SK Finance Limited Rating upgraded to ‘CRISIL A+/CRISIL PPMLD A+ r/Stable’
Rating Action
1 crore = 10 million Refer to annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has upgraded its ratings on existing debt instruments and bank facilities of SK Finance Limited (SK) to ‘CRISIL A+/CRISIL PPMLD A+ r/Stable’ from ‘CRISIL A/CRISIL PPMLD A r/Stable’
The upgrade reflects the SK’s strengthened capitalisation metrics, demonstrated ability to manage asset quality despite the challenging macroeconomic environment and sustained earnings profile. SK’s capital base has been bolstered by the recent equity raise, which continued strong growth. Further, the company has also diversified its resource profile and has managed to consistently reduce its incremental cost of borrowings which too supports the earnings profile.
The capitalization metrics have been supported by the regular and timely equity raising with company raising around Rs 1468 crore (including secondary exits) since inception, of which 717 crore has been raised in the last one year. Additionally, the company’s capitalization metrics has also been supported by healthy internal accruals generated with return on managed assets being in the range of 2%-3% in the last 4 years. Consequently, the networth of the company stood at Rs 1541 crores with gearing of 2.3 times as on December 31, 2021; Gearing is expected to remain within 4 times over the medium term.
SK has demonstrated its ability to manage asset quality in challenging times- collection efficiency ratio[1] remains range bound at 95%-100%. While the collections were impacted during the peak of the second-wave, dropping to 90% in April 2021 and 89% in May 2021, and post June 2021, the collections have improved and have remained comfortable in the range of 96%-100%. This consequently resulted in a resilient and controlled asset quality metrics in terms of 90+ dpd at 3.5% as on March 31, 2021, as against 3.3% as on March 31, 2020. The 90+ dpd increased to 4.4% as on December 31, 2021, however the same was due to the quarter effect and is expected to improve by March 2022.
Further SK has consistently managed to raise funds at competitive rates- it raised a total of Rs 2300 crores in fiscal 2021 and Rs 1200 crores in the nine months ended December 31, 2021; with the last couple of quarter incremental fund raising being at around 8-9%.
CRISIL Ratings has also withdrawn its rating on Rs 50 crore of non-convertible debentures and Rs 70.25 crore of long term principal protected market linked debentures, as there is no amount outstanding against these instruments. The withdrawal is in line with the withdrawal policy of CRISIL Ratings. (Refer to annexure for details of rating withdrawn.) [1] Calculated as Total collections including overdue but excluding prepayments divided by current billing |
Analytical Approach CRISIL Ratings has evaluated the standalone business and financial risk profile of SK. |
Key Rating Drivers & Detailed Description Strengths:
SK Finance has a vintage of over 25 years in the used vehicle finance segment and has built in-depth knowledge of its target segment. It started off as a direct selling agent in 1994 for entities such as Anagram, Escorts, SRF finance, Kotak Mahindra Prime etc. for two & three wheeler and commercial vehicle (CV) financing. Since 2005, the company transitioned to an assignment-based player for AU Financiers, ICICI Bank, Shriram Transport Finance Company Ltd. and HDFC Bank. After receiving a first round of growth capital of Rs 23 crore in fiscal 2012 (Rs.18 Crore from Banyan Tree Growth Capital & Rs 5 Crore from the promoters), the company started growing its own on-book lending portfolio and has scaled up significantly since then. In fiscal 2015, the company also launched MSME financing in areas where it was well penetrated through CV financing which constituted for around 12% of the overall portfolio as on December 31, 2021. SK Finance plans to grow it to 15% of the overall portfolio over the medium term. The promoter has also built a strong management team with rich experience in similar lines of business. As a team, they have also been strengthening and digitizing the systems and processes of the company, which will support the planned scale-up.
SK Finance has comfortable capitalization with sizeable networth which increased by almost 3 times in last 3 years to Rs 1541 crore as on December 31, 2021, from Rs 555 crore as on March 31, 2019. Consequently, the Tier I and overall capital adequacy ratios also remained comfortable at 32.46% and 33.27%, respectively, as on December 31, 2021. The adjusted gearing too was comfortable at 2.3 times (on-book gearing at 2.2 times) as on December 31, 2021. While the gearing will increase from current levels over the medium term, the company’s philosophy is to maintain gearing at under 4 times on a steady state basis. Net worth to Net NPA ratio also remained comfortable at 17.3 times as on December 31, 2021, as compared to 14.9 times as on March 31, 2020.
Capitalization metrics have been supported by the regular capital infusions in the past with SK Finance having raised Rs 1468 crores (including secondary exits) since inception. Of this, Rs 380 crores was raised in December 2021, of which Rs 150 crore was primary. CRISIL expects capitalisation to remain comfortable supported by internal accruals and regular capital infusion, thus providing a cushion against asset-side risks.
Given the segment of operations, the net Interest Margins (on total income basis) tends to be high and have remained over 10% during the last 3 years driven by the high yields on the portfolio given the inherent borrower profile and improving cost of funds.
With controlled asset quality metrics, SK has been able to control its credit costs which has supported the earnings profit. While the company’s credit cost increased in fiscal 2020 to 3% due to additional covid provisioning. However, the company has been able to bring it down to 2.2% in fiscal 2021 and further down to 0.9% (annualized) in first nine months of fiscal 2022. This was despite the high provision coverage ratio being maintained by the company in last three years at 40%-50%.
Further, with newer branches achieveing scale and with technological changes made in last 1.5 years, the company has been able to bring down its sourcing/collection costs, leading to operational effiiciencies and improvement in the operating costs.
