Detailed Rationale

CRISIL Ratings’ ratings on the bank facilities of Profectus Capital Pvt Ltd (Profectus) continue to reflect healthy capitalisation, supported by capital commitment from its 100% shareholder, Actis, and extensive experience of the senior management in the financial services space. These strengths are partially offset by small scale of operations and modest earnings.

 

Profectus offers secured advances to micro, small and medium enterprises (MSMEs) and focuses on enterprises with limited access to channels of formal financing. In the past two years, lockdowns amid the Covid-19 pandemic led to disruption in economic activity and exerted pressure on the cash flow of borrowers, especially the MSME segment. Consequently, collections dropped during lockdowns, both in the first and second waves of the pandemic but recovered gradually thereafter on account of subsequent easing of movement restrictions. The third wave of the pandemic has not disrupted operations materially but any change in the payment discipline of the borrowers may affect delinquency levels and will remain a monitorable.

 

Under the Reserve Bank of India’s (RBI’s) Resolution Framework 1.0 and 2.0 for Covid-19-related stress, the company restructured 1.6% of its assets under management (AUM) as on December 31, 2021. Gross non-performing assets (GNPAs) inched up to 2.0% as on June 30, 2021, from 0.20% as on March 31, 2021, mainly on account of the pandemic, but steadily improved thereafter to 1.6% as on December 31, 2021. Ability to manage collections and asset quality in fiscal 2023 will be a key monitorable.

 

While Profectus continues to rely on loans from banks and non-banking finance companies (NBFCs), it has been able to successfully diversify the lender base and now has relationships with over 17 lenders compared with only two as on March 31, 2020. Overall borrowings increased to Rs 627 crore as on December 31, 2021, and Rs 443 crore as on March 31, 2021, from Rs 103 crore as on March 31, 2020. Involvement of Actis in fundraising activities has helped Profectus leverage the former’s relationships. The company’s cost of borrowing at 9.5% in the nine months ended December 31, 2021, and 10% in fiscal 2021 was comparable to that of its peers. Furthermore, the company plans to tap into capital markets over the near term to further diversify its resource mix.

Analytical Approach

CRISIL Ratings has assessed the standalone business and financial risk profiles of Profectus and has also factored in capital commitment from Actis.

Key Rating Drivers & Detailed Description

Strengths:

Healthy capitalisation, supported by capital commitment from Actis

Capitalisation is healthy, supported by networth of Rs 658 crore and gearing of 0.7 time as on March 31, 2021, compared with Rs 554 crore and 0.2 time, respectively, a year earlier. As on December 31, 2021, networth was Rs 666 crore and gearing was 0.9 time. Capitalisation is supported by regular capital infusion from Actis, which invested USD 140 million (around Rs 1,000 crore). The company has already received Rs 655 crore since its inception in June 2018, of which the latest tranche of Rs 100 crore was infused in March 2021. The next tranche of Rs 100 crore is expected by May 2022 with the remaining commitment of around Rs 250 crore to fructify in the next 6-9 months as per business requirement.

 

Although gearing will increase as the company scales up, it should remain below 3 times over the next few fiscals and 5-6 times on a steady-state basis. Furthermore, Actis is committed to regularly infusing capital as and when required to maintain business growth over the medium term.

 

Experienced management

The company was founded by Mr KV Srinivasan, who has extensive work experience and a track record of successfully building a retail MSME loan book. All the core members of the top management have worked with each other prior to joining Profectus and have a reputation of successfully managing the retail finance business.

 

Backed by its significant experience, the management has put in place strong systems and risk management processes at an early stage, which was critical to the business given the inherent vulnerability of the MSME customer segment. The company has an experienced board, and the top management is focused on institutionalising strong corporate governance principles. The experience of the management should continue to help scale up the loan book.

 

Weaknesses

Small scale of operations

The company started disbursements in November 2017, and the scale of operations remains small as on date. The total portfolio was Rs 1,175 crore as on December 31, 2021, and Rs 893 crore as on March 31, 2021, against Rs 454 crore a year earlier. While the disbursements in the six months ended September 30, 2021 was low at Rs 234 crore due to the second wave of the pandemic, it recovered to Rs 289 crore in the three months ended December 31, 2021. Disbursement in fiscal 2021 was Rs 645 crore compared to Rs 491 crore a year back. Growth in the loan book is expected to pick up in the near term as economic activity revives. The size of the book will remain small over the medium term.

 

Modest earnings

Profitability will remain modest, with elevated operating costs, which happened because of expansion of the branch network, related recruitment and investment in technology. Nevertheless, the company broke even in fiscal 2021 (under Ind-AS), with profit after tax (PAT) of Rs 6.8 crore against loss of Rs 0.7 crore a year earlier, along with rise in scale. Return on assets (RoA) stood at 0.7% in fiscal 2021, against negative 0.1% in the previous fiscal. In the first nine months of fiscal 2022, PAT was Rs 7.4 crore and annualised RoA was 0.8%. Credit cost was broadly stable at 0.5% (annualised) in the first nine months of fiscal 2022 and 0.5% in fiscal 2021 compared with 0.4% in the previous fiscal. However, as per Indian Generally Accepted Accounting Principles (IGAAP), the company broke even in the first half of fiscal 2020.

 

Profitability is expected to improve further as the company ramps up its loan book and benefits from operational leverage accrual. However, given the relatively unseasoned portfolio, the company’s delinquencies and ability to manage its credit costs will be closely monitored.

Liquidity : Adequate

As on January 31, 2022, liquid investments were Rs 85 crore and unutilised bank lines were Rs 58 crore against debt obligation of Rs 87 crore over the three months through April 2022. Liquidity is further supported by the presence of Actis, which can infuse funds in case of any exigency.

Outlook Stable

Profectus will maintain its healthy capitalisation, supported by regular capital infusion from Actis. The experienced management is expected to help increase the company’s revenue along with reasonably healthy asset quality.

Rating Sensitivity factors

Upward factors

• Significant improvement in the market position, while maintaining asset quality
• Improvement in profitability, with return on managed assets beyond 2.5% on a sustained basis

 

Downward factors

• Change in capital raising plans over the next few years, leading to increase in gearing to beyond 6 times on a sustained basis
• Challenges in regularly raising funds from diversified sources and at optimal rates
• Significant and sustained weakening of the asset quality coupled with the company continuously reporting losses

About the Company

Profectus was founded in June 2017 by Mr K V Srinivasan, who earlier headed Reliance Commercial Finance and Reliance Home Finance. The company is registered with the RBI as a systemically important, non-deposit-taking NBFC. It has presence in 22 cities across 12 states and union territories. Actis, a global private equity firm, held a 100% stake in the company as on March 31, 2021.

 

Actis, founded in 2004 (after a spin-off from CDC Group plc, earlier known as Commonwealth Development Corporation), has raised USD 14 billion and has assets under management of over USD 10 billion. It has made more than 200 investments and over 160 exits globally. Actis has 15 offices globally and employs more than 200 people, including 120 investment professionals, in 10 countries.

 

In fiscal 2021, net profit was Rs 6.8 crore on total income (net of interest expense) of Rs 79.4 crore against loss of Rs 0.7 crore on total income (net of interest expense) of Rs 48.3 crore in the previous fiscal.

 

In the first nine months of fiscal 2022, net profit was Rs 7.4 crore on total income (net of interest expense) of Rs 75.2 crore, as compared with net profit at Rs 6.4 crore on total income (net of interest expense) of Rs 58.1 crore in the corresponding period of last fiscal.

Any other information: Not applicable