Detailed Rationale

CRISIL Ratings has reaffirmed its rating of 'CRISIL A+/Stable/CRISIL A1+' on the bank facilities of  NJ Capital Pvt Ltd (NJ Capital, part of the NJ group).

 

CRISIL Ratings has changed its analytical approach to factor the proposed change in the corporate and shareholding structure of NJ Capital, which is currently a wholly owned subsidiary of NJ India Invest Private Limited (flagship company of NJ group). NJ India Invest will transfer its stake in NJ Capital to NJ Financial Services Pvt Ltd (NJ Financial Services; holding company, directly held by promoters of NJ India Invest). The mutual fund distribution business will remain in NJ India Invest, while the lending business will remain with NJ Capital but housed under a separate holding company, NJ Financial Services. Both NJ India Invest and NJ Financial Services will be individually held by the promoters, Mr. Neeraj Choksi and Mr. Jignesh Desai. This reorganisation is pursuant to compliance with regulatory guidelines from SEBI. For arriving at the ratings, CRISIL Ratings now factors in support from the promoters and NJ group, whose flagship company is NJ India Invest. The credit profile of NJ Capital will continue to benefit from the strong operational and financial synergies with the NJ group and expectation of timely financial support, in case of any exigency.

 

The rating reflects the strong financial and managerial support from NJ group, whose flagship company is NJ India Invest. Additionally, the rating also reflects the benefits that NJ Capital is expected to receive owing to the well-established market position of NJ group in the mutual fund distribution business, adequate capitalisation to support medium term growth plans of NJ Capital and adequate risk management policies. These strengths are partially offset by improving though small scale of operations with limited track record in the lending business and modest profitability.

 

NJ India is among the largest mutual fund distributors in India, with average assets under advice (AUA) of Rs 1,26,771 crore as on September 30, 2022 (Rs 94,096 crore as on March 31, 2021). The company has remained among the top three mutual fund distributors over the past five years (despite facing direct intense competition from banks in this space). Furthermore, the company has achieved top position in terms of gross commissions received during the past five years. The company primarily caters to retail investors who are looking to invest in mutual funds. It has created a huge network of over 47,300 distribution partners with presence in 19 states of India. The company also has prime focus towards Tier II and below cities/locations through which it is able to tap a large market. As on March 31, 2022, they catered to more than 20.75 lakh investor accounts. Believing that the vast untapped potential in the lending space presents a great opportunity, the NJ group set up its non-banking financial company (NBFC), NJ Capital, which started its operations by providing loans against mutual funds. This strong distribution set-up of NJ India provides ready market for NJ Capital to leverage and offer financing solutions.

 

The capital position at the parent level has remained comfortable with consolidated networth of Rs 873 crore and negligible gearing as on March 31, 2022 (consolidated networth Rs 663 crore and negligible gearing as on March 31, 2021). Stable gross accretions of over Rs 600 crore (cumulatively) during the past 4 years has enabled the company to build its current capital position. NJ Capital, being the only NBFC arm within the NJ group, will benefit from capital infusion on regular basis from NJ group and its promoters to support growth plans. Till September 2022, NJ India has infused around Rs 90 crore of equity. Post reorganisation, promoters are expected to infuse additional equity of around Rs 160 crore in tranches.

 

As on March 31, 2022, assets under management (AUM) of NJ Capital  improved to Rs 97 crore as against Rs 35 crore a year ago. As on September 30, 2022, the AUM stood at Rs 140 crore. Although NJ Capital has shown improvement in operations however it has limited track record of operations. While the group started laying the groundwork for its NBFC operations in fiscal 2019, they commenced lending only during fiscal 2020 and has maintained a cautious approach to growth. Therefore, the ability of the company to grow its portfolio while maintaining asset quality will be a key monitorable.

 

In terms of asset quality, NJ Capital has reported nil GNPA as on September 30,2022. Furthermore, there has been no credit loss reported in the lending business since inception. The company has maintained its conservative stance in systems and the process for invocation of securities held by it in case of non-payment or default.

