Detailed Rationale

CRISIL Ratings has placed its ratings on the bank facilities and debt instruments of Adani Capital Private Limited (ACPL) on ‘Rating Watch with Negative Implications’. CRISIL Ratings has also withdrawn its rating on non-convertible debentures of Rs 50 crore (See Annexure 'Details of Rating Withdrawn' for details) in line with its withdrawal policy. CRISIL Ratings has received independent confirmation that these instruments are fully redeemed.

 

The rating action follows the communication dated July 23, 2023, stating that Bain Capital has entered into a definitive agreement to acquire the entire 90% stake held by Adani Group through Adani Finserve Private Limited in ACPL and Adani Housing Finance Pvt Ltd (AHFPL). The proposed transaction also involves a primary capital infusion of Rs 1,000 crore from the acquirers, of which Rs. 700 crores shall be infused in form of equity upon closing of the transaction and Rs 300 crore is in the form of share warrants (with a paid-up capital of 25% infused upfront on closing of the transaction) to be exercised within 18 months. The transaction is subject to various statutory and regulatory approvals. In the interim, a liquidity line of $50 million (around Rs 410 crore[1]) is also being made available by Bain Capital immediately for the entities.

 

Bain Capital is a private investment firm with approximately $175 billion in assets under management. It was founded in 1984 and is into private equity, public equity, fixed income, credit, venture capital and real estate investments across multiple sectors, industries, and geographies. It has more than 1,600 team members spread across 24 offices worldwide. Bain Capital has experience in investing in a diversified set of financial services businesses in India and across the Globe, including Axis Bank, 360One (previously known as IIFL Wealth), Judo Bank, L&T Finance Holdings, Legacy Corporate Lending, and more.

 

The existing analytical approach factors in support from Adani Group and the strong linkages in terms of operations, management, treasury and infrastructure. However, once the transaction is concluded, the group support factored in the existing analytical approach will be discontinued. The revised analytical approach will be based on the standalone credit risk profile of ACPL (combined with AHFPL) and benefits, if any, emanating from the incoming investor Bain Capital.

 

In light of the above developments, the ratings have been placed on Rating Watch with Negative Implications. CRISIL Ratings will track the progress on the transaction and have discussions with the management and the incoming investor to understand their support stance, commitment, strategic importance and long-term business and financial strategy for the company. The watch will be resolved once all requisite regulatory approvals are in place, and once greater clarity emerges on the said aspects.

 

The ratings continue to reflect strong support from the Adani group, till the proposed transaction gets concluded. The rating also factors in the standalone performance in terms of comfortable capitalisation, improvement in earnings profile and experienced management of the financial services businesses’ (consolidated for ACPL and AHFPL). These strengths are partially offset by small scale of operations. Till the proposed transaction is completed, any downward revision in CRISIL Ratings’ view on the Adani group's credit risk profile would also have a bearing on the rating.

[1] Conversion rate as on July 26, 2023 1 USD = INR 81.9975

Analytical Approach

For arriving at the rating, CRISIL Ratings has combined the financial services business of the Adani group, which includes ACPL and AHFPL, as there are strong linkages in terms of operations, management, infrastructure, and treasury. The ratings also factor in support from the Adani group. The group should support these entities, in business as usual and in distress situations, as and when required, considering the strategic importance of the financial services business to the group and high commitment owing to majority shareholding and shared brand.

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

Expectation of strong support from the Adani group

The financial services businesses are an important avenue for the Adani group. The group, through its step-down subsidiaries, has 90% stake in both ACPL and AHFPL. Moreover, ACPL’s MSME lending business is expected to also tap into suitable business opportunities in the ecosystem of the Adani group entities.

 

The financial services businesses benefit from the shared brand in raising resources and building relationship with banks, other lenders and investors. A common brand implies a strong commitment on the group to support the financial services businesses both, in business as usual and in distress situations, as and when required. There is also an oversight of operations by the group by representation on the board.

 

The Adani group is a diversified conglomerate and one of India’s largest infrastructure and utilities platforms whose profile is supported by market leadership in the transport & logistics and energy & utilities segments. It has strong operating efficiencies and execution track record in most of its businesses.

 

The rating is sensitive to the credit risk profile of the Adani group. Any material increase in the group’s consolidated leverage levels or significant enhancement in debt in the promoter holding companies vis-a-vis the market value of their investments in the operating companies will remain key monitorables.

