Detailed Rationale

CRISIL Ratings has assigned its ‘Provisional CRISIL AA (CE)/Positive’ rating to the proposed long term bank facilities of SG Finserve Limited (SG Finserve).

 

SG Finserve, a non-banking financial company (NBFC), is a group company of the APL Apollo group, whose flagship company is APL Apollo Tubes Limited (AATL Apollo; 'CRISIL AA/Positive/CRISIL A1+'). The promoters of APL Apollo group acquired SG Finserve in August 2022 to cater to the funding requirements of the dealers of APL Apollo Tubes in its first phase of growth plans.

 

The provisional rating on SG Finserve is primarily based on the strength of an unconditional and irrevocable corporate guarantee backed by a defined payment mechanism by the APL Apollo Group entity, S Gupta Holding Pvt Ltd (formerly known as APL Infrastructure Pvt. Ltd.) (SGHPL; 'CRISIL AA/Positive/CRISIL A1+'). The debt of SG Finserve is also considered in the credit profile of SGHPL. Further, if there is a devolvement of corporate guarantee, SGHPL will be able to honor its obligations. SGHPL has sufficient financial flexibility by way of 26.6% stake in AATL as on September 30, 2024, translating into a market value of Rs 10,530 crore, as on October 29, 2024.

 

Since inception till September 30, 2024, SG Finserve has cumulatively disbursed Rs 31,579 crore. The AUM stood at Rs 821.9 crores as on September 30, 2024. The delinquencies however remain nil since inception. The rating also considers high strategic importance of SG Finserve to the overall group. The same was also evident from Rs. 450 crore of unsecured loan given by the promoters, which will be replaced by bank debt going forward and Rs. 450 crore of fresh equity warrants issued in October 2024 in the Company. Further, the group will extend support to SG Finserve in terms of details around the dealer network which would form a critical component of the company’s underwriting process as well as enforce stop supply in the event of any delay from the network of APL Apollo group. CRISIL Ratings expects managerial, operation and financial support from the group to SG Finserve to continue over the medium term.

 

Moreover, the ratings also factors in comfortable capitalisation of the company with networth of Rs  856.5 crore, as on September 30, 2024, and nil external borrowings as in date. These strengths are partially offset by company’s nascent stage of operations.

Analytical Approach

CRISIL Ratings has considered the standalone business and financial risk profiles of SG Finserve along with expectation of strong support from APL Apollo group. The APL Apollo group comprises of the flagship operating company, AATL and its holding company SGHPL.

 

The ratings are based on CRISIL Ratings' criteria for rating instruments backed by guarantees. The 'CE' (credit enhanced) suffix reflects the payment structure, which is designed to ensure full and timely payment to lenders on account of the corporate guarantee by SGHPL.

Key Rating Drivers & Detailed Description

Strengths:

• Continuing, unconditional and irrevocable corporate guarantee by SGHPL

The credit-enhanced ratings of SG Finserve are based on an unconditional, continuing, and irrevocable guarantee from SGHPL. The payment structure is designed to ensure full and timely payment to the lender. The proposed guarantee also contains clear mechanism for ensuring repayments to the lenders on the due date by way of well-defined structure. The proposed structure entails that SG Finserve, fund the repayment account at least at ‘t-1’ (t being the due date) days prior to the due date, failing which the guarantee will be invoked by lenders and SGHPL will have to fund the account by ‘t’, thus ensuring the repayments happen on due date. Effectively, the guarantor, SGHPL, will pay, on the due date, any amount due and payable by SG Finserve in relation to these instruments, in case of any shortfall in account balance one day prior to debt repayment date by SG Finserve. The guarantee and undertaking together cover the principal, interest and other amounts payable under the loan. The provisional rating is based on the confirmation by the client to share the required documents in line with the structure submitted to CRISIL Ratings, post which the provisional rating will be converted into a final rating.

 

• Strategic importance to the APL Apollo group

SGHPL is a holding company with 26.6% stake in AATL as on September 30, 2024 (with market value of Rs ~10,530 crore as on October 29, 2024). The APL group has a vintage of over 30 years. Since SGHPL is purely a holding, the group draws strength from its strongest operating company, AATL.  AATL with its 11 manufacturing units and geographical diversity, is the largest and the fastest growing ERW steel tubes/ structural products manufacturers in India, with current production capacity of 41 lakhs metric tonnes per annum (MTPA). AATL earned PAT of Rs. 170.4 crore on total income of Rs. 4,999 crore in Q1 of fiscal 2025 as against PAT of Rs. 732.4 crore on total income of Rs 18,194 crores in fiscal 2024. AATL still remains a financially strong company with strong capital structure reflected by gearing of 0.31 times as at March 31, 2024. The strategic importance of SG Finserve to the overall group remains very high. The same was also evident from Rs. 450 crore of unsecured loan given by the promoters, which will be replaced by bank debt going forward and Rs, 450 crore of fresh equity warrants issued in October 2024 in the Company.

