Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL A4+’ rating on the short-term bank facility of Arya Fin-Trade Services (India) Pvt Ltd (Arya Fin-Trade).

 

The ratings continue to reflect company’s adequate capital position supported by improvement in earning profile, and adequate risk management systems. These rating strengths are partially offset by small scale of operations, high concentration in NBFC book and susceptibility to uncertainties inherent in the capital markets.

 

The Arya group’s networth has improved to Rs 70 crore in September 2021 from Rs 53 crore in March 20. The improvement in networth is attributed to stable gross accretions in the past 18 months. The group’s earning profile benefitted from the volatility and higher volumes in the capital market business. The company reported total income of Rs 26 crore, which resulted in profit after tax of Rs 7.5 crore during fiscal 2021. On a provisional basis, the company has reported total income of Rs 15 crore and PAT of 5.6 crore for the first half of fiscal 2022. In addition to this, the cost to income for the group improved significantly to 48% for the first half of fiscal 22 as compared to 74% in fiscal 2020.

 

During the past one year, the group has reduced its focus on lending business through its NBFC arm, Arya Fin Roots as a result AUM degrew to Rs 9 crore as on September 2021 from Rs 38 crore as on September 2020. This is mainly because of SEBI regulations where brokerage companies directed to collect margins upfront from the client there by reducing leverage. Despite decline in exposure, the loan book has remained chunky and risky with the top three- four loans accounting for more than 90%. The group, however, has not faced any asset quality issue thus far. Therefore, the ability of the group to maintain asset quality while reducing chunkiness in the portfolio will remain a key monitorable.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of Arya Fin-Trade and Arya Finroot Financials Pvt Ltd (Arya Fin Roots). This is because both these companies, collectively referred to as the Arya group, have highly integrated operations and common directors and senior management. The rating reflects adequate capitalisation, comfortable earnings profile and healthy risk management systems backed by the extensive experience of the promoters. These strengths are offset by the small scale of operations, large exposures in the non-banking financial company (NBFC) arm of the group and susceptibility to uncertainties inherent in the capital markets.

 

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:

Healthy capitalisation profile

The Arya group’s  networth has improved significantly in the past two and a half years to Rs 70 crore in September 2021 from Rs 38 crore in March 19. This is largely on account of capital infusion of Rs 14 crore by Trinity Global Fund for a 7.2% stake in the company during fiscal 2020 and internal accruals. Further, during the past 18 months, the group’s business benefitted from the volatility and higher volumes in the capital markets. This resulted in higher accretions in the current fiscal (till September 2021), which further augmented its capital position. Further, leverage of the group has also improved to 0.1 times  as on Sep 2021 times from 0.5 times as on March 2020. Accordingly, the company’s capitalisation profile remains adequate for the current and planned scale of operations

 

Improvement in earnings profile with high dependence on income from prop trading activities

The group’s earning profile benefitted from the volatility and higher volumes in the capital market business. The company reported total income of Rs 26 crore, which resulted in profit after tax of Rs 7.5 crore during fiscal 2021. Trend continued in first half of fiscal 2022; on a provisional basis group have reported total income of Rs 15 crore and PAT of 5.6 crore for the first half of fiscal 2022. In addition to this, cost to income improved to 48% as on September 21 as compared to 74% in fiscal 2020

 

The group’s promoters have remained highly active in proprietary trading activities. Therefore, the higher focus on proprietary trading has resulted in revenue profile getting skewed towards the same. As on September 2021, share of income from proprietary trading activity stood at  58% increased from 48% as on March 21. Further, post new SEBI regulation interest income from NBFC arm also reduced to Rs 0.4 crore for H1FY22 as compared with Rs 2.4 crore in H1FY21.  Share of broking income in total income remained unchanged to 14% ;broking income for H1FY22 stood at Rs2.1 crore as on September 21 (Rs 3.6 crore as on Match 21). 

 

Although, earnings profile is comfortable with overall improvement in the topline and bottom line. The group’s ability to steadily enhance its revenue diversity over the medium term will be key monitorable.

 

Adequate risk management systems

The promoters, who have more than a decade’s experience in the capital markets have put in place adequate risk management systems. Further, a good team of professionals handle various activities. The group engages in jobbing and proprietary trading activities, which are riskier than client broking. However, the promoters have developed adequate systems to manage the risks. As a prudent practice, the company also maintains low exposure to direct proprietary trading activities, wherein risks are higher due to the open market positions.