 

Additionally, CRISIL Ratings has taken note of report (dated May 6, 2023) submitted by Expert Committee constituted by Supreme Court of India and movement of SEBI’s investigation with regards to minimum public shareholding, disclosure of transactions with related parties in accordance with law and stock price manipulations.

 

Any adverse regulatory/ government action in the wake of the previously published Hindenburg research report, emerging issues around corporate governance, ongoing investigations ordered by Supreme Court of India or a decline in group’s resource raising capabilities from banks or capital markets will be a key monitorable.

 

Now, considering the proposed transaction, extent of impact on support stance of incoming investor along with implication on business and financial synergies will be monitored.

 

Comfortable capitalisation

ACPL and AHFPL have comfortable capitalisation as reflected in consolidated networth of Rs 777 crore with a consolidated on-book gearing of 3.3 times (3.6 times for ACPL and 2.2 times for AHFPL). CRISIL Ratings’ adjusted gearing on a consolidated basis was 4.1 times as on March 31, 2023 (4.3 times for ACPL and 3.4 times for AHFPL). Both, ACPL and AHFPL have adequate access to capital to scale up their business, with the Adani group having committed equity capital of Rs 600 crore over the medium term which has been fully infused; the latest infusion being Rs 150 crore during the fourth quarter of fiscal 2022 and Rs 25 crore in September 2022. Gearing, at a consolidated level for the financial services business is expected to increase as business scales up. Further, with improving profitability, internal accruals are also expected to augment the capital position of the businesses. Additionally, networth coverage for net NPAs remained high at around 27 times as on March 31, 2023.

 

Once the proposed transaction is concluded, the expected primary capital infusion of Rs 1,000 crore will strengthen the capitalisation of the company. This will also result in immediate reduction in the consolidated on-book gearing to 1.7 times on a pro-forma basis from current level of 3.3 times as on March 31, 2023.

 

Improvement in earnings profile

During fiscal 2023, including the upfront income from direct assignment (DA), ACPL reported a net profit of Rs 91 crore. AHFPL reported a profit of Rs 14 crore during the same period. ACPL had incurred high operating expenses for setting up the requisite infrastructure in the initial years of business. With gradual scale-up in loan book of the businesses, earnings profile has improved and businesses at a consolidated level turned profitable in fiscal 2021. While ACPL remained profitable over the last 5 years, AHFPL was reporting losses till fiscal 2020, resulting in losses at a consolidated level. Profitability was impacted in fiscal 2022 due to higher credit costs and operating expenses from continued branch expansion and hiring of manpower. ACPL and AHFPL reported profit of Rs 7.2 crore and Rs 5.8 crore respectively in FY22. Provisioning coverage ratio (PCR) was 39% as on March 31, 2023 for both ACPL and AHFPL. The ability of the management to improve and sustain profitability will be a monitorable.

 

Experienced management

The financial services businesses have experienced management teams to run operations and scale up business in both the housing finance and non-housing finance businesses. Long track record and extensive experience of the management team in the financial services space has helped establish the group’s track record in the lending business in the four plus years since inception. In the existing set up, the management has scaled up the businesses to an AUM of Rs 3,977 crore as on March 31, 2023, while maintaining adequate asset quality in the challenging macro-environment.

 

Weakness:

Small scale of operations

ACPL commenced operations in 2017 and the housing finance business commenced operations in 2018. Consolidated loan book witnessed a healthy three-year compound annual growth of ~50%; with overall assets under management (AUM) at Rs 3,977 crore as on March 31, 2023 (Rs 2,436 crore as on March 31, 2022). Disbursements have also improved in fiscal 2023 to Rs 2,503 crore from Rs 1,342 crore a year back.

 

The lending business is well diversified across asset classes with 100% of the portfolio being towards retail segments. As on March 31, 2023, the company operated in 6 verticals – business loans contributed 35% of the AUM followed by farm sector finance (28%), commercial vehicle loans (17%), home loans (12%), supply chain finance (4%), and loan against property (4%). Geographically, the portfolio is diversified across states such as Gujarat, Maharashtra, Rajasthan, Karnataka, Andhra Pradesh, Telangana, Madhya Pradesh, UP and Tamil Nadu.

