Detailed Rationale

CRISIL Ratings has reaffirmed its 'CRISIL BBB/FA-/Stable' ratings on the long-term bank facility and fixed deposit of Punjab Kashmir Finance Limited (Punjab Kashmir Finance; a part of the PKF group).

 

The ratings continue to reflect the extensive experience and long-standing presence of the group’s management in the asset financing business. The rating also factors in the group’s adequate capital position with comfortable gearing position. These strengths are partially offset by the moderate scale of operations with regional concentration and average asset quality.

 

PKF group has demonstrated ability to improve on collection efficiency ratio[1] despite the challenging times faced during the second wave of Covid-19 pandemic. The month-on-month collection efficiency for PKF group has stood above 90% in July 2021 and then improved further to over 100% during December 2021 and January 2022. In terms of asset quality, there was slight impact visible with gross non-performing assets (90+ dpd) increasing to 8.87% as on December 31,2021 from 7.67% as on March 31, 2021. Apart from impact of the peak second wave, the inch-up in gross NPAs was also due to marginal de-growth in asset base, since the management focused more on having recoveries and remained cautious over portfolio growth. Additionally, as part of the one-time restructuring scheme related to Covid-19 announced by the Reserve Bank of India, PKF group did not utilized the same and did not do any restructuring of its accounts till date. CRISIL Ratings, nevertheless believe, the ability of PKF group to sustain on its collection efficiency in order to improve its asset quality will remain key monitorable.

Analytical Approach

The PKF group comprises of entities: PKF Finance, Punjab Kashmir Finance, Punjab Reliable Investments Pvt Ltd and Reliable Agro Engineering Services Pvt Ltd. For arriving at the ratings, CRISIL Ratings has combined the financial and business risk profiles of all the group entities because of high business integration and common promoters.

 

Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

Experience of the promoters

Managing Director Mr Alok Sondhi and Joint Managing Director Mr Vivek Sondhi have been in the asset financing business for over 35 years. The group has been in the business for more than 6 decades and has passed through several economic cycles. It has maintained a strong brand in Punjab, Delhi, Haryana, and Chandigarh, and competes with banks and other large non-banking financial companies (NBFCs).  The long-standing presence and strong brand image in the regions that PKF group operates in has helped them to raise debentures and public deposits at competitive rates.

 

Adequate capital position supported by internal accruals

Consolidated networth for the group stood at Rs 72.6 crore as on December 31, 2021 (Rs 70.2 crore as on March 31, 2021). Overall gearing was also comfortable at 2.6 times (2.8 times as on March 31, 2021) and has remained below 4 times over the past decade. Furthermore, RoA of the group has always remained comfortable between 2-3% over the last 5 years supported by competitive cost of borrowing and operating costs that has stood at 8.3% and ~4% respectively. Owing to impact on asset quality due to pandemic, the group increased in provision coverage to close to 60% during nine months of fiscal 2022. Despite this, the earnings profile of the group has remained comfortable with RoA of 1.8% (annualized basis) during the same period. The capital position of group, therefore, has remained supported by steady internal cash accruals. The group, nevertheless, proposes to write-off few old NPA accounts in Q4 fiscal 2022, which may have slight impact on profitability. However, on overall basis, the capital position is expected to remain adequate given the group has philosophy to operate at relatively low gearing level. In terms of capital infusion, while promoter possess ability to infuse funds at any point in time, the last infusion was done in fiscal 2018 of Rs 0.5 crore. However, given the moderate growth plans, CRISIL Ratings believes that the gearing is expected to remain steady over the medium term.