 

SG Finserve will continue to be engaged in the activities of channel financing for the dealers of AATL, other large corporates and industry leaders in their respective sectors. Further, it will also provide bill discounting facilities to the creditors of AATL. The facilities offered will be for an average tenor of 90 days with rate of interest (ROI) of around 11%-15%. In addition to the proposed corporate guarantee to be given by SGHPL to SG Finserve, it will also benefit by way of a Letter of Comfort for stop supply arrangement from AATL. CRISIL Ratings believes that SG Finserve will continue to benefit from the comfort provided by the group entities and promoters in the form of cost of borrowing.

 

Moreover, SG Finserve will have strong operational synergies with AATL and its subsidiaries. SG Finserve has also integrated its systems with AATL to get timely data on the sales done to the dealers and the overall outstanding, also a stop-supply arrangement is maintained, wherein the supply to the dealer will stop in case there is overdue. Further, the promoters over the long term will continue to hold majority stake in SG Finserve.

 

• Comfortable capitalisation metrics

Post the acquisition, the promoters and investors have infused Rs 822.5 crore of equity (including Rs. 112.5 crore received on October 25, 2024) in the company till date. Over the longer term, the promoters are expected to continue to hold the majority and controlling stake in the company. The company’s networth stood comfortable at Rs 856.5 crore as of September 30, 2024 and Rs. 806.4 crore for fiscal 2024. CRISIL Ratings expects timely capital infusion from promoters to continue to support growth and in the event of distress. While the company has nil external debt as on date, the company plans to avail external borrowings to support growth plan. On a steady state basis, the gearing metrics for the company are expected to remain under 3 times.

 

Weakness:

• Nascent stage of operations

SG Finserve started its operations from September 2022. In the short period, while the entity has made disbursements of ~ Rs 31,579 crore till September 30, 2024, however it is at a nascent stage of operations and the systems and processes are still being developed and established.

 

SG Finserve is engaged in the activities of channel financing for the dealers of AATL, other large corporates and industry leaders in their respective sectors. Further, AATL has a vintage of these dealers of over 3 decades and for the last decade, the bad debts within AATL have remained within 0.2%. CRISIL Ratings believes that the NBFC will continue to benefit from the established track record of the group. Consequently, delinquencies are expected to remain under control. However, given the lending segment of the company and nascent stage of business, the company remains exposed to concentration risk. Any higher than anticipated uptick in the asset quality metrics will remain a key monitorable.

Liquidity: Strong

The asset liability management (ALM) as on September 30, 2024, shows no cumulative negative mismatches upto 1 year maturity bucket (the inflows include existing bank limits). SG Finserve has unencumbered cash and equivalents of Rs 2.02 crore and investments in fixed deposits of Rs. 27.8 crore, as on September 30, 2024. Against this, there are nil external debt obligations. 

Outlook: Positive

CRISIL Ratings believes SG Finserve will continue to receive strong support from the APL Apollo Group. The rating will remain sensitive to any change in CRISIL Ratings’ rating on SGHPL or AATL.

Rating Sensitivity Factors

Upward factors:

• Upward revision in the credit rating of AATL or SGHPL by one notch or higher

 

Downward factors:

• Downward revision in the credit rating of AATL or SGHPL by one notch or higher
• Non-adherence to the terms and conditions of transaction structure/payment mechanism

Adequacy of credit enhancement structure

The guarantee that is proposed to be provided by SGHPL is unconditional and irrevocable and will cover the entire rated amount for bank loans. The payment structure is designed to ensure full and timely payment to the lender. The proposed guarantee also contains clear mechanism for ensuring repayments to the lenders on the due date by way of well-defined structure. The proposed structure entails that SG Finserve, fund the repayment account at least at ‘t-1’ (t being the due date) days prior to the due date, failing which guarantee can be invoked by lenders and SGHPL will have to fund the account by ‘t’, thus ensuring the repayments happen on due date.

Unsupported ratings: CRISIL A+

CRISIL Ratings has introduced the suffix CE for instruments having explicit credit enhancement feature in compliance with the Securities and Exchange Board of India circular dated June 13, 2019.

