Detailed Rationale

CRISIL Ratings has assigned its ‘CRISIL AA+/Stable’ rating to the long-term bank facility of Investec Capital Services India Private Limited (Investec India).

 

The rating centrally factors in the strategic importance of Investec India to, and expectation of strong support from, its ultimate parent, Investec Bank Plc (IBP). IBP, through its subsidiaries, holds 80.3% stake in Investec India and the balance is held by SBI Capital Markets Ltd (SBICAP), which also views the venture as an important vehicle to drive the equity capital markets (ECM) business. The rating also factors in Investec India’s adequate capitalisation for the current and planned scale of operations, and experienced management team. These strengths are partially offset by the small, albeit improving, scale of operations and exposure to risks inherent in capital market businesses.

 

Investec India was incorporated in 2010 as an indirect subsidiary of IBP. The company is engaged in corporate advisory, private credit, institutional equities and research and ECM businesses. To grow the ECM business, IBP entered into an investment agreement with SBICAP, under which SBICAP has acquired 19.7% stake in Investec India and is awaiting approval to increase its stake to 40%. With this transaction, Investec India is now a joint venture (JV). The partnership has yielded favourable results, with the JV moving up the league table rankings in terms of number of deals in the ECM segment. Furthermore, all the business segments are supported by experienced senior management team and continued support from IBP.

 

Because of the agency nature of the business, the company does not have significant capital requirement except for margins to be placed at the stock exchanges. It is adequately capitalised to cater to the current and medium-term business requirements. It has been profitable since fiscal 2018 and the cash accrual has been supporting the capital position.

 

Nevertheless, the scale of business is small compared to peers in the segment. It is also susceptible to volatility inherent in capital market businesses. Profitable scale up of the businesses and performance during an adverse capital market cycle will be a key monitorable.

Analytical Approach

CRISIL Ratings has considered the standalone credit risk profile of Investec India and has factored in the strong support it receives from IBP. This is considering the strategic importance of the company, shared brand name and operational linkages with IBP.

Key Rating Drivers & Detailed Description

Strengths:

• Expectation of strong support from IBP given the strong parentage

The rating centrally factors in the expectation of strong operational and managerial support from IBP. The entity was set up by IBP as India is considered an important market and a strategic fit to IBP’s overall growth. IBP has four board seats out of seven in India and two representatives (Mr Kevin McKenna, Chief Risk Officer of IBP [on the board of other Investec group companies] and Mr David Van Der Walt, ex-CEO of IBP) on the board of Investec India. Furthermore, the country head, Mr Ajeeth Narayan, is deputed from IBP. The risk management systems of Investec India have been drawn upon from IBP and the latter is involved in the strategic operations of the company. The private credit book is also on the IBP balance sheet (except for the recently launched alternative investment fund).

 

Investec India was reconstituted as a JV in June 2021, with SBICAPacquiring 19.7% stake, to enhance its market position in the ECM segment and derive other synergies from the association. Nevertheless, IBP is committed to support the venture given the strategic importance and strong moral obligation given the shared brand name and associated reputation risk.

 

SBICAP also views the JV as an important vehicle for its ECM segment and is involved both at the board level as well as in the daily functioning of the ECM business. Both the partners act in concert on strategic and key operational decisions.

 

• Adequate capitalisation

Capitalisation is adequate, reflected in networth of Rs 171 crore as on March 31, 2022, supported by internal cash accrual. Given the nature of businesses, capital requirement is largely for placing margin at the stock exchanges. As these activities seldom require large capital, the networth is likely to remain comfortable for the current and planned scale of operations.

 

• Experienced senior management

Investec India has a seasoned senior management team with significant experience in the respective segments. The country head for India business, Mr Ajeeth Narayan has over 30 years of banking experience and has been deputed from IBP. Mr Vikram Surana, who co-heads the corporate finance and ECM segments has spent over 16 years (of the total experience of 18 years) in the advisory segment and has worked on many deals in various sectors in the mergers and acquisitions (M&A) and equity capital raising transactions space. The head of private credit, Mr Piyush Gupta, has over 27 years experience in the Indian credit and fixed income markets and was previously the managing director (MD) and head of fixed income at JP Morgan. Mr. Mukul Kochhar who heads the institutional equities, has over 24 years of experience in the space. Mr. Rambhushan Kanumuri has over 27 years of experience and is the Chief Strategy and Operating Officer responsible for the central services supporting the growth of the various businesses. 

 

Ms. Neha Shah is the Chief Financial Officer and has an experience of over 10 years.

 

CRISIL Ratings believes the rich experience of the management will stand Investec India in good stead as it scales up its business.

 

Weaknesses:

• Small, albeit improving, scale of operations

Investec India commenced operations in 2010. It has gradually set up presence across corporate finance advisory, private credit, ECM and institutional equities and research. However, its scale of businesses is small compared with peers in these segments.

