Rating Rationale

Key Rating Drivers & Detailed Description

Strengths:

* Strong synergies and risk protection mechanisms ensuring good asset quality management

The OFB group has built its book with focus on risk protection mechanisms along with underwriting practices. As on Mar-19, the BG/LC backed loan book / receivables was at just 29% and 37% for Oxyzo and OFB Tech, respectively. However, over the years, Oxyzo Finance has increased it to around 62% and 56% in Oxyzo Finance and OFB Tech, respectively as on December 31, 2021. Apart from BG, in Oxyzo Finance, another 14% of the portfolio is fully secured through property, machinery, charge on current & fixed assets and future receivables. The consolidated portfolio backed by BG/LC is expected to be at 65-70% level on steady state basis. Consequently, GNPA of the portfolio backed by BG has been low at 0.6% as on December 31, 2021.

OFB group through its business model has created one stop solution for B2B SMEs through which it provides multiple services i.e. procurement of raw material, financing for procuring raw material and business development opportunities. OFB Tech is engaged in selling raw materials to SMEs. Oxyzo Finance through its prime product called purchase financing (87% of the portfolio as on December 31, 2021) provides financing solution to SMEs for buying raw material wherein it directly transfers the funds to supplier, therefore, ensuring high control over end usage of funds. The group has one more platform called “BidAssist” which enlists all the outstanding tenders on a daily basis from where SMEs can choose relevant tenders and increase their business. Around 35+ lakh users actively look for tender information on BidAssist which additionally acts as one of the lead acquisition channels for OFB Tech and Oxyzo. Therefore, through its business model, the group has created multiple touch points with SMEs which helps it to find early warning signals at both individual borrowers and sector level.

Additionally, OFB Tech does not hold any inventory as 100% of its sales are order-backed; the minimal inventory which appears on the books is on account of inventory in transit. This protects company against any price volatility risk and inventory risk. Furthermore, as the company is trading in multiple product categories like industrial steel, infra steel, cement/RMC, polymers, petroleum derivatives, non-ferrous metals, industrial chemicals, building material, pipes, non-perishable agro commodities, etc. and also catering to clients from different sectors, hence it is not exposed to downturn in any particular industry. OFB Tech also gives unsecured credit to only good quality customers having long track record.

CRISIL Ratings understands that OFB Tech has done acquisition of 13 companies in fiscal 2022 that would bring value addition in the supply chain and would help them to increase their existing margins in the business and increase their product suite for the customers.

Having control over end usage of funds, along with a cap of ticket size on unsecured lending has ensured comfortable performance of asset quality even for unsecured purchase financing in Oxyzo Finance. The GNPA for unsecured purchase financing book stood at 1.9% as on December 31, 2021 as compared to 2.8% as on March 31, 2021. Furthermore, through its early warning signals and market intelligence owing to its business model, the group identified the key focused sectors amidst weak macro-economic environment which helped it to maintain good asset quality along with increasing the proportion of secured portfolio. All these factors have led to the group showing resilience even during pandemic year with it facing minimum asset quality challenges.

Oxyzo Finance also has unsecured long-term financing book constituting around 4% of total portfolio as on December 31, 2021. However, the group is trying to de-grow this book as it is not the focus area owing to limited control over end usage of funds, low engagement with the customer and relatively low asset quality than other products.

Consequently, total GNPA of Oxyzo Finance stood at 1.6% as on December 31, 2021 as compared to 1.2% as on March 31, 2021. Furthermore, only Rs 5.8 crore (~0.3%) of the portfolio has been restructured as on December 31, 2021. These further showcase the good performance of the asset quality even during pandemic year. Having said that, as the portfolio scales up with new customer acquisitions and geographical expansion, the ability to maintain asset quality will remain a key monitorable.

* Healthy ramp-up in scale of operations for OFB Tech

There has been a healthy scale up in revenue for OFB Tech since the company’s incorporation in Aug-2015: operating income has grown at a healthy compound-annual-growth-rate (CAGR) of 167% over the last five fiscals ended 2021; operating income was Rs 1380 crore in fiscal 2021 as against Rs 10.2 crore in fiscal 2016; revenue was around Rs 3828 crore during 9M of fiscal 2022 as compared to Rs 801 crore during 9M of fiscal 2021. The healthy growth has been driven by addition of products, expansion to newer geographies supporting addition of new customers, and higher volume sold to existing customers. Over the last three years, the company has successfully been able to add more products/SKUs to its portfolio and offer value added services to its clients. OFB Tech currently trades in around 27 SKUs including industrial steel, cement/RMC, polymers, petroleum derivatives, non-ferrous metals, industrial chemicals, building material, pipes, non-perishable agro commodities, etc. The company has signed MoUs and procures material from reputed OEMs like JSW Steel, Jindal Steel and Power, Tata Steel, SAIL, HPCL, IOCL, Reliance Industries, etc. Company has continued to diversify from north India to newer geographies in the west and south, which has helped add new customers gradually. Furthermore, company has also diversified horizontally, wherein it has started supplying different category of products to the same final customers.

* Strong capitalisation metrics

Capitalisation metrics are comfortable supported by regular capital infusion. The group has raised about Rs 6761 crore of equity since inception from a diverse set of sources such as private equity players, promoters and high networth individuals (HNIs) till March 2022 of which Rs.5370 crore was raised in OFB Tech and Rs 1421 has been raised in Oxyzo Finance. Consequently, the networth of the group stood at Rs 4650 crore (including goodwill) while Oxyzo Finance reported a networth of Rs 549 crore as on December 31, 2021.

