| Adani Capital Private Limited | ||||||||
| Ratings continues on 'Watch Negative' | ||||||||
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| 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 continues its ratings on the debt instruments and bank facilities of Adani Capital Private Limited (ACPL) on ‘Rating Watch with Negative Implications’.
On July 23, 2023, Bain Capital had 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 were placed on Rating Watch with Negative Implications. CRISIL Ratings continues to track the progress on the transaction and will 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 October 25, 2023 1 USD = INR 83.1725 |
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:
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.
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 3.4 times as on June 30, 2023.
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.
Provisioning coverage ratio (PCR) was 42% as on June 30, 2023 for both ACPL and AHFPL. The ability of the management to improve and sustain profitability will be a monitorable.
Weakness:
The lending business is well diversified across asset classes with 100% of the portfolio being towards retail segments. As on June 30, 2023, the company operated in 6 verticals – business loans contributed 36% of the AUM followed by farm sector finance (27%), commercial vehicle loans (16%), home loans (13%), loan against property (5%), and supply chain finance (3%). 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 in March 31, 2023. GNPAs inched up to 1.9% in June 30, 2023.
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 September 30, 2023, ACPL’s cash and cash equivalent of Rs 237 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.
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Rating Sensitivity factors Upward Factors:
Downward Factors:
The rating would be sensitive to change in shareholding upon completion of the Bain Capital transaction 2,3 till the group remains the majority shareholder |
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. During first quarter of fiscal 2024, the businesses reported a PAT of Rs 18 crore on a total income (net of interest expense) of Rs 93 crore.
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. During first quarter of fiscal 2024, it reported a PAT of Rs 18 crore on a total income (net of interest expense) of Rs 83 crore. |
Key Financial Indicators: Financial services business (ACPL & AHFPL)
*managed assets includes the off-book AUM
Adani Capital Pvt Ltd (Standalone)
*managed assets includes the off-book AUM |
Any other information CRISIL Ratings has recently received intimation from one banker about an operational delay in payment of a term loan instalment of Rs. 83.3 lakhs back in October 2022. CRISIL Ratings understands that it was a one-off event and technical delay in nature. Adani Capital’s account is current with the banker and the banker has also recently enhanced its exposure. CRISIL Ratings takes feedback from bankers on periodic basis and had not received previously any adverse feedback regarding debt repayment till date. In this case, Adani Capital has clarified that it had initiated the payment instructions in their banker’s system on the due date i.e. October 19, 2022. However, due to a technical issue, the payment was processed by the banker on the subsequent day. CRISIL Ratings notes that the company had sufficient liquidity on the due date to service the payment. The company has taken corrective measures to ensure such instances do not occur in the future including advancing the payment initiation process timeline. CRISIL Ratings believes the delay does not reflect the financial inability or unwillingness of the company to service its debt on time. |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
*Yet to be issued &Interchangeable with short term bank loan facility |
Annexure - List of Entities Consolidated
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Criteria Details
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