Rating Rationale

Strengths:
* Significant experience of the promoters and senior management in the two-wheeler and two-wheeler finance industry
The founders of WEPL have over 30 years' experience in the two-wheeler and two-wheeler finance industry and were part of one of the leading companies in this segment. The top management also has extensive experience in handling various functions in similar businesses including collections, backend operations, credit and legal.

Given their significant experience, the management of WEPL has been able to put in place strong systems and risk management processes at an early stage itself. This is especially important as the organized pre-owned two-wheeler financing segment is relatively nascent in the Indian market. The credit approval for new two-wheelers is centralized; the company is also in the process of centralizing the credit approval for pre-owned two-wheelers. The operational risk aspect has been minimized through IT systems as all the deviation approvals and disbursals are automated and done through centralized system.

The management is also focused on building good governance systems. It has an experienced Board with two independent directors and has appointed reputed auditors.

CRISIL believes that the experience of the promoters and management will stand WEPL in good stead as it scales up its portfolio.

* Healthy capitalization metrics supported by regular capital raising
The company has healthy capitalisation, supported by regular capital raising. It also has a comfortable leverage philosophy, with gearing not expected to cross 4 times at all points in time. The company has been able to raise capital from private equity funds on a regular basis in the form of compulsorily convertible preference shares (CCPS). In 2017 and 2018, the company raised Rs 59.5 crores through infusion from Elevar M-III & Elevar I-IV AIF and Rs 63.5 crores from Faering Capital India Evolving Fund (II and III). The networth of WEPL was comfortable at Rs 106 crores as on December 31, 2018. As on the same date, gearing stood at 0.5 times. WEPL plans to raise an additional Rs 250 crore in fiscal 2020; with this, despite planned portfolio growth, gearing would remain within 2.0 times by March 2021.

Weaknesses:
* Small scale of operations
WEPL commenced operations in April 2017 and as on December 31, 2018, it had a small portfolio of Rs 65 crore. Of this, 43% is new two-wheeler financing, 41% is used two-wheeler financing, 9% is loan against vehicle, 4% to corporates (for new two-wheelers) and remaining 3% was from trade advances and portfolio buyouts. The company is expected to grow its portfolio at a healthy pace to around Rs 700 crore by end of fiscal 2021. Even at this AUM, it would have a share of sub-3% in overall non-bank two-wheeler financing market. However, its share in the used two-wheeler financing market is expected to be significantly higher.

* Asset quality susceptible to risks inherent in two-wheeler financing; used two-wheeler financing is a relatively untested segment
WEPL's asset quality is susceptible to risks associated with financing of two-wheelers wherein the borrower credit profiles could be relatively weak. Further, the pre-owned 2W segment is untested- while the customer profile is similar to that of new two-wheelers, the ability to recover sufficiently through repossession and sale of assets needs to be seen.

Gross non-performing assets (NPA) ratio for WEPL stood at 1.97% at December 31, 2018 against 0.19% at March 31, 2018. The 0 days past due delinquencies of the company was 11.03% at December 31, 2018. However, the loan book of the company is new and the asset quality metrics are expected to inch up as the loan book seasons.

WEPL is attempting to mitigate potential asset quality challenges by focusing on customer segments where the vehicle is used for income generating activities. This acts as a disincentive to default. However, at an industry level, delinquencies in the 2-wheeler finance segments are high. Therefore, the ability of the company to contain delinquencies within manageable levels will need to be demonstrated over the medium term.

* Earnings profile currently constrained due to high operating costs
Given the nascent stage of operations for the company, the earnings profile is currently constrained amidst high operating costs given the branch expansion and technological investments being undertaken. The company reported a loss of Rs 11.2 crore in the nine months ended December 31, 2018. High employee costs formed the bulk of the operating expenses with the employee strength of WEPL increasing from 123 as on March 31, 2018 to 337 at December 31, 2018. Operating costs are expected to remains elevated with WEPL planning to expand the branch network to 15 branches by end fiscal 2020 and 26 branches by end fiscal 2021. With a typical branch taking around 6-8 months to break-even (excluding allocation of Head Office costs), operating efficiencies would flow in only over the medium term. Nevertheless, the central underwriting model will support operating leverage going ahead.

Further, the high-yield portfolio with IRR ranging between 20-30% across all segments supports the earnings profile. As the portfolio scales up and gearing increases, the ability to raise resources at competitive costs will be important. Additionally, the ability of the company to manage asset quality, and therefore, credit costs, will be a key determinant of profitability going ahead.

Particulars

Unit

9M 2019

2018

2017

Total Assets

Rs crore

160

Advances

Rs crore

Total Income (after finance cost)

Rs crore

7.4

3.3

0.1

Profit after tax

Rs crore

-11.2

-7.7

-1.2

Gross NPA

1.97

0.19

Gearing*

Times

0.5

0.3

Return On Assets

-ve