Analytical Approach

CRISIL Ratings has revised its analytical approach for assessment of NJ Capital due to proposed corporate reorganisation. For arriving at the rating, CRISIL Ratings has assessed the credit risk profile (business and financial risk profiles) of NJ Capital. Further, CRISIL Ratings now factors in the expectation of strong support from NJ group, whose flagship company is NJ India Invest. CRISIL Ratings believes NJ Capital will remain integral part of NJ group due to operational and business synergies given their common promoters and shared brand.

Key Rating Drivers & Detailed Description

Strengths:

• Expected financial, operational and management support from its promoters and NJ group

NJ Capital is the only lending arm of the NJ group. As part of its long-term strategy, the group has forayed into the lending business by offering loans against mutual funds to its vast captive customer base. NJ Capital provides diversity in product profile to the existing client base of the group. Given full ownership, shared name, common branding and corporate identity, CRISIL Ratings believes the promoters and NJ group have a strong moral obligation to support NJ Capital. One of the NJ group's founder promoter is also on the board of NJ Capital. Further, support from promoters is expected on an ongoing basis as well as in the event of distress. Also, promoters intend to infuse capital into NJ Capital to support growth. Till September 2022, NJ India has infused around Rs 90 crore of equity. Post reorganisation, promoters are expected to infuse additional equity of around Rs 160 crore in tranches. The promoters and NJ group have also articulated their stance to ensure financial and liquidity support to NJ Capital, in case of any exigency, to enable it to meet its repayment obligations in a timely manner.

 

• Established market position in the mutual fund distribution space to benefit NBFC operations 

The NJ group is promoted by Mr. Neeraj Choksi and Mr. Jignesh Desai with over 28 years of experience in the mutual fund distribution business. The management's experience and understanding of the business has enabled the company to be among the top three mutual fund distributors with AUA of Rs 1,26,771 crore as on September 30, 2022 (Rs 94,096 crore as on March 31, 2021). Further, its wide distribution network has enabled steady growth of the business. NJ has over 47,300 NJ Wealth Partners (authorised distribution partners), spread across 95 branches in 19 states of India. As on March 31, 2022, they catered to more than 20.75 lakh investor accounts. This strong reach and huge investor base are expected to benefit NJ Capital; the group is offering financing services to its existing customers. This provides huge opportunity and ready customer base for NJ Capital to leverage and build its portfolio. Additionally, NJ Capital will also be able to leverage on current wide distribution network of the parent without investing heavily on the same. Therefore, CRISIL Ratings believes NJ Capital will benefit from long track record of its promoters and wide distribution network of the group to scale up the business.

 

• Adequate capitalisation with conservative gearing policy

At a standalone level, the networth of NJ Capital stood at Rs 96 crore with 0.6 times gearing as on Sep 30, 2022. NJ Capital is in the initial phase of business and is expected to get capital infusion from the promoters and NJ group, if required. Further, NJ India had consolidated networth of Rs 873 crore with a negligible debt as on March 31, 2022. The group primarily relies on internal accruals for its funding requirement and has negligible debt on its book. Furthermore, the group is mainly present in commission-based business wherein the capital requirement is relatively lower; the capital will be primarily required for NBFC arm. Further, the management has indicated that they will maintain gearing levels below 2.5 times at NJ Capital in the near term.

 

Weakness:

• Improving yet small scale of operations with limited track record in the lending business

Being in the initial stage of operations, NJ Capital has a small portfolio with AUM of Rs 140 crore as on September 30, 2022 (Rs 35 crore as on March 31, 2021). As of now, it mainly caters to the customers of the NJ group. The group started laying the groundwork for its NBFC operations in 2019 as a part of diversification strategy. However, actual lending commenced in fiscal 2020. The group has limited experience in lending operation. However, they have developed a team by acquiring professionals from the industry and most of the team members have more than 20 years of experience. In addition to this, the risk in loan against securities book is managed by maintaining adequate security cover. Ability to scale up operations, backed by healthy asset quality, remains a key rating monitorable.