 

Post implementation of the guidelines outlined in the Reserve Bank of India’s (RBI’s)circular dated November 12, 2021, the companies reported an inch-up in gross non-performing assets (GNPAs) in December 2022. However supported by collection and recovery efforts and write-offs of around Rs 20 crore, ACPL and AHFPL reported GNPA of 1.5% and 1.4% respectively as on March 31, 2023 while the portfolio 90+ days past due (dpd) was 1.2% and 1.3% respectively. Under the RBI’s Resolution Framework for Covid-19-related stress, the restructured book of ACPL and AHFPL constituted around 0.8% of their portfolio.

 

Overall, given the small scale of operations, ability of the management to scale up the business and manage asset quality risks across business cycles will be key.

Liquidity: Adequate

Liquidity position of the financial services business is adequate. As on June 30, 2023, ACPL’s cash and cash equivalent of Rs 120 crore and expected inflows of Rs 270 crore over July-September 2023 are expected to take care of debt repayments of Rs 304 crore over the same period.

 

As on June 30, 2023, on a consolidated basis, ACPL and AHFPL’s liquidity position was adequate with cash, cash equivalents and unutilised bank facilities of Rs 237 crore and expected inflows of Rs 650 crore over July-December 2023 against debt obligation of Rs 741 crore over the same period. Liquidity position is also supported by a liquidity line in the form of Non-convertible debentures of $50 million from Bain Capital for both ACPL and AHFPL.

Rating Sensitivity factors

Upward Factor

• Upward revision in CRISIL Ratings’ view on the Adani group's credit risk profile
• Significant scale up in market position of the financial services businesses while maintaining asset quality (gross NPA <1%) and earnings profile on a sustained basis

 

Downward Factor

• Reduction in the expected support to, or significant reduction in stake in, the financial services businesses by Adani Group, or a downward revision in CRISIL Ratings’ view on the Adani group's credit risk profile
• Deterioration in asset quality with gross NPA increasing to above 3%, over an extended period, thereby also impacting profitability.

About the Company

ACPL received the non-banking financial company license in 2017 and provides MSME finance - business loans, farm sector finance (tractor loans), commercial vehicle loans, and supply chain finance. AHFPL received the housing finance license in June 2018. The company is primarily engaged in the affordable housing segment and offers two products: home loans and LAP. As of March 2023, ACPL and AHFPL had 166 operational branches in Gujarat, Maharashtra, Rajasthan, Karnataka, Madhya Pradesh, Andhra Pradesh, Telangana, UP and Tamil Nadu with an AUM of Rs 3,977 crore

 

During fiscal 2023 the businesses reported a PAT of Rs 105 crore on a total income (net of interest expense) of Rs 389 crore as against a PAT of Rs 13 crore on a total income (net of interest expense) of Rs 182 crore in fiscal 2022.

 

ACPL reported a PAT of Rs 91 crore on a total income (net of interest expense) of Rs 329 crore for fiscal 2023 as against a PAT of Rs 7 crore on a total income (net of interest expense) of Rs 147 crore in the previous fiscal.

Key Financial Indicators : Financial services business (ACPL & AHFPL)

As on / for the year ending Mar 31,		2023	2022
Total managed assets*	Rs crore	4,323	3,112
Interest Income	Rs crore	491	278
Other Income	Rs crore	14	7
Income from assignment	Rs crore	99	19
Total income (net of interest expense)	Rs crore	389	182
Profit after tax	Rs crore	105	13
Gross NPA	%	1.5	1.4
Return on managed assets*	%	2.8	0.5
CRISIL Ratings-adjusted gearing	Times	4.1	3.6

*managed assets includes the off-book AUM

 

Adani Capital Pvt Ltd (Standalone)

As on / for the year ending Mar 31,		2023	2022
Total managed assets*	Rs crore	3,629	2,649
Interest Income	Rs crore	424	239
Other Income	Rs crore	9	4
Income from assignment	Rs crore	84	11
Total income (net of interest expense)	Rs crore	329	147
Profit after tax	Rs crore	91	7
Gross stage 3	%	1.5	1.5
Return on managed assets*	%	2.9	0.3
CRISIL Ratings-adjusted gearing	Times	4.3	4

*managed assets includes the off-book AUM

Any other information: Not applicable