Key Rating Drivers & Detailed Description
Strengths:
Strong experience of promoters and management in rural financing
The founders of Sarvagram, Mr Utpal Isser and Mr Sameer Mishra have significant relevant experience complementing the business model of the group. Both of them have been involved in managing rural businesses across financial sector entities including banks. The management team too has strong experience in the rural finance business. Given their significant experience, the management is focused on putting in place sound systems and risk management processes at an early stage itself. The group has invested significantly in analytics capability, underwriting capabilities, and risk analytics. CRISIL believes that the experience of the promoters and management will stand Sarvagram in good stead as it scales up its portfolio.
Comfortable capitalization metrics
Capitalisation metrics for the group remain comfortable, supported by regular capital infusions. The group has raised around Rs 101 crores within 2 years of its operations at the parent level, with Rs 76 crore being raised in January 2021. Pursuant to capital infusion, the networth of Sarvagram Solutions stood at Rs 97.41 crore as on March 31, 2022, as against 97 crore as on March 31, 2021 and Rs 24 crore as on March 31, 2020. Of the total capital raised, the parent has infused around Rs 80 crore in the NBFC, i.e. Sarvagram Fincare Limited. Consequently, at standalone level, the company had a networth of Rs 51.86 crore as on March 31, 2022, as against Rs 17 crore as on March 31, 2021 and Rs 9 crore as on March 31, 2020. The gearing metrics also remained comfortable at both consolidated and standalone level at 2.4 time (adjusted for goodwill) and 2.9 times, respectively, as on March 31, 2022.
Capitalization metrics are expected to remain comfortable in the medium term with gearing metrics not expected to go beyond 3.5 times on on-book basis.
Weakness:
Modest scale of operations with limited track record
Given the nascent stage of operations, the assets under management (AUM) for the company was modest at Rs 171 crore as on March 31, 2022, as compared to Rs 39 crore as on March 31, 2021. The company currently has five credit products under its portfolio, i.e. business loans (28%), farm loans (32%), personal loans (25%), home loans (6%) and gold loans (8%). The company offer these credit products to semi-urban/rural households. The company follows brick and mortar business model for the purpose of its lead generation and currently has 50 branches as on March 31, 2022, as compared to 9 as of March 31, 2021, primarily in the states of Gujarat and Maharashtra. The company has also started its operations in Rajasthan and Karnataka and plans to further expand its operations in the given states.
Given the significant experience of management, the management is focused on putting in place sound systems and risk management processes at an early stage itself. For the purpose of underwriting, Sarvagram Fincare considers the entire household income and expenses. In addition, the focus is also on secured lending. As of March 31, 2022, 65% of the company’s AUM was secured by mortgage. Additionally, the company also secures it portfolio through stock hypothecation. Including the stock hypothecation, the secured portfolio would constitute 80% of the total portfolio.
With the small scale of operations, the company has managed its collection efficiency[1] well with the same dropping to 83% in April 2020 i.e. immediately post Lockdown which then improved to over 98% in September 2020, i.e. post the moratorium period and continued to remain at the similar levels. Even during the second-wave of Covid-19, the collections slightly dropped to 91% in April 2021, however, the same increased to 95% in May 2021 and remained in the range of 95%-100%. Consequently, the asset quality metrics in terms of 90+ dpd remained comfortable at 1.3% as on March 31, 2022 as against 1.1% as on March 31, 2021 and nil in March 2020. The increase in 90+ dpd levels was on account of exposure to micro-finance and SME segments, to which the company had offered loans before the pandemic. The company has now stopped lending to the affected sectors within the SME segment. Additionally, the company has also not done any restructuring as per the RBI Covid resolution framework.
Nevertheless, with just 2 years of operations, the portfolio lacks seasoning and the ability of the company to manage its asset quality as the portfolio scales up remains to be seen and would remain a key monitorable.
Earnings profile constrained by high operating expenses
The earnings profile is currently constrained amid high operating costs given the branch expansion and technological investments being undertaken given the nascent stage of operations. SarvaGram Fincare reported a loss of Rs 20.3 crore for the period ending March 31, 2022, as against loss of Rs 4.9 crore for fiscal 2021. High employee costs formed the bulk of the operating expenses, due to increase its branch operations and consequent hiring of sales officer, branch managers and credit managers. Operating costs are expected to reduce over the medium term as the newly opened branches achieve scale, and employee costs normalise even as the company continues to increase its network. With a branch typically turning profitable by around 4-5 months at operational level, operating efficiencies would flow in only over the medium term. Nevertheless, the central underwriting model will support operating leverage.
Furthermore, the high-yield portfolio with IRR ranging 20-30% across all segments supports earnings profile. The company is also planning to start off-book lending in near term.
As the portfolio scales up and gearing increases, ability to raise resources at competitive costs will be important. Additionally, ability to manage asset quality, and therefore, credit costs will be a key determinant of profitability over the medium term.