Key drivers for unsupported ratings

For arriving at the unsupported ratings, CRISIL Ratings has considered the standalone business and financial risk profiles of SG Finserve. CRISIL Ratings has also applied its group notch-up framework to factor in the extent of support available from APL Apollo Tubes group.

 

The ratings factor in strategic importance of SG Finserve to the APL Apollo group’s flagship company, AATL and the strong financial flexibility of the promoters. The ratings also reflect the high operational linkages with AATL, since SG Finserve caters to the dealers and suppliers of AATL. However, the rating is largely constrained by its nascent stage of operations.

About the Company

SG Finserve, originally known as Moongipa Securities Limited, was established in 1994. The promoters of APL Apollo group, namely Mr. Rahul Gupta and Mr. Rohan Gupta, acquired 56.25% stake in SG Finserve on August 20, 2021, post which an open offer was made which concluded on July 22, 2022. The entity was having Type I NBFC license until September 25, 2024 which was later converted into Type II NBFC license on October 3, 2024.

 

About the Guarantor

Operating since 2006, S Gupta Holding Private Limited (formerly known as APL Infrastructure Private Limited) is a holding company with limited operations in the APL Group. SGHPL enjoys healthy financial flexibility from its stake in APL Apollo Tubes Limited (valued at ~Rs 10,530 crore as on October 29, 2024). The company derives majority of its business from trading of shares and steel pipes, as well as dividend from subsidiaries and rental income. The APL group has been in business for over 30 years.

 

About the Group

Established in 1986, APL Apollo is the largest and one of the fastest growing ERW steel tubes/structural products manufacturers in India, with a current production capacity of 41 lakhs MTPA. The company is a part of the Sudesh group and is promoted by Mr. Sanjay Gupta.

 

Currently, APL Apollo has 11 manufacturing facilities, with 3 plants in Sikandrabad (Uttar Pradesh); 1 each in Hosur (Tamil Nadu), Murbad (Maharashtra),  Hyderabad (Telangana),  UAE; and 2 plants in Bangalore (Karnataka) and Raipur (Chhattisgarh). It has also established a wide 3-tier distribution network with around 800+ dealers.

List of covenants

• The Guarantor irrevocably and unconditionally:
• The Guarantor hereby agree and give consent that, if the borrower does not fund the designated payment accounted by T-1 (1 business day before the due date T) then the lender shall serve the notice or demand immediately through e-mail to the guarantor to fund the said account on due date as per sanction terms. In the event of the Guarantor(s) failure to pay to the Bank the said dues forthwith on demand made by the Bank then in such event, the aforesaid amount shall bear and carry interest at the rate of 18% per annum or such other rate as the Bank may in its absolute discretion stipulate, from the date of demand till payment by the Guarantor(s).
• Notwithstanding anything contained in the guarantee deed, the non-issuance of demand notice or the lender not invoking the guarantee shall not absolve the obligations of the guarantor to pay its obligation on the payment date and even if bank has not issued the demand notice / invoked the guarantee as per clause (b) above, the guarantor shall pay its obligation forthwith and in any case on or before the payment date in the event of failure on the part of the issuer/borrower in repaying the same to the bank (acting for itself and on behalf of and for the benefit of the lender) on payment date/due date. 
•  The Guarantor shall at all times until the expiry of the Final Settlement Date, except as may otherwise be agreed in writing by the lender, undertake to ensure that all loans from shareholders including, without limitation, any payments in relation thereto shall at all times until the expiry of the Final Settlement Date be subordinated to the lender;
•   Without the prior written approval of the lender (acting in accordance with Approved Instructions), the Guarantor shall not, at all times until the Obligations are outstanding, (whether directly or indirectly), change the name of the Issuer, without the consent of the lender (acting in accordance with the Approved Instructions); and undertake any Change of Control.

Any other information

SG Finserve had originally received NBFC license on May 16, 2018, however that was Type I NBFC license. Thereafter, Company was acquired by APL Apollo Group and it applied for an application with RBI for converting into a Type II NBFC in January 2024. RBI, via its letter dated July 3, 2024, had returned the company’s application for conversion from a Type I to Type II NBFC. Company had again resubmitted the application on August 6, 2024 with RBI for obtaining the NBFC Type II approval. RBI via its mail dated September 25, 2024 has approved the proposal for conversion from Type I to Type II NBFC. The company has now received new Certificate of Registration dated October 3, 2024, to operate as a Type II NBFC.