| Kotak Investment Advisors Limited | ||||||||
| Ratings Reaffirmed | ||||||||
| Rating Action | ||||||||
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| 1 crore = 10 million | ||||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale
The ratings continue to reflect the strategic importance to, and expectation of strong support from the ultimate parent, Kotak Mahindra Bank Ltd (KMBL; rated ‘CRISIL AAA/CRISIL AA+[1]/FAAA/Stable/CRISIL A1+’), and comfortable capitalisation. These strengths are partially offset by a volatile, though adequate, earnings profile.
The rating on the preference shares also factors in expectation that, given the company’s multiple revenue sources (including management fees from domestic funds, advisory fees from off-shore funds, wealth advisory income, dividend and interest income on sponsor commitment, and other interest income), surpluses generated will be adequate to cover any future dividend payments. [1] For Perpetual Non-Cumulative Preference Shares. |
Analytical Approach The ratings factor in strong support from the parent, KMBL. That’s because KIAL and KMBL have extensive business and operational linkages, the same senior management team, and a common brand. |
Key Rating Drivers & Detailed Description Strengths: * Strategic importance to, and expectation of strong support from, KMBL The company receives operational, financial, and managerial support from KMBL, and other group companies. KMBL held 58.6% stake in KIAL as on December 31, 2021. The balance 41.4% is held by Kotak Mahindra Capital Company Ltd (KMCC), which is a wholly-owned subsidiary of KMBL. Further, currently, the board of KIAL has five members from KMBL. The senior management has also been associated in various roles with other subsidiaries of KMBL in the past.
The company is also expected to benefit from being part of the Kotak group, in terms of competitive borrowings. The group also offers funding support, and has infused equity of around Rs 354.6 crore till now. There is high flexibility for incremental inflow of funds, as and when needed.
The Kotak group is likely to continue to hold 100% stake in KIAL. The shared Kotak brand implies KMBL’s strong moral obligation to support the company, both on an on-going basis as well as in the event of distress.
* Comfortable capitalisation Capitalisation is comfortable for the size and nature of the business. The business is predominantly fee-based, except for the sponsor commitment made for the funds managed/ advised on. Under IGAAP, the networth stood at Rs 745 crore and the gearing at 0.29 time as on December 31, 2021. The group has infused Rs 300 crore of equity capital in current fiscal. Being a part of the Kotak group, the company has high flexibility to raise incremental funds.
Weakness: * Volatile, though adequate, earnings profile The company has multiple revenue sources, but these are linked to either the fund size or the returns on the funds, thus reducing revenue diversity. It earns managerial and advisory fees from the funds that it manages and advises on. This is primarily linked to the fund size for most of the funds. It also earns returns on its investment in the funds in the form of sponsor commitment. Further, it earns variable income in case the returns on a fund surpass the set hurdle rate. With the start of the wealth advisory business in KIAL (earlier carried out through KMBL), since April 2019, revenue profile is expected to diversify over the medium term. This is also expected to lend stability to the revenue. However, for the near term, the additional employee expense and investments in technology could keep operating costs higher than the linked revenue.
The company has consistently reported profits over the past few fiscals except for FY20. However, earnings tend to be highly variable for investment income, although cushioned by adequate fee income. The management fee is linked to the fund size, and has picked up with increase in assets under management (AUM). Nevertheless, the income on own investment and variable income is highly volatile.
Though profitability is likely to remain variable given the nature of the business, multiple revenue sources should keep it adequate. |
Liquidity: Superior Borrowing was at Rs 217 crore as on December 31, 2021. The cash and bank balance was Rs 159.68 crore as on February 28, 2022, against nil principal debt repayment obligation for the next six months. The company also benefits from the support from KMBL. |
Outlook: Stable KIAL is likely to maintain its strong market position in the alternative investment space and continue to benefit from the operational, financial, and managerial support from KMBL. |
Rating Sensitivity factors Downward factors:
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About the Company KIAL, incorporated in 1994, is a subsidiary of KMBL and is involved in fund management and advisory services. It acts as a fund manager for domestic funds and currently manages 17 such funds. It also provides non-binding advisory services to offshore funds, which are managed by international subsidiaries of the Kotak group. As of December 31, 2021, it managed/advised on assets worth around Rs 19,999 crore across six segments - private equity, real estate, infrastructure, special situations, listed strategies and optimus. Fee income from managerial and advisory services is the major source of revenue. Other sources include returns generated on investments made in the form of sponsor commitment in funds. Further, the company received an investment advisory licence in fiscal 2019, and has started wealth advisory services, which were earlier carried out through KMBL.
Under Ind-AS, profit after tax (PAT) was Rs 64 crore on total income of Rs 182 crore for fiscal 2021, against net loss of Rs 9 crore on total income of Rs 96 crore for fiscal 2020.
For the nine months ended December 31, 2021, under IGAAP, PAT was Rs 40 crore on total income of Rs 168 crore, against PAT of Rs 21 crore on total income of Rs 96 crore for the corresponding period of the previous fiscal. |
Key Financial Indicators : (As per IGAAP)
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Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL Ratings' complexity levels are assigned to various types of financial instruments. The CRISIL Ratings' complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL Ratings' complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
Annexure - Details of Instrument(s)
*Yet to be issued |
| 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 31-Mar-2022 in line with the lender-wise facility details as on 07-Dec-2021 received from the rated entity.
Criteria Details
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