Rating Rationale
February 10, 2020 | Mumbai
121 Finance Private Limited
'CRISIL A4+' assigned to CP 
 
Rating Action
Rs.2 Crore Commercial Paper CRISIL A4+ (Assigned)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has assigned its 'CRISIL A4+' rating to the commercial paper of 121 Finance Private Limited (121 Finance).
 
The rating factors in adequate systems and processes, experienced management, and adequate capitalisation. These strengths are partially offset by a small scale of operations with geographical concentration, high dependence of borrowers on timely receivables from counterparties, and high customer concentration in the loan portfolio.
 
The systems and processes are adequate for the current and future scale of operations. The overall gross non-performing assets (GNPA) have remained low at 0.5% as on September 30, 2019, improving from 0.7% as on March 31, 2019. The company has stringent internal norms for on-boarding of borrowers, which has helped to maintain asset quality. Further, it has developed a robust information technology (IT) infrastructure, which is adequate for the current and planned scale of operations. The board and management comprise of eminent bankers with an experience of more than 30 years in the financial sector. This has helped to maintain credit quality over the past few years. Capitalisation is adequate for the current scale of operations. The gearing was comfortable at 1.3 times as on October 30, 2019 (1.0 time as on March 31, 2019).
 
These rating strengths are partially offset by a limited track record of operations. The total disbursements have remained at Rs 50-75 crore per fiscal over the three fiscals through 2019. Nevertheless, given that the loans are for a short tenure of 2-3 months, the overall outstanding book stood at Rs 30 crore as on December 20, 2019 (Rs 24.5 crore as on March 31, 2019). The company has been in existence only for five years.
 
Most of the borrowers have counterparties comprising mainly of state government organisations and mid/large corporates. Therefore, the borrowers may face a stretch in their receivables cycle due to delays in clearing payments from these counterparties. This, in turn, may impact their ability to run operations profitably.
 
Although the overall concentration of the loan exposures has come down over the past two fiscals, the current concentration of top 10 borrowers was high at 32% as on October 30, 2019.
 
The overall profitability is also constrained by high operational costs. The overall average RoE was below 5% over the past three fiscals.

Key Rating Drivers & Detailed Description
Strengths
* Adequate systems and processes for the scale of operations
The company extends short-term business loans to MSMEs (micro, medium, and small enterprises) with a ticket size Rs 10 lakh to Rs 2 crore. It has stringent internal norms for on-boarding borrowers, including thresholds for vintage, turnover, banking relationships, profitability, and networth. Further, the company utilises various data points of CIBIL, bank statement analysis, GST (goods and service tax) returns, third-party checks, and fit and proper checks for credit analysis.
 
The company has developed robust IT systems with intellectual property rights for its self-developed loan origination systems, live asset-liability and treasury management systems, bank statement analysis (vendor), CIBIL analysis (special add-on features), and quick notes. These systems have helped to maintain a quick turnaround time while sustaining credit quality
 
Asset quality has remained healthy with low GNPAs of 0.5% as on September 30, 2019, improving from 0.7% as on March 31, 2019. There have been only two NPAs among the total 470-480 borrowers since inception.
 
* Adequate capitalisation
The networth was Rs 13.7 crore and the gearing 1.3 times as on October 30, 2019. The promoters have infused Rs 11.2 crore since taking over the company in April 2015. The gearing is expected to remain below 3 times over the medium term. Capitalisation is adequate for the current scale of operations.
 
* Experienced management
The board comprises of Mr Lalit Jain (former DGM of SBBJ) and Mr P N Verma (former general manager of UCO Bank), along with Mr Ravi Modani, who has a doctorate in working capital management. The management personnel have been in the financial sector for more than 30 years and understand the credit risk profiles of the borrower's well, which has supported the healthy asset quality. Further, the chief technology officer and general manager, Mr Gazal Binani, has developed systems to support the credit decisions of the key members. The management is well equipped to handle the planned scale of operations.
 