 

Weakness:

Exposure to chunkier and riskier borrowers in the NBFC arm

The group is exposed to high risks through Arya-Fin-Roots, its NBFC arm. The group’s overall assets under management increased to Rs 37.6 crore as on September 30, 2020, from around Rs 7.0 crore as on March 31, 2019. After SEBI regulation on upfront margin collections, the group has  reduced its exposure to Rs 9 crore as of September 2021.

 

Despite reduction in total exposure, the loan book continues to remain chunky with the three- four loans comprising more than 90% of the overall book. Thus, any increase or slippage from this book might affect the capital and earnings profile and impact the group’s repayment ability.

 

Small scale of operations

Scale of operations is modest with 40-50 active high networth individual (HNI) clients. The group is largely engaged in proprietary trading, which forms more than 50% of its income on a steady state basis. However, growth within the same remains a monitorable.

 

Exposure to volatility inherent in capital market-related businesses

Over the last couple of years, the broking industry has witnessed continuous regulatory revisions. With the objective of further enhancing transparency and limiting the misuse of funds, the Securities and Exchange Board of India has introduced a few regulations in the last one year. These include upfront margin collection for intraday positions and limiting the usage of power of attorney. The industry is undergoing changes pertaining to margin collection and pledging practices effective September 1, 2020. The new practices will change the vintage business model of various small to mid-sized broking companies that relied on relationships by offering differential leverage and margin payment avenues to clients. This is likely to lower overall competition and lead towards larger digital and bank-based brokers.

 

The regulations of upfront margin collections for intraday trading are expected to decrease the leverage levels in the industry to 4-5 times from the current 10-15 times, which will mean that the level of positions (in terms of volume) taken by retail investors will also get affected. The likely impact of this change on the Arya group’s performance on an ongoing basis will be a monitorable. Furthermore, as per new regulations, the shares owned by investors can be lien marked with the respective broker instead of having to follow the current practice of transferring it to the broker's pool account. CRISIL Ratings understands that most top brokers have already streamlined their systems in accordance with the revised regulations. However, this may impact the small and mid-sized brokers given their not-so-advanced IT infrastructure and risk management systems. While these revised regulations may affect the performance in the near term, in the long run, the industry will benefit from increased transparency and the de-risk broking platform for retail customers.

Liquidity: Adequate

Liquidity is adequate for the current scale of operations. The group has no term debt outflows of the company pertain to bank guarantee commissions and operational expenses only. The group maintained unencumbered cash and bank balances of Rs 5-6 crore on a steady state basis. As on Dec 31, 2021, the group has Rs 31.5 crore of cash and bank balances. The liquidity cover is adequate at 7-8 times for the group The group has fixed deposits maintained at exchanges and banks for trading limits of Rs 250-300 crore based on market situations

Rating Sensitivity factors

Upward factors

• Steady increase in the income from non-proprietary segment to more than 60% of topline
• Reduction in the chunkiness in the portfolio within the NBFC business with the top five exposures reducing to less than 50%

 

Downward factors

• A significant loss impacting the capital profile
• Gearing increases and remains above 5 times
• Any asset quality pressure faced in the NBFC business weakening the group’s earnings profile

About the Company

Arya Fin-Trade is a capital market entity which is engaged in arbitrage trading, Jobbing and stock broking operations. The company got merged with its commodity broking company Arya Tradex Private Limited in fiscal 2019 post regulatory rules permitting merger of equity & commodity entities. The company was founded in 2010 by brothers Mr Ravi Patel and Mr Shani Patel who used to work as arbitrageurs and jobbers earlier. The company deals in the equity, currency and commodity segments. The company has a over the years developed technology systems and processes for efficient trading in the markets. The company currently uses algorithm softwares developed by NSE approved vendors such as Greeksoft and Multitrade. It has availed the NSE co location facility for higher trading speeds. The company currently has a arbitrage desk of around 50 traders who use the existing automated trading systems of the company for earnings arbitrage spreads. The arbitrageurs are advised to use strategies such as cash futures arbitrage, pairs, spread, conversion reversal, mean reversal which carry lower risk compared to naked position trading.

Key Financial Indicators- Arya group (Consolidated)

Particulars/ For the year Ended March 31,	Unit	H1 FY22*	2021	2020
Total assets	Rs crore	302	221	232
Broking income	Rs crore	2.1	3.6	4.2
Trading income	Rs crore	8.8	12.5	10.6
Total income	Rs crore	15.1	26.0	20.9
Profit after tax(PAT)	Rs crore	5.5	7.5	4.8
Gearing	Times	0.1	0.2	0.5
Return on equity	%	16.7^	11.9	10.5
Cost to income	%	48.2	58.4	74.2

*Provisional ;

^on an annualized basis

Any other information: Not Available