 

Weakness:

Average asset quality

PKF group’s asset quality has remained average, the increase in delinquencies during fiscal 2022 has been primarily due to second wave which resulted in disruptions in economic activities. In terms of asset quality, there was slight impact visible with gross non-performing assets (90+ dpd) increasing to 8.87% as on December 31, 2021 from 7.67% as on March 31, 2021. Assuming RBI guidelines on Prudential Norms for Income Recognition Asset Classification (IRAC), the 90+ for the group as on December 31, 2021 stood at 9.51%. Apart from impact of the peak second wave, the inch-up in gross NPAs was also due to marginal de-growth in asset base, since the management focused more on having recoveries and remained cautious over portfolio growth. Nevertheless, the group has displayed a strong ability to improve its collection efficiency, when calculated after considering overdues, collections improved to above 100% in December 2021 and January 2022. Further, as part of the one-time restructuring scheme related to the pandemic that was announced by the RBI, the group has not restructured any account till date. Nevertheless, CRISIL Ratings will continue to closely monitor the asset quality situation over the medium term. The group’s ability to contain incremental delinquencies in the asset financing business segment will be a key rating monitorable.

 

Modest scale of operations with regional concentration

The group registered degrowth in the book size owing to pandemic and the conservative approach of the management towards scaling up and focus on improving asset quality metrics. The assets under management (AUM) for the group stood at Rs 219 crore as compared to 244 crore in fiscal 2021 (Rs 246 crore in fiscal 2020). The scale of operations for the group is small and concentrated in the northern states of Punjab, Haryana, and Delhi. In spite of being in operations for six decades and a network of 13 branches, the group has remained small player. Though the group intends to scale up operations, it will likely remain a small retail financing player with regional focus, over the medium term.

Liquidity: Adequate

As on January 31, 2022, PKF group had liquidity of Rs 3.58 crore in terms of cash and equivalent, including liquid investments, of Rs 44.0 crore and cash credit or working capital demand loan (CC/WCDL) facility of Rs 18.16 crore. The group's liquidity buffer (assuming nil collections) to cover total debt and loan repayment and operating expenses arising over February and March 2022 is above 5 times.

Outlook: Stable

CRISIL Ratings believes the PKF group will continue to benefit from the experience of the promoters and maintain adequate capitalisation over the medium term.

Rating Sensitivity Factors

Upward Factors:

• Improvement in asset quality with gross NPA level (90+ dpd) reducing and maintained below 5%
• Earnings profile, in terms of RoA, maintained at over 2%
• Improvement in scale of operations while maintaining operational cost

 

Downward Factors:

• Increase in steady state gearing above 5 times
• Deterioration in asset quality leading to increase in credit costs and its consequent impact on profitability with significant fall in RoA from present level

About the Group

Punjab Kashmir Finance, the flagship entity of the PKF group, was established by Mr Balbir Raj Sondhi in 1958 to provide loans for purchasing CVs. The group has diversified into financing passenger cars, earthmoving equipment, medical equipment, and industrial and other machinery in recent years. The group also extends business loans (against property) to well-known corporate entities or their promoters. The group has operations in Punjab, Delhi, and Haryana. Its loan portfolio was around Rs 219 crore as on December 31, 2021.

 

The PKF group had a net profit of Rs 5.2 crore and total income of Rs 40.1 crore during fiscal 2021, compared to Rs 5.6 crore and Rs 42.0 crore, respectively, in fiscal 2020. For the 9 months through December 2021, net profit was Rs 4.1 crore and total income was Rs 29.9 crore.

 

Punjab Kashmir Finance reported a net profit of Rs 1.6 crore and total income of Rs 16.2 crore in fiscal 2021, compared with Rs 1.8 crore and Rs 17.0 crore, respectively, for fiscal 2020. For the 9 months through December 2021, net profit was Rs 1.7 crore and total income was Rs 13.0 crore.

Key Financial Indicators – PKF Group

As On/For Period Ended	Unit	Dec – 2021	Mar-2021	Mar-2020
Total assets	Rs crore	302.3	303.5	304.7
Total income	Rs crore	29.9	40.1	42.0
Profit after tax	Rs crore	4.1	5.2	5.6
90+ dpd	%	9.5*	7.7	6.7
Gearing	Times	2.6	2.8	3.0
Return on assets	%	1.8	1.7	1.9

*includes RBI impact

Any other information: Not applicable

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs.Crore)	Complexity Level	Rating assigned  with outlook
NA	Cash Credit	NA	NA	NA	20	NA	CRISIL BBB/Stable
NA	Fixed Deposits	NA	NA	NA	0	Simple	FA-/Stable