| ARKA Fincap Limited | ||||||||||||||
| Rated amount enhanced for Bank Debt | ||||||||||||||
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| & For public issuance | ||||||||||||||
| Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. | ||||||||||||||
| 1 crore = 10 million | ||||||||||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has reaffirmed its ratings on outstanding debt instruments and bank facilities at 'CRISIL AA-/CRISIL PPMLD AA-/Stable/CRISIL A1+'.
CRISIL Ratings on the bank facilities and debt instruments of Arka continue to factor in the expectation of strong support from the ultimate parent, Kirloskar Oil Engines Ltd (KOEL; rated ‘CRISIL AA/Stable/CRISIL A1+’), because of strategic importance and strong moral obligations. The ratings also factor in adequate capitalisation for the initial stages of operations. These strengths are partially offset by the nascent stage of operations.
As KOEL aims to expand into other financial services business, it has formed a holding company, Arka Financial Holdings Pvt Ltd (AFHPL) which will be the holding company for all financial services businesses of KOEL. KOEL has transferred 100% of its stake in Arka to AFHPL. KOEL, nevertheless, will continue to ultimately holds 100% stake in Arka and will remain the majority shareholder over the medium term. KOEL has infused around Rs 930 crore in ARKA till date. |
Analytical Approach For arriving at the ratings, CRISIL Ratings has assessed the standalone credit risk profile of Arka, and factored in the support expected from ultimate parent, KOEL, given the strategic importance of Arka to the former, 100% ultimate shareholding, and the strong moral and financial obligations to support it. |
Key Rating Drivers & Detailed Description Strengths:
Arka derives strong support from its ultimate parent, KOEL, in the form of high strategic importance and strong moral obligations, being its step-down subsidiary. The financial services entity has been identified as a focus area for the parent’s overall diversification plans. KOEL has already infused around Rs 930 crores till date (Rs 125 crore and Rs 130 crore were infused in fiscal 2021 and fiscal 2022 respectively; Rs 149 crore were infused in fiscal 2023), depicting strong financial support towards its subsidiary. KOEL wholly owns Arka and is expected to remain the majority shareholder over the medium term. Moreover, 3 out of 7 directors on Arka’s board are also on KOEL’s board. Promoters of KOEL also have representation in most of the key committees of Arka, viz., credit, asset liability, IT steering, risk management, etc. Arka is expected to benefit from the Kirloskar group’s expertise, especially in small and medium enterprise (SME) lending.
The rating also factors in the strong support from the ultimate parent KOEL, demonstrated by the articulation of its intention to support Arka by way of: (i) its intention to maintain majority shareholding in Arka in the foreseeable future, (ii) Arka, being core to overall business strategy of growth of which diversification into financial services is an integral part, and, (iii) KOEL, making it best efforts to conduct Arka’s business in line with Kirloskar group’s philosophy, so that it meet its obligations on a timely basis.
Arka benefits from funding support from the ultimate parent and has adequate capitalisation for initial stages of operations. KOEL has already infused around Rs. 930 crore till date. Capital support from the parent, is expected to keep capitalisation of Arka adequate (Net worth of Rs 1048 crore and Capital Adequacy ratio of 25.5% as on March 31, 2023, and Rs 837 crore and 30.9% as on March 31, 2022), with low gearing of 3 times as on March 31, 2023 (2.1 times as on March 31, 2022) in the initial stages of operation.
Weakness:
As operations have only commenced in April 2019, they are still in the initial stage. The total loan book stood at Rs 3,961 crore as on March 31, 2023 (Rs 2,380 crore as on March 31, 2022, and Rs 1,124 crore as on March 31, 2021) with a mix of corporate (40%), real estate (30%) and SME/micro-SME exposure (30%). Going ahead, Arka plans to build a loan book with a healthy mix of corporate, real estate and MSME segments. The company’s ability to scale up operations with a healthy loan book, while maintaining its asset quality over the medium term would be a key monitorable. |
Liquidity : Strong Arka had overall borrowings of Rs 3102 crore as on March 31, 2023 (Rs 1,734 crore as on March 31, 2022). The company’s liquidity is strong with around Rs 355 crore of cash/cash equivalents and liquid investments as on March 31, 2023. Against this, outflow on account of debt repayments in next four months (April’23 till July’23) is ~Rs 504 crore. Liquidity is further supported by expectation of financial assistance from ultimate parent, in case of any requirement. |
Outlook Stable CRISIL Ratings believes Arka will remain strategically important to KOEL and will continue to benefit from its strong support and high moral obligations from the ultimate parent over the medium term. |
Rating Sensitivity factors Upward Factor:
Downward Factor:
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About the Company Arka is a non-deposit taking systemically important non-banking financial company (NBFC). It is promoted by the Kirloskar group and is a step-down subsidiary of KOEL. Arka was originally incorporated as Kirloskar Capital Ltd, however, the name was subsequently changed to Arka Fincap Ltd in August 2019. In January 2022, KOEL transferred its 99.41% stake in Arka to AFHPL (wholly owned subsidiary of KOEL) and the remaining stake was transferred in March 2022. Arka commenced its operations from April 2019. It has senior leadership and experienced management team on board and has also put in place various policies for smooth operations of its business. Arka aims to build a loan book with a mix of corporate, real estate and SME/MSME segment. |
About the Group KOEL, one of the flagship companies of the Kirloskar group, manufactures and services diesel engines (primarily between 2.5-740 horsepower) and diesel generator sets (mainly between 2-1,010 kilo-volt-ampere). The company also makes diesel-, petrol-, and kerosene-based pump sets. It has manufacturing units in Pune, Kagal, and Nashik (all in Maharashtra). KOEL caters to the agriculture, power generation, and industrial sectors. On August 01, 2017, it acquired 76% stake in La-Gajjar Machineris Pvt Ltd and is likely to acquire the balance stake in the next five years, in line with the share purchase agreement. KOEL has set up an NBFC business through ARKA, with equity infusion of Rs 880 crore till date. |
Key Financial Indicators
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Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
@Term loan facility is as per outstanding as on March 31, 2023 ^Interchangeable with short term bank loan facility; includes undrawn bank line from Bajaj Finance Limited #Working capital facility is based on sanctioned amount *Yet to be issued |
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| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Criteria Details
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