Detailed Rationale

CRISIL Ratings has reaffirmed its 'CRISIL A+/Stable' rating on the non-convertible debentures of Avendus Capital Private Limited (ACPL). The rating continues to reflect the strong track record of the promoters in investment banking (IB), healthy capitalisation, and a conservative lending policy. The rating also factors in benefits from capital infusion by, and synergies with, global private equity firm, Kohlberg Kravis Roberts (KKR), which is the dominant shareholder of the group. These strengths are partially offset by the early stage of the lending business, and inherent volatility in capital-market-related businesses.

 

The group is mainly present in fee-based businesses such as IB, and asset and wealth management, whose revenues are linked to investor sentiments and the performance of the Indian capital market. It also has a credit business that is synergistic with the overall business model. Given the nature of the business, the earnings tend to be volatile and hence in the current macro environment the performance will remain a monitorable. The group has, nevertheless, been working towards increasing the share of relatively stable revenue from the lending business (carried out through Avendus Finance Pvt Ltd [AFPL], a wholly owned subsidiary of ACPL). Further, it also has a robust pipeline for the IB business.

 

The second wave of Covid-19 pandemic had resulted in intermittent lockdowns and localised restrictions. This led to some delays in collections returning to normalcy.

 

Nevertheless, the COVID-19 related one-time restructuring scheme announced by the Reserve Bank of India (RBI) has provided necessary support to affected borrowers. AFPL has restructured four of its borrowers under Resolution Framework – 1.0 and 2.0 scheme.

 

Overall collections remain healthy, supported by loan prepayments (Rs 257 crore in fiscal 2021 and Rs 332 crore in first half of fiscal 2022) for AFPL.

 

Nevertheless, the ability of the company to manage collections and asset quality going forward, is a key monitorable. Also, the impact of the third wave of the pandemic, if and when it comes in terms of its spread, intensity and duration, will also be closely monitored.

 

Despite the difficult macroeconomic environment, the group has been able to report strong performance in IB due to the advisory-based business model and a strong relationship with clients.  As a result, the group’s net profit significantly increased to Rs 80 crore for fiscal 2021 from Rs 12 crore in fiscal 2020 (Rs 142 crore as on first half of fiscal 2022) primarily due to higher revenues from investment banking.

Analytical Approach

For arriving at the rating, CRISIL Ratings has combined the business and financial risk profiles of ACPL, and its subsidiaries (including AFPL), collectively referred to as the Avendus group. That’s because of their integrated operations, shared brand, and common promoters and management pool.

 

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:

Competent promoters with strong domain knowledge, and relationships across mid-market corporates

The group is recognised among the top players in the IB domain, given its ability to execute complex transactions- this is also reflected in the increasing average fee per deal. The promoters have demonstrated their expertise in several sectors such as technology, consumer goods, healthcare, digital systems, and business process outsourcing by successfully executing several IB transactions for over a decade. This has resulted in the group forging strong relationships with several corporates in the mid-market space. The group offers an expanded suite of products to clients, with structured credit solutions complementing its existing bouquet of services in the IB space. It has also been establishing its position in the wealth management and asset management businesses.

 

It has experienced business leaders heading the relatively new businesses (financing, wealth management and asset management). Leveraging existing relationships in the mid-corporate space will create business opportunities for the financing and wealth management businesses.

 

Comfortable capital position and conservative gearing policy

With a consolidated networth of Rs 1,341 crore (unaudited and provisional) as on September 30, 2021, the group is adequately positioned to support the growth of its businesses over the medium term. Most of the capital requirement will be in the lending business housed in AFPL, as other businesses including IB are fee-based. Moreover, the group has flexibility to raise capital from majority shareholder KKR, if needed. The gearing policy is conservative and the management intends to keep the gearing below 1.5 times over the medium term on a steady-state basis (0.5 times as on September 30, 2021).

 

Benefits of association with KKR

KKR acquired stake in the group's flagship company, ACPL, in November 2015, boosting the group's capital position. Furthermore, ACPL raised Rs 292 crore fresh equity capital in fiscal 2018 of which Rs 150 crore was contributed by KKR, resulting in a 64.4% stake in the company. KKR has board representation in the group, which benefits from KKR’s expertise and oversight. While capital infusion by KKR will help the Avendus group grow its business, the association will also help the group expand clientele, mainly in the wealth and asset management businesses.

 

Weaknesses

Early stage of financing business; asset quality in lending business a monitorable

While ACPL has a strong track record in IB, the lending business is relatively new. AFPL commenced lending operations in fiscal 2017 in the wholesale financing segment and had outstanding loans of around Rs 1,284 crore as on September 30, 2021 (Rs 1,179 crore as on March 31, 2021 and Rs 1,087 crore as on March 31, 2020). The loan book is at similar levels as compared to fiscal 2020 due to a cautious approach adopted by the management coupled with higher prepayments in fiscal 2021 (Rs 257 crore in fiscal 2021 and Rs 332 crore in first half of fiscal 2022). Since inception, AFPL has made gross disbursements of Rs 3,240 crore and received prepayments of around Rs 1,380 crore.

 

AFPL has recently started loan against securities (LAS) financing business mainly for mid-market corporate clients of Avendus group. This segment is still in a nascent stage with a loan book of Rs 179 crore as on September 30, 2021 (Rs 141 crore as on March 31, 2021).

 

The promoters' strong relationships and understanding of business dynamics of mid-corporates should enable the group to scale up the lending business, however the management has adapted a cautious approach. Also, a strategy of measured growth in the lending business, along with conservative risk practices, should support the business risk profile. While the gross non-performing assets (GNPAs) were nil as on September 30, 2021, some of the borrowers are facing challenges given the disruptions due to the prevailing pandemic.. AFPL has restructured four of its borrower (out of which 2 loans were FVTPL and 2 loans were at amortised cost) with an outstanding amount of Rs ~195 crore under RBI’s one-time restructuring 1.0 and 2.0 scheme. For FVTPL category, the loans have been valued at ~85% and for amortised loans, ECL have been provided at ~28% (as per IND AS) as against prudential floor of 10% prescribed by the RBI. As such, the ability to manage asset quality and maintain healthy collections, especially during the current weak environment, and profitably scale up the business, will remain key rating monitorables.

 

Susceptibility to cyclicality in capital-market-related businesses:

The group's capital market businesses (IB and asset management) remain susceptible to economic, political and social factors that drive corporate and investor sentiments. However, the group has been able to report strong performance in IB due to the advisory-based business model and a strong relationship with clients. The group’s net profit significantly increased to Rs 80 crore for fiscal 2021 from Rs 12 crore in fiscal 2020 (Rs 142 crore as on first half of fiscal 2022) primarily due to higher fee-based income.

 

The group has, however, been working towards increasing the share of its lending business over the past few years. AFPL's share of revenue in the consolidated revenue has been increasing steadily from 8% in 2017 to ~24% for March 31, 2021. However, during first half of fiscal 2022 share of revenue of lending business in the consolidated revenue declined given the management’s cautious approach towards lending in the current environment as well as the focus on recovery. Nevertheless, in longer term, lending business, which has relatively stable revenue, is expected to partially offset the volatility in the capital market-related businesses.

Liquidity: Strong

Asset-liability management was strong as on September 30, 2021. Liquidity cushion in the form of cash and cash equivalents (Rs 275 crore), mