Income, Equities and Investment Banking divisions for the Asia Pacific region, Mr Singh has a professional experience of over two decades. Over its operating history, the company’s senior management team has gained strength, and now comprises renowned professionals from various industry sections.
Mr Vivek Bansal, Incred’s Chief Financial Officer (CFO), has experience of two decades, which include leadership stints in Fidelity Investments (London) and Standard Chartered (Mumbai). Prior to Incred, Mr Bansal served as deputy CFO of YES Bank and Group Head of Finance. Mr Ashwin Sekar, who is the Chief Product and Technology Officer, had been associated with companies such as Gain Credit for over 13 years. The business side is headed by Mr Saurabh Jhalaria who has almost 20years of work experience and was earlier Managing Director – Singapore operations at Deutsche Bank. Mr Prithvi Chandrasekhar (Chief Risk Officer), has held various positions across several companies, including Capital One and McKinsey over a professional stint of over 25 years. This team of senior executives reports to a board comprising veterans from the financial services industry. These include independent directors, nominee directors from investor bodies and a few representatives from the senior management team of Incred.
InCred had a diversified loan portfolio of Rs 4,676 crore as on June 30, 2022 which marks a quarterly growth of 23% (non-annualised). This growth was driven by addition of erstwhile KKR India’s wholesale loan portfolio to Incred’s overall AUM as part of the corporate reorganization. As on June 30, 2022, the AUM mix consists of personal loans (35%), secured school financing (11%), student loans (12%), lending to NBFCs (11%) and anchor & escrow backed business lines (18%). Apart from these, erstwhile KKR India’s wholesale portfolio also constitutes 13% of the AUM now. This book is spread across 5 group accounts and is expected to run down in the near to medium term.
In the initial phase of erstwhile Incred Financial Services Ltd, growth in the loan portfolio was driven by higher focus on wholesale segments such as supply chain financing and lending to financial institutions and escrow-backed lending which, which cumulatively formed 76% of the total loan book as on June 30, 2017. These segments were followed by unsecured business loans, which formed another 18% of the loan portfolio with slightly higher degree of granularity. However, eventual growth corresponded with diversification across asset segments with more focus on retail loans. Thereafter, the company ventured into segments such as personal loans and two-wheeler loans, and also tapped the niche segment of education loans via student loans and secured school funding. Over time, concentration around wholesale segments has reduced and the loan book has diversified across retail segments. Presently, 87% of AUM is composed of retail secured and unsecured loans. And the 13% exposure to structured lending book acquired from KKR India will eventually decline as the book gets paid off fully by end of fiscal 2023.
Also, given low correlation between these segments, CRISIL Ratings believes that the diversified loan portfolio supports the overall business profile, especially in case of stress in any one segment.
Weaknesses:
Owing to the nascent scale of operations, operating expenses of Incred, though correcting, have remained high attributed to support costs, especially employee and technology-linked expenses. Furthermore, on-boarding of senior management to lead respective asset segments has also contributed to the high employee expenses. In fiscal 2020, the company focused on optimizing cost and overall operating expense increase was controlled at 19%. However, the business growth was less than what was budgeted, as AUM grew at 17% over the year on account of cautious origination in some segments and overall challenging macroeconomic environment for most part of the year. Disbursements in the last quarter of fiscal 2020 were also impacted because of the lockdown. Resultantly, the operating expense ratio for the year remained high at 6.9%. During this period, the company’s strategic exit from its housing finance subsidiary led to recognition of Rs 6.2 crore as impairment which also contributed to the high operating expenses. Additionally, write-offs of Rs 35 crore primarily in the personal loans and non-anchor supply chain segments and dedicated Covid-19 linked provisioning of Rs 5 crore further constrained the profitability. This translated to a low RoMA of 0.2% for fiscal 2020 (0.2% for fiscal 2019). However, upon adjusting for one-time impairment loss and Covid-19 provisioning, RoMA stood at 1.1% for fiscal 2020.
For fiscal 2021, Incred reported a net profit of Rs 10 crore, after factoring in higher provisioning and write offs of Rs 89 crore and non-cash ESOP expenses of Rs 10.3 crore. Consequently, the RoMA for fiscal 2021 was 0.4%, and after adjusting for this one-time/ non-cash expenses, annualised RoMA is estimated at ~1.6%. Credit cost rose to 3.7% in fiscal 2021, compared with 2.6% in fiscal 2020.
For fiscal 2022, the company reported an annualized RoMA of 1.1% corresponding to a net profit of Rs 36 crore. After adjusting for non-cash ESOP expenses, demerger related legal expenses incurred and net charge on P&L due to sale of two-wheeler portfolio, the annualized RoMA for the period was about 1.6%. For Q1-FY2023, the company’s profitability has improved materially, resulting in a RoMA of 2.8% (non-annualised) for the quarter.