 

• Modest profitability

Since NJ Capital is in the early stage of operations, company's profitability is modest. However, it is expected to stabilize over the medium term. During fiscal 2022, the company reported profit after tax (PAT) of Rs 0.92 crore (Rs 0.13 crore in fiscal 2020). For first half of fiscal 2023, NJ Capital has shown improvement in profitability and reported a profit before tax  of Rs 3.88 crore. Profitability is expected to improve further over the medium term, with scaling up of operations. In terms of financing costs, while there has been limited debt, the company has been able to borrow at competitive rate of less than 7.5-8.5% during fiscal 2022 and in first half of fiscal 2023. Additionally, during 3 years of operations, the company has managed to report nil credit losses. Both these factors have helped the company to report positive accretion so far. Nevertheless, the ability of the company to improve its profitability with growth in portfolio and managing credit costs will remain a key monitorable.

Liquidity: Adequate

On a standalone basis, NJ Capital has adequate liquidity with asset and liability management (ALM) showing positive cumulative gaps in the up to six months bucket as of September 30, 2022. As on March 31, 2022, liquidity for NJ Capital stood at around Rs 10.63 crore in the form of cash, unutilized funding limits and liquid investment in mutual funds. At the NJ group level, liquidity in the form of cash/ bank balance, fixed deposit and investments in mutual funds aggregated to Rs 648 crore as on September 30, 2022. Furthermore, CRISIL Ratings understands NJ India has a policy of maintaining liquidity equivalent to one year of its overall budgeted expenditure at the group level. CRISIL Ratings expects the group to maintain free liquidity of at least Rs 300 crore on a steady state basis.

Outlook: Stable

CRISIL Ratings believes NJ Capital will continue to benefit from the strong financial, managerial and operational support from NJ group.  

Rating Sensitivity factors

Upward Factors

• Change in CRISIL Ratings view on credit profile of NJ group
• Improvement in scale of operations while maintaining asset quality and earning profile at the current level or higher levels.
• Sustainability in earnings profile with return on managed assets (ROMA) greater than 2.5% maintained on steady state basis

 

Downward factors

• Any change in CRISIL Ratings view on credit profile NJ group or any change in promoter's stance of providing support to NJ Capital
• Deterioration in market position of NJ India Invest or reduction in profitability thereby impacting the credit profile of NJ group
• Deterioration in the earnings profile of NJ Capital
• Dilution in risk management practices, leading to weakening of asset quality with 90+days past due (dpd) in lending book increasing beyond 5%

About the Company

Incorporated in 1994, the NJ group provides a wide array of financial services, such as mutual fund distribution, portfolio management services (PMS), insurance distribution and loans against shares. The product profile of the group also includes distribution of capital market products direct equity & exchange traded funds and fixed income products namely non- convertible debentures, company deposit etc. Over the last few years, NJ Group has expanded into other businesses, and today it also has presence in businesses of real estate, insurance broking, training & development and technology, Portfolio Management, NBFC, Payment Aggregator, Organic and Non-Organic Food and Health related social activities. The promoters of the company Mr. Neeraj Choksi and Mr. Jignesh Desai, have more than 28 years of experience in the mutual fund distribution business. As on Sep 30, 2022, the group has more than 47,300 distribution partners with presence in 19 states of India

 

About NJ Capital: the company is the NBFC arm of the group, which caters mainly to NJ India Invest's clients by primarily providing loans against mutual funds. The company was incorporated in 2009 and received Certificate of Registration as an NBFC from Reserve Bank of India in February 2019. It had a loan book of ~Rs 140 crore as on Sep 30, 2022. The company has reported nil gross non-performing assets for the past three years

Key Financial Indicators: NJ Capital Pvt Ltd (standalone)

As On/For the year ended March 31	Unit	Sep 22	FY22	FY21	2020
Total assets	Rs crore	154.2	100	42	25
Total income	Rs crore	9.5	9.2	3	1
Profit after tax	Rs crore	3.88*	0.96	0.13	0.18
ROA	%	6.1%	1.3%	0.5%	0.8%
Gearing	Times	0.6	0.9	0.6	0.0

*Profit before tax

Any other information: Not applicable