Weaknesses
* Limited track record of operations
The company has been in existence for only the past five years. The incremental portfolio is required to be monitored over the medium term for consistency of performance
 
* High customer concentration in the loan portfolio
The top 10 loans stood at around 32% of the overall assets under management (AUM) and 67% of the overall networth as on October 30, 2019. Any slippage from the top exposures to the overdue category will impact the credit risk profile. However, the diversification strategy should limit the risk. Additionally, most of the borrowers have high dependence on receivables from state and central governments, military services, and corporates. Typically, counterparties linked to state/central governments may delay in clearing the payments due to procedural issues. In such a scenario, the receivables cycles of the borrowers may get stretched and this, in turn, may impact their ability to run their operations profitably.
 
* Modest profitability
The average RoE for the three fiscals through 2019 was below 5%. Operating costs have remained high at 8-10% of the average total assets over the past few fiscals. The company is likely to use the existing systems over the growing portfolio during the medium term, which should help improve overall profitability.
Liquidity Adequate

The company has surplus funds over the next one year buckets in the ALM statement. The inflows over outflows coverage for three months and six months is high at above 5 times. Most of the borrowings have a tenure of around a year and even the advances have a similar tenure; thus, there is no refinancing risk. The portfolio has a churn rate of around 3 times per fiscal and thus the overall disbursements have been above Rs 250 crore despite a modest loan book of Rs 30 crore. The inter-corporate deposits raised are locked up till 2021, with no payment liability till March 2021. Repayment of non-convertible debentures is expected to start only in September 2020; this should be supported by the current liquidity.

Rating sensitivity factors
Upward factors
* Maintenance of the asset quality with GNPAs at less than 0.7% on a steady-state basis with growth in the portfolio
* Improvement in the scale of operations with an increase in disbursements and AUM
* Better capitalisation, with an increase in the absolute networth, supported by adequate gearing
 
Downward factors
* Increase in the NPA ratio to above 5%, thereby impacting overall profitability and capitalisation
* Increase in concentration of the top loans in the loan portfolio
* Diversification into other product categories

About the Company

121 Finance (earlier, Yerrow Finance & Investments Private Limited), based in Jaipur, Rajasthan, is a non-banking financial company that started operations in April 2015. The company deals in two products: enterprise business loans (EBL) and individual business loans (IBL), of which the former comprises more than 70% of the overall loan book and will remain the focus product.
 
EBL's are short-tenure loans of a ticket size of Rs 30-40 lakh extended to MSMEs for a tenure of 7-180 days for meeting their short-term funding requirements. These loans are usually to companies having counterparties in the form of government and corporate associations. The company charges an internal rate of return (IRR) of 18-20% on these loans. The loans are unsecured and are provided with four options EMI (equated monthly instalments), flexible, flexiplus, and bullet repayments. However, a minimum monthly payment of at least 5% of the overall amount is compulsory even in flexi repayment loans.
 
The second product is secured business loans to small, unorganised, cash-generating businesses such as. kirana stores and restaurants. The ticket size here is usually Rs 2-10 lakh and the duration 2-6 years with an IRR of 20-22%. The company has developed online systems and processes for digital sanctioning and disbursement of loans.
 
The churn in the loans book is high considering the size. The churn ratio has remained above 3 times for the EBL product as these loans are for ad hoc requirements against receivables from the government and other organisations.

Key Financial Indicators
Particulars as on March 31 Unit Oct 19 2019 2018
Total assets Rs crore 31.0 26.9 23.2
Total income Rs crore 2.9 4.5 4.4
Profit after tax Rs crore 0.4 0.7 0.6
Gross NPA % 0.5 0.7 0.0
Gearing Times 1.3 1.0 0.8
Return on assets % 2.6 2.6 2.5

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL 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)
ISIN Name of the Instrument Date of Allotment Coupon  Maturity Date Amount Rating assigned  
NA Commercial paper NA NA 7-365 days 2 CRISIL A4+
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  2.00  CRISIL A4+    --    --    --    --  -- 
All amounts are in Rs.Cr.
Links to related criteria
Rating Criteria for Finance Companies
CRISILs Criteria for rating short term debt

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