Key Rating Drivers & Detailed Description

Strengths:

Adequate capitalisation and funding profile

The capital position is adequate, supported by networth of Rs 121 crore, in relation to the modest size of the advance book as on March 31, 2022. As on same date, gearing was 1.9 times. Furthermore, around Rs 100 crore of Series D round of funding is expected to complete before mid of fiscal 2023. Gearing is expected to increase as the scale improves, and on a steady-state basis, gearing is expected to remain at 4-5 times.

The company has attracted Rs 127 crore in capital since it commenced operations in 2015 from a strong investor base with Sewa Mutual Benefit Trust (SMBT), Women’s World Bank (WWB), Oikocredit Ecumenical Development Cooperative Society U. A. (Oikocredit), Omidyar Network Fund Inc. (Omidyar), HDFC Holdings, AHI Capital, and HDFC Life all holding stakes in the company.

The business model of SGRL combines lending with social impact, catering to a niche market of informal housing tenure or incomplete property documentation - wherein it assists potential customers in making the property title legally executable. SGRL is expected to continue to benefit from the support of its investors.

On the debt side, the US International Development Finance Corporation sanctioned a low cost, 15-year long credit line of USD 30 million (Rs 225 crore) in August 2019 at an all-in cost of 9.3%. Of this, the company has drawn down USD 18 million (around Rs 135 crore), with last tranche of USD 6 million (Rs 45.7 crore) in April 2022. The company has USD 12 million (around Rs 90 crore) available for drawdown, of which USD 8 million (around Rs 60 crore) will be available after incremental equity infusion of Rs 33 crore. Additionally, the company received sanctions from large banks, such as State Bank of India and HDFC Bank, at competitive margin. This will support the growth plans of SGRL and help maintain its asset-liability profile, and improved profitability.

Experienced management team

The current senior management team has been with the company since its inception and has played a critical role in attracting equity and credit investors through their earlier work connections. Ms Shruti Gonsalves (chief executive officer and managing director) has work experience of around 22 years and has been associated with the government and private agencies in development finance and financial inclusion.  The company also has an experienced second line, which has helped put adequate systems and processes in place to manage the inherent risks in the borrower profile.

Weakness

Early stage of operations

The company commenced operations around six years ago and remains a small player in the affordable housing finance industry, with a loan book of Rs 320 crore as on March 31, 2022.

While the current level of delinquencies is low, GNPAs inched up to 0.89% as on March 31, 2022, from 0.30% as on March 31, 2021, because of the Covid-19 pandemic and the RBI circular. Nevertheless, the portfolio has witnessed limited seasoning and has a short legacy compared with average tenure of 10 years and recent scaling -up of the portfolio. SGRL had 4.9% of AUM under restructuring as on March 31, 2022, out of which only 1.6% had loan-to-value (LTV) ratio of more than 80%.

Furthermore, SGRL targets women who are in the low-income group and economically weaker section and who are employed in the informal sector and may have informal property titles. Given that the target customer segment has limited financial flexibility in times of distress, on account of relatively high risk compared with traditional home finance companies, the delinquencies are expected to increase from current levels as scale increases and the portfolio seasons. Nevertheless, asset quality should benefit from the granular and secure nature of the portfolio with LTV of less than 40% for around 90% of the portfolio. However, the ability to manage the asset quality will need to be demonstrated over a longer period.

Also, the company needs to demonstrate its ability to improve profitability on a sustained basis. The company broke even in fiscal 2020, with net profit of Rs 1.0 crore, compared with loss of Rs 3.8 crore in fiscal 2019, as the scale, and operational efficiency improved. Net profit was Rs 4.3 crore in the fiscal 2022 as compared with Rs 9.3 crore in fiscal 2021, mainly due to higher credit cost and forex losses on the USD denominated borrowings.  In the company’s target segment, yields remain high but the ability to control credit costs and operating expenses will be the key determinants of profitability, over the medium term. At the same time, access to relatively low-cost funding line is expected to support the profitability metrics.

Key Financial Indicators

Annexure - Details of Instrument(s)

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