Adjusted gearing too was comfortable at 0.5 times and 3.3 times for the group and Oxyzo Finance, respectively, as on December 31, 2021. For OFB Tech at standalone level, capital structure is healthy, reflected in gearing and total outside liabilities / tangible networth (TOL/TNW) of 0.44 time and 0.52 time, respectively as on March 31, 2021. Gearing and TOL/TNW have remained sub-1 time in the past. Gearing was ~0.07 time as on Dec 31, 2021.

The adjusted gearing is expected to remain under 4 times at Oxyzo Finance level, 2 times at group level and under 1 time at OFB Tech level on a steady state basis. Furthermore, the group raised additional equity of Rs 1379 crore in January 2022 in OFB Tech and Rs 1421 crore in March 2022 and April 2022 in Oxyzo Finance. This has further boosted the networth of the group. CRISIL Ratings expects gearing to be maintained supported by regular capital raise and accretion of profits thus providing a cushion against asset-side risks.

* Adequate earnings profile during initial stage of operations itself

At consolidated level, the group turned profitable in fiscal 2019 and has been profitable since then, earning healthy return on managed assets (RoMA). RoMA at consolidated level was around 3.4% (annualised) in first nine-months of fiscal 2022 as compared to 2.6% in fiscal 2021.

Oxyzo Finance has been making profits since inception. While in the initial stages, the earnings profile was constrained by operating expenses, the same has improved to 2.5% (annualized) in 9MFY22 from 8.3% in fiscal 2019 thereby supporting the earnings profile. Consequently, RoMA in first nine-months of fiscal 2022 was stable at 3.2% (annualised), with the credit cost normalising to pre-covid levels.

At standalone level, as OFB Tech is engaged in trading business, the operating margin is modest; however the same has improved over the last four fiscals ended 2021. Company’s operating margin turned positive in fiscal 2018. The operating margin was 3% in fiscal 2021 and fiscal 2020. The operating margin has been supported by improved pricing (supported by stronger aggregation volumes across limited set of direct manufacturers & suppliers and MoU benefits) and by the interest income from customers for credit sales. The operating margin moderated to ~1.34% during 9M-FY22 due to higher revenue share from agro-commodities segment which is relatively lower margin segment. However, with increasing revenue share from industrial goods segment, the operating margin is expected to gradually rebound to previous levels. Debt protection metrics are also moderate, with interest cover and net cash accruals to adjusted debt of 3.6 times and 0.07 time, respectively in fiscal 2021. Interest cover and net cash accruals to adjusted debt ratios were around 4.3 times and 0.2 time during 9M-FY22.

Earnings profile of the group has been supported by decreasing operating expenses owing to operating leverage kicking in with scale and controlled credit costs. Having said that, the ability to keep the credit cost under control as the portfolio scales further up along with maintaining adequate NIMs with competition expected to come in will remain key monitorables.

Weakness:

* Ability to profitably scale up operations with high pace of growth

OFB Tech has significantly scaled up its operations over the last 2 years, especially during the last nine months of fiscal 2022. Gross trading revenues is estimated to have grown by more than 300% in fiscal 2022 over previous year. The monthly revenue has been on an increasing trend and the company is expected to clock monthly revenue of around Rs1600 crore in March 2022 itself. OFB Tech has also forward integrated partially in order to provide value addition to its customers. The company has plans to further increase its trading volumes by 300% in fiscal 2023 too. In light of the same, CRISIL Ratings believes the a sharp scale up of operations may bring it with attendant operational risk challenges linked to product quality, debtor management etc. Furthermore, there has been consistent capital infusion by marquee investors and the same is expected to continue to support the business risk profile going forward. OFB Tech has raised around Rs 4576 crore of equity in fiscal 2022. Of this, around Rs 1000 crore has been utilized for acquisition of about 13 companies that would be of value addition for the products catered by OFB Tech to its customers. Hence, the future business strategy around deployment of equity capital, growth plans, foray into new business segments, integration in supply chain and its implications on the business and financial profile of the group will remain key rating monitorables.

* Inherent vulnerability of the asset quality metrics for the unsecured lending portfolio for the group

The focus of OFB group has been to grow the AUM with significant share of secured exposures in the medium term. However, around 24% of the consolidated AUM comprises of unsecured [1] loans. Given the fact that the scale up happened recently, the track record of the lending operations is limited. While the performance in unsecured purchase financing has been marginally impacted with GNPA being at 4.7% as on Mar-20 as compared to 2.2% as on Mar-20, however the same the GNPA as on Dec-21 improved marginally to 3.9% for the unsecured portfolio. Within the unsecured portfolio, the Group has been facing challenges in the long term finance segment with GNPA level of 13.2% as on December 31, 2021. However, the share of this segment in the overall AUM would be less than 5%. While the GNPAs in this segment have 39% provisioning as on December 31, 2021, the same is an indication of the fact that issues may crop up in future as the group increases its scale or enters newer geographies. Hence, owing to limited track record of operations, the performance on asset quality of unsecured loans remain a key monitorable.

* Moderately large working capital requirement and exposure to competition for trading operations

OFB Tech has moderately large working capital requirements as reflected in gross current assets of 147 days (~107 days net off cash) as on March 31, 2021, largely driven by debtors of 127 days (debtor days are calculated against net sales i.e. excluding GST). However, 55-75% of the company’s debtors are secured by LC/BG. Also, the product categories that company trades are currently dominated by fragmented distributors and they remain exposed to intense competition. OFB Tech, however, has presence across multiple brands and products, and offers additional services to its customers which can be a competitive edge.

[1] Unsecured includes Unsecured long-term loans, unsecured purchase financing loans, semi-secured loans with 20% FLDG and unsecured trade receivables