Rating Rationale
August 31, 2020 | Mumbai
Alacrity Securities Limited
Ratings downgraded to 'CRISIL B+/Stable/CRISIL A4'
 
Rating Action
Total Bank Loan Facilities Rated Rs.23 Crore
Long Term Rating CRISIL B+/Stable (Downgraded from 'CRISIL BB-/Stable')
Short Term Rating CRISIL A4 (Downgraded from 'CRISIL A4+')
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has downgraded its ratings on the bank facilities of Alacrity Securities Limited (Alacrity) to 'CRISIL B+/Stable/CRISIL A4' from 'CRISIL BB-/Stable/CRISIL A4+'.
 
The downgrade is primarily driven by Alacrity's weak earnings profile, its modest market position and exposure to risks related to the equity markets. These weaknesses are offset by the extensive experience of the promoters in the capital markets business.
 
In fiscal 2020, the company suffered decline in the value of its investments in listed shares and loss in derivatives trading of Rs 5.5 crore. This loss was largely led by decline in the market value of securities on account of volatility in the markets during March 2020. Furthermore, the company's broking income decreased to Rs 0.5 crore during fiscal 2020 from Rs 1.2 crore in fiscal 2019. This has led to decline in overall non-proprietary-related profitability.
 
The company's market position remains modest with active client base of 200-250 customers in fiscal 2020. The overall brokerage was led by the top 20 customers who contributed more than 80% of the overall brokerage for the company
 
The company's key broking business remains exposed to economic, political and social factors that drive investor sentiments. Given the cyclical nature of the business, brokerage volumes and earnings are highly dependent on the level of trading activity in capital markets. This makes earnings and profitability volatile.
 
The promoters of the company have extensive experience and have been in the stock broking business for more than 30 years. They have witnessed several cycles of the market.

Key Rating Drivers & Detailed Description
Weakness:
* Weak earnings profile
The company has reported net loss of Rs 6.8 crore in fiscal 2020 and Rs 4.0 crore in fiscal 2019. The company reported a trading income loss of Rs 5.5 crore in fiscal 2020, and Rs 1.8 crore in fiscal 2019 leading to total income of negative Rs 3.87 crore in fiscal 2020 and Rs 0.56 crore in fiscal 2019. The losses in fiscal 2020 are on account of high volatility during March 2020 causing decline in the value of investments held by the company. After subsequent recovery in equity markets post March 2020, the company's inventory value has improved by Rs 2.6 crore till August 20, 2020. Nevertheless, the ability of the company to manage its proprietary book and generate profits will be closely monitored.
 
In terms of core broking income, the company has faced a significant decline of 61% with income falling to Rs 0.5 crore in fiscal 2020 from Rs 1.2 crore in fiscal 2019. This decline is largely led by decrease in the number of sub brokers for the company in fiscal 2020. This has impacted the overall non-proprietary revenue and profitability of the company. Therefore, the ability of the company to improve its profitability, both through broking as well as proprietary trading income, will remain a key rating sensitivity factor.
 
* Modest market position
The company has small scale of operations with around 200 active clients. Furthermore, the top 20 clients contribute more than 80% of the overall broking income on a steady-state basis. The company is engaged in retail broking which is highly competitive and newer clients are moving towards bigger brokers. It has thus become increasingly difficult for smaller non-digital brokers to gain newer client base for the broking business. On account of several competitive limitations, the company is likely to remain a small player in the equity broking space in the near term.
 
* Exposure to risks associated with capital market-related businesses
The company's key broking business remains exposed to economic, political and social factors that drive investor sentiments. Given the cyclical nature of the business, brokerage volumes and earnings are highly dependent on the level of trading activity in capital markets. This makes earnings and profitability volatile.
 
Strength:
* Extensive experience of the promoters in the equity broking business
Benefits from the promoters' experience of over two decades and a loyal, but small, client base should continue to support the business. Furthermore, the promoters have been managing the company conservatively and do not intend to venture into unrelated businesses.
Liquidity Stretched

The company has Stretched liquidity for its scale of operations. It does not have any term-based borrowings and overdraft (OD) availed from the banks are for working capital requirement. The company maintains fixed deposits as collateral for facilities availed by it. Alacrity has access to intraday OD of Rs 1 crore for any urgent requirement at the exchange. The company has shares of Rs 9-10 crore which can be utilised for any urgent repayment.

Outlook: Stable

CRISIL believes Alacrity's promoters have extensive experience of the capital markets and the company will continue to benefit from it. 

Rating Sensitivity factors
Upward factors
* Substantial improvement in profitability with sustained return on net worth of above 7-8%
* Net worth improving to above Rs 20 crore and being maintained at that level
* Improvement in cost to income ratio to below 90%
 
Downward factors
* Pressure on capital position continues with net worth falling below Rs 10 crore
* Further weakening of profitability with cost to income ratio over 100%
About the Company

Incorporated in 1994, Alacrity is in the retail equity broking business and actively undertakes proprietary trading. The company has one branch in Kandivali, Mumbai. It was founded by Mr Himanshu Mehta and Ms Nalini Prabhu (ex-State Bank of India employee). The latter moved out of the company in 2003. Mr Mehta is also engaged in other businesses, such as trading in steel and arranging of funds for companies.
 
Alacrity has two associate companies-Pooja Equiresearch Pvt Ltd and Odyssey Corporation Ltd-which are independent and have no financial or operational synergies with Alacrity. In fiscal 2014, Alacrity released an initial public offering of 6 lakh shares at a price of Rs 15 (premium of Rs 5). The shares were listed on the small and medium enterprises segment of the Bombay Stock Exchange in August 2013.

Key Financial Indicators
Particulars Unit 2020 2019
Total assets Rs crore 35.8 43.9
Total income Rs crore -3.87 0.56
Profit after tax Rs crore -6.8 -4.0
Gearing Times 3.2 1.4
Return on net worth % -35.6 -20.9

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.
Annexure - Details of Instrument(s)
ISIN Name of instrument Date of
allotment		 Coupon rate (%) Maturity date Issue size
(Rs crore)		 Complexity Level Rating assigned
with outlook
NA Overdraft NA 11.7 NA 11 NA CRISIL B+/Stable
NA Bank Guarantee NA NA NA 11.5 NA CRISIL A4
NA Proposed Long Term Bank Loan Facility NA NA NA 0.5 NA CRISIL B+/Stable
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
Fund-based Bank Facilities  LT/ST  11.50  CRISIL B+/Stable      06-05-19  CRISIL BB-/Stable  26-04-18  CRISIL BB-/Stable  23-01-17  CRISIL BB-/Stable  CRISIL BB-/Stable 
Non Fund-based Bank Facilities  LT/ST  11.50  CRISIL A4      06-05-19  CRISIL A4+  26-04-18  CRISIL A4+  23-01-17  CRISIL A4+  CRISIL A4+ 
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Bank Guarantee 11.5 CRISIL A4 Bank Guarantee 11.5 CRISIL A4+
Overdraft 11 CRISIL B+/Stable Overdraft 11 CRISIL BB-/Stable
Proposed Long Term Bank Loan Facility .5 CRISIL B+/Stable Proposed Long Term Bank Loan Facility .5 CRISIL BB-/Stable
Total 23 -- Total 23 --
Links to related criteria
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating Criteria for Securities Companies

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