Consequently, return on managed assets (RoMA) also remained comfortable and stood at 2.3% (annualised) during first nine-months of fiscal 2022 as compared to 2.3% in fiscal 2021. CRISIL also notes that the company has been able to sustain its profitability metrics even during the pandemic period with RoMA remaining range bound between 2%-3% in last four years.
Having said that, while operating expenses have reduced in the past couple of years, however, CRISIL Ratings expects the same to remain elevated as the company further invests in branch expansions in the new geographies. Additionally, with the uncertainty in the environment due to Covid-19, the ability of the company to manage its credit costs will remain a key monitorable.
SK Finance had an adequately diversified borrowings portfolio as on December 31, 2021, consisting of loans from banks (40%), non-convertible debentures (NCDs, 42%), loans from financial institutions (8%), securitization (8%) and external commercial borrowings (ECBs, 2%). Over the years, SK Finance has also been able to diversify its lender profile, by bringing in more banks under its resource mix, which also led to increase in the share of loans from banks from 19% in March 2019 to 40% in December 2021, whilst also continuing to maintain its NCD share at 40%. The company has also been able to bring its incremental cost of fund significantly down to ~8% in Q3FY2022 from 11.99% as on Q1FY2020.
Weakness:
The company’s scale of operations remained modest with AUM at around Rs 4178 crores as on December 31, 2021. Portfolio comprised commercial vehicle (49 %), tractor (19 %), Car (17 %), MSME (12 %) and two-wheeler (3 %) as on December 31, 2021. In the last few years, the company has diversified its geographical composition and currently has a presence in 10 states such as Rajasthan, Gujarat, Madhya Pradesh, Maharashtra, Haryana, Punjab, Chhattisgarh, New Delhi, Uttarakhand and Himachal Pradesh. However, Rajasthan and Gujarat continued to dominate the majority of the portfolio with share of 62% and 14%, respectively, which too has improved from 73% and 16%, respectively, as of March 31, 2019. While CRISIL expects a rapid scale up in the portfolio going forward, however, the ability of the company to further reduce the geographical concentration will remain a key monitorable.
Additionally, SK Finance focus has been on used vehicle financing (greater than 70% of the portfolio over the past three fiscals). This, coupled with the target segment of rural and semi-urban customers, leads to asset quality remaining susceptible to slippages.
Nevertheless, the company has put in place adequate underwriting practices and risk management practices which are separate for both of its segments i.e. Vehicle and MSME Finance. In case of vehicle finance, there are three layers of credit assessment which includes assessment at field, branch and headquarters level whereas in case of MSME finance, credit assessment is looked at from 3 different ways i.e. asset related, customer related and business related. The company has further strengthened its underwriting and risk management practices post Covid-19.
Because of stringent credit assessment procedure, the company has demonstrated its ability to manage asset quality metrics as 90 days past due (dpd) percentage of the company has hovered from 3% to 4% over past 3 fiscals.
The collection efficiencies[1] for the company, post the moratorium period, remained in the range of 95-100% across the months and reached 104% in March 2021. The collections were marginally impacted in second wave and reached 90% in April 2021 and 89% in May 2021, however, the same improved June onwards and remained between 96%-100% with December collections being at 99%. Consequently the 90+ dpd also remained comfortable at 3.5% as on March 31, 2021, as against 3.3% in the previous fiscal. The 90+ dpd increased to 4.4% in December 2021, however, the same was due to the quarter effect. Additionally, the write-offs and the restructured assets done during the pandemic also remained low and stood at 0.5% and 1.8%, respectively, as on December 31, 2021.
Nevertheless, given the higher geographical concentration in Rajasthan and Gujarat, as the company scale up its operations in the newer geographies, its ability to manage asset quality metrics while scaling up needs to be demonstrated and will remain a key monitorable. [1] Calculated as Total collections including overdue but excluding prepayments divided by current billing |
Liquidity: Strong SK Finance has an adequate ALM profile as on December 31, 2021, with no cumulative negative mismatches in the up to one year buckets (excluding unutilized bank lines) indicating that business inflows also support repayments. As on December 31, 2021, the company had cash and cash equivalents of Rs 827 crore, against which it had debt repayments (including interest) of Rs 738 crore for the next six months (Jan-22 to Jun-22). As a policy, the company plans to maintain a liquidity cover of 3 months (excluding collections/prepayments) at all times. |
Outlook: Stable CRISIL believes that SK Finance will benefit from its experienced promoters and management team and will maintain its comfortable capitalisation metrics going ahead. However, asset quality performance will be demonstrated only over time. |
Rating Sensitivity factors Upward Factors:
Downward Factors:
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About the Company SK Finance Limited (Erstwhile ESS KAY Fincorp Ltd), incorporated in 1994 by Mr Rajendra Kumar Setia and his family members. The company is engaged in the business of providing financing for income generation activity (CV and MSME lending against self-occupied property), the company also extends loans for purchase of two-wheelers, tractors, and cars.
SK Finance has a legacy of over 24 years in used vehicle finance segment and has, over a period of time, evolved from being a direct selling agent to originate to sell model to a full-fledged NBFC. The company had an AUM of Rs 4178 crore as on December 31, 2021.
The company reported a profit after tax (PAT) of Rs 85 crore on total income of Rs 578 crore in the nine months ending fiscal 2022, as against a PAT of Rs 91 crore on total income of Rs 691 crore in fiscal 2021 |
Key Financial Indicators
^based on year end averages *IND-AS #Annualised |
Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL Ratings' complexity levels are assigned to various types of financial instruments. The CRISIL Ratings' complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL Ratings' complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
Annexure - Details of Instrument(s)
^yet to be issued
Annexure – Details of Rating Withdrawn
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| Annexure - Details of Bank Lenders & Facilities | ||||||
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Criteria Details
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