Given the provisioning policy, coupled with sustained focus on tightening costs and operating expenses, CRISIL Ratings expects Incred’s profitability to sustain at levels higher than that seen in the past in normal course of business. However, Incred’s ability to scale up the portfolio, enhance recoveries and improve profitability while keeping credit costs low, will be a key rating sensitivity factor.
Given the relatively short track record of operations and low, thought increasing, seasoning in the loan portfolio, asset quality of the book remains untested. As on March 31, 2020, GNPA stood at 2.8%, as compared to 1.8% as on March 31, 2018. Elevation in non-performing assets stemmed from challenges faced within personal loans and non-anchor business loan segments wherein the company also took write-offs of Rs 35 crore. During fiscal 2021, GNPAs rose to 4.5% by December 31, 2020 amidst tepid economic environment. However, following the recovery in Q4 2021, GNPAs reduced to 3.4% as of March 31, 2021 which – after the pandemic’s second wave, again elevated marginally to 3.9% [including the impact of 0.65% points due to the Reserve Bank of India (RBI) circular of November 2021 on NPA recognition] as on December 31, 2021. However, following the revival in collections thereafter, GNPA as on June 30, 2022 improved to 2.4%.
In terms of collections, when calculated after giving benefit of over-dues, collections improved to 100% in March 2021, from 89% in September 2020. However, impacted by the pandemic’s second wave and the sporadic lockdown that followed, monthly collection efficiency for the non – NPA portfolio, over Q1-FY2022 has ranged between 96-98%. For the month of May 2022, collection efficiency of the overall book was 99.4%. Going forward, the company’s ability to scale up operations, while maintaining asset quality and profitability at adequate levels amidst business challenges, will be key rating sensitivity factors.
As on June 30, 2022, Incred’s AUM stood at Rs 4676 crore, as compared to Rs 3804 crore, a quarter ago - registering a growth of 23% (non-annualised) over this period. However, the AUM is spread across seven asset classes. While this gives Incred the benefit of diversity, scale of operations and market position remains moderate within each asset class. In the aftermath of the pandemic’s second wave, the AUM dipped marginally towards the end of Q1 2022 however, the growth has restored since then. As the portfolio continues to gain vintage, the company’s ability to profitably scale the portfolio across diverse segments remains to be demonstrated. |
Liquidity: Adequate As on June 30, 2022, the company had liquidity balance of Rs 694 crore (includes cash and equivalents, excludes cash credit lines and committed bank lines, excluding any upcoming collections). This balance covers the estimated outflow towards debt obligations and operating expenses scheduled for the succeeding 3 months, by 1.86 times. |
Outlook: Stable Incred is expected to maintain adequate capitalisation and diversity in its lending portfolio. The company will also continue to benefit from the extensive experience of its leadership. |
Rating Sensitivity factors Upward factors:
Downward factors:
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About the Company The erstwhile Incred Financial Services Ltd (now renamed as Incred Prime Finance Ltd) was a non-deposit taking, non-banking financial company headquartered in Mumbai. Incorporated in January 1991 as Visu Leasing and Finance Pvt Ltd (VLFL), this company was acquired by Incred in 2016, after which, its name was changed to reflect the Incred brand. Having started its operations in February 2017, Incred is a new-age financial services platform that leverages technology and data science, throughout its lending chain, thereby reducing the turnaround time.
On June 30, 2022, the company had a diversified AUM of Rs 4676 crore which includes the effect of corporate reorganization with erstwhile KKR India Financial Services. KKR India was a non-deposit taking, systemically important, NBFC, engaged in providing structured funding, promoter financing, and mezzanine financing, commenced operations in October 2009. Prior to the corporate reorganization, KKR Capital Markets India Private Limited held 100% stake in KKR India. The current Incred Financial Services Ltd refers to the merged entity. |
Key Financial Indicators
^includes the amalgamation impact of InCred Housing Finance Private Limited All the financial figures pertaining to June 30, 2022/Q1 FY 2023 are on a provisional basis. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
*Previously rated CRISIL A/ Watch Positive/CRISIL A1; transferred from erstwhile Incred Financial Services Ltd which has been renamed as Incred Prime Finance Ltd ^Yet to be issued #including sublimit for working capital term loan Note: This Annexure has been updated on 09-Mar-23 to correct the coupon rate for a few ISINs.
Annexure - Details of Rating Withdrawn
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| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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This Annexure has been updated on 25-Aug-22 in line with the lender-wise facility details as on 19-Aug-21 received from the rated entity.
#including sublimit for working capital term loan
Criteria Details
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