 

In the corporate advisory segment, it provides strategic advice including private equity fund raise, mergers, acquisitions and strategic partnership. Market position in the segment has been improving consistently with the company securing tenth position in the financial advisory league table in 2021.

 

In the private credit segment, Investec India provides credit solutions to mid-market corporates and private equity sponsors for various debt financing requirements such as structured private credit solutions, acquisition and leverage financing, growth financing, bridge financing, stake consolidation and dividend recapitalisation. The company has been growing in prominence in the private credit space catering to mid-sized corporates. The team size also have been augmented in these segments in alignment with the scale-up plan. The company is also the investment manager to the recently launched AIF Category 2 Fund. 

 

In the institutional equities segment, the company has empanelment with both domestic and overseas clients and is supported by an experienced research team. Investec India, till recently, was present only in the cash segment and has entered the derivatives segment in May 2022, which is expected to improve its market position in the institutional equities segment. In the ECM business, the JV with SBICAP has strengthened the company’s position, improving its ranking in league tables. 

 

Nevertheless, the current scale of operations is moderate and profitable scale-up remains to be seen.

 

• Exposure to risks inherent in capital market businesses and volatility in earnings

Investec India’s capital market businesses (institutional equities, corporate advisory, ECM and private credit) are susceptible to economic, political and social factors which drive corporate and investor sentiments. The company's brokerage volumes and deal flows are susceptible to the vagaries of the capital market. The company has been profitable since fiscal 2018 and the internal accruals have been supporting the capital position. Profitable scale up of the businesses, and performance during capital market cycles is a key monitorable.

Liquidity: Strong

Liquidity is strong owing to the agency nature of business and nil borrowings. (Investec India needs funds for meeting margin requirement at the exchanges; this is met through own funds.) The company had cash and bank balance of Rs 183 crore as on March 31, 2022.

Outlook: Stable

CRISIL Ratings believes Investec India will continue to receive strong support from IBP because of the strategic importance of the India operations and the latter’s moral obligation.

Rating Sensitivity factors

Upwards factors

• Upward revision in CRISIL Ratings’ view on the IBP’s credit risk profile
• Significant improvement in market position of Investec India with substantial and steady increase in earnings on a sustained basis

 

Downward factors

• Reduction in the expected support to Investec India by IBP, or a downward revision in the credit view on IBP by CRISIL Ratings
• Any significant fall in profitability with Investec India incurring steady losses

About the Company

Investec India was incorporated in June 2010 as a stepdown subsidiary of Investec Bank Plc. Investec India provides merchant banking, stock broking, research, financial advisory and other related services. SBICAP acquired 19.7% stake in the company in June 2021.

 

In fiscal 2022, Investec India reported profit after tax (PAT) of Rs 40 crore on total income of Rs 173 crore, compared with PAT of Rs 29 crore on total income of Rs 128 crore in fiscal 2021.

 

About Investec Bank Plc

IBP is a bank based in the UK; it provides a range of financial products and services to clients primarily based in the UK. It has a number of other distribution and origination channels to support the underlying core businesses in the Channel Islands, India, Ireland, Switzerland, the USA and Hong Kong. IBP’s offerings are broadly classified into two principal divisions: specialist banking, and wealth and investments. Specialist banking activities include corporate and investment banking activities and high networth individuals (HNI) – private client banking activities. In the wealth and investment segment, IBP services private clients, trusts, charities, intermediaries and pension schemes as a wealth/investment manager.

In fiscal 2022, IBP reported net profit of £[1] 232.9 million (£ 62.9 million in fiscal 2021) on total assets of £ 27.6 billion (£ 24.4 billion as on March 31, 2021). As on March 31, 2022, gross core loans were £ 14.6 billion (£ 12.5 billion as on March 31, 2021), assets under management £ 44.4 billion (£ 41.7 billion as on March 31, 2021) and deposits £ 18.6 billion (£ 16.2 billion as on March 31, 2021).

Gross stage-3 and net stage-3 assets were 2.1% and 1.6%, respectively, as on March 31, 2022 (2.8% and 2% as on March 31, 2021). Common equity tier-1 and overall capital adequacy ratio were 12% and 18.2% as on March 31, 2022 (11.8% and 16.4% a year earlier).

[1] Exchange rate as on June 08, 2022: 1 Pound sterling = Rs 97.62

Key Financial Indicators

As on / for the period ended March 31	Unit	2022	2021
Total assets	Rs crore	231	104
Total income	Rs crore	173	128
Profit after tax (PAT)	Rs crore	40	29
Cost to income ratio	%	67	66
Return on networth	%	33	46
Gearing	Times	0	0.1

 

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs crore)	Complexity level	Rating assigned with outlook
NA	Proposed Long Term Bank Loan Facility	NA	NA	NA	200	Simple	CRISIL AA+/Stable