Detailed Rationale

CRISIL Ratings has reaffirmed the ratings on debt instruments and long-term bank facilities of JM Financial Asset Reconstruction Company Limited (JMFARC) at 'CRISIL AA-/Stable/CRISIL A1+'.

 

The ratings continue to centrally factor in the expectation of strong support from the JM Financial group, both on an ongoing basis and during challenging times. The ratings also reflect JMFARC's comfortable capitalisation, continued good track record of recoveries from the acquisitions and adequate market position. These rating strengths are partly offset by JMFARC's exposure to asset-quality challenges inherent in the industry it operates in and volatility in earnings profile.

Analytical Approach

For arriving at the ratings, CRISIL Ratings has assessed the standalone credit risk profile of JMFARC and continues to factor in strong managerial and financial support from the JM Financial group. CRISIL believes JMFARC, will, in case of exigencies, receive distress support from its parent for timely repayment of debt obligations, considering the strategic importance of the entity and also high moral obligation on account of majority shareholding and shared brand name.

Key Rating Drivers & Detailed Description

Strengths:

• Strong support from and operational synergies with JM Group

JMFARC is strategically important to the JM Financial group given that the group has identified asset reconstruction as one of the core businesses for growth. JMFARC also has operational synergies with other businesses of the group such as investment banking and corporate lending. The JM Financial group extends financial, operational, and management support to JMFARC.  JMFL also infused Rs 183 crore in H1 FY2020 by subscribing to the rights offer made by JMFARC for the issue of CCDs and is willing to extend additional capital (subject to board approval) to support the company if needed. It has also provided debt funding support to the company in the past and will continue to do so in future as well. The JM Financial Group has representation on the company's board by nomination of the Chairman and two Directors. The single largest shareholding and the shared brand lead to high moral obligation on the JM Financial group to support JMFARC. CRISIL believes that the JM Financial group will support JMFARC in meeting its debt obligations on time. CRISIL believes that JMFARC is expected to continue to receive strong support from its parent over the medium term, given its high strategic importance to the parent and the strong moral obligation of the parent to support the company.

 

• Reasonable recovery track record

JMFARC has also demonstrated a good recovery track record from the stressed assets. While the overall SR redemption ratio was at 39.0 % as on December 31, 2021, it was due to the fact that most of the acquisitions have been done in last four fiscals. The company's recovery track record is also supported by the relatively high discount at which most assets have been acquired till date in Fiscal 22, at around 81% as on December 31, 2021. CRISIL believes the company will remain selective in pricing future deals as well, which will enable it to maintain its recovery track record over the medium term.

 

• Comfortable capital position

JMFARC has comfortable capitalisation with net worth (including non-controlling interest) of Rs 1794 crore as on December 31, 2021 (Rs 1586 crore as on March 31, 2021). JMFL also infused Rs. 183 crore in H1 FY2020 by subscribing to the rights offer made by JMFARC for the issue of CCDs. JMFL currently holds 59.25% in JMFARC as on December 31, 2021.

 

JMFARC has an adequate gearing philosophy given the nature of its business, which supports its capitalisation. Gearing stood at 1.4 times as on December 31, 2021 and is expected to remain under 2.0 times on a steady state basis over the medium term.

 

• Comfortable market position

JMFARC is among the leading asset reconstruction companies in India with outstanding security receipts (SRs)-both owned and managed-of Rs.10709.9 crore as on December 31, 2021 (Rs.11059.9 crore as on March 31, 2021. The focus of the company is on recoveries of existing assets.

 

Weaknesses:

• Recovery challenges inherent in the industry

Despite having adequate asset acquisition and resolution policy framework, JMFARC will continue to face challenges, given the inherent nature of the asset reconstruction business and the ARC industry as a whole. As the company's AUM has grown primarily in the past few years and it takes around four to five years to resolve an asset and recover dues, the performance of the recently acquired portfolio remains to be seen. Furthermore, in the current challenging macroeconomic scenario, marked by significant pressure on cash flows of highly leveraged borrowers, JMFARC's ability to effect recoveries will remain a key monitorable.

 

• Volatility in earnings

Given the inherent nature of the business, JMFARC's earnings profile can tend to be volatile because of uncertain and erratic recoveries.  Profit after tax (PAT) improved to Rs 65 crore for fiscal 2021 from Rs 48 crore a year earlier on account of increased resolutions in the period post the COVID wave. PAT has further improved to Rs 158 crore in first nine-months of fiscal 2022 as compared to Rs 54 crore for the same period last year due to low operating, credit expense and Profit from resolutions. In the medium-term, the company plans to scale up its income and maintain its income mix from three different income streams, i.e. management fees, interest income from restructured accounts and profit/ yield on redemption. JMFARC's ability to scale up its business, and thus maintain profitability levels, will remain a key monitorable over the medium term.

Liquidity: Strong

At a group level, as on December 31, 2020, the group had total debt repayment (including interest) of Rs 3327 crore till June 2022. In addition to scheduled collections, the group had cash and equivalent of Rs 3854 crore and unutilised bank lines of Rs 168 crores.

Outlook: Stable

CRISIL Ratings believes that JMFL will remain majority shareholder in JMFARC and will continue to provide strong support to the company. Further, CRISIL also believes that JMFARC will maintain comfortable capitalisation and adequate gearing over the medium term.

Rating Sensitivity factors

Upward Factors

• Upward revision in the rating of parent JMFL
• Significant increase in JMFARC's recovery from stressed assets while maintaining comfortable financial profile with gearing staying under 2 times

 

Downward Factors

• Change in the extent of JMFL's ownership of JMFARC or diminution in the expected support from the parent
• Weakening of capitalization metrics with gearing inching beyond 3 times for an extended period of time

About the Company

JMFARC was incorporated in September 2007 by JMFL which holds 59.25% per cent stake in JMFARC, with the balance held by Mr. Narotam Sekhsaria (16.5%), Valiant Mauritius Partners FDI Ltd (8.4%), and others including three public sector banks (12.82%).

About the Group

JM Financial is an integrated and diversified financial services group engaged in various capital markets related lending activities. The Group's primary businesses include (a) Investment bank which shall cater to Institutional, Corporate, Government and Ultra High Networth clients and includes investment bank, institutional equities and research, private equity funds, fixed income, syndication and finance; (b) Mortgage Lending includes both wholesale mortgage lending and retail mortgage lending (home loans, education institutions lending and LAP);  (c) Alternative and Distressed credit includes the asset reconstruction business and alternative credit funds; and (d) Platform AWS which shall provide an integrated investment platform to individual clients and includes wealth management business, broking, PMS and mutual fund business.

 

As of March 31, 2021, the consolidated loan book stood at ~Rs 10,854 crore, distressed credit business AUM at ~Rs 11,060 crore, wealth management AUM at ~Rs 76,122 crore, and mutual fund QAAUM at ~ Rs 2,389 crore.

 

As of December 31, 2021, the consolidated loan book stood at ~Rs 11,240 crore, distressed credit business AUM at ~Rs 10,710 crore, wealth management AUM at ~Rs 84,988 crore, and mutual fund QAAUM at ~ Rs 2,020 crore.

 

The Group is headquartered in Mumbai and has a presence across 624 locations spread across 186 cities in India. The equity shares of JM Financial Limited are listed in India on the BSE and NSE.

Key Financial Indicators

As on/ for the period end	Unit	Dec-21	Mar-21	Mar-2020
Total Assets	Rs. Cr.	4338	4292	4190
Total income	Rs. Cr.	434	385	414
Profit after Tax	Rs. Cr.	158	65	48
Gross NPA	%	NA	NA	NA
Gearing	Times	1.3	1.6	1.7
Return on Assets	%	4.9	1.5	1.1

 

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of Instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue Size (Rs. Crore)	Complexity Levels	Rating Outstanding with Outlook
NA	Debenture^	NA	NA	NA	500	Simple	CRISIL AA-/Stable
NA	Commercial Paper	NA	NA	7-365 days	300	Simple	CRISIL A1+
NA	Proposed Long Term Bank Loan Facility	NA	NA	NA	200	NA	CRISIL AA-/Stable

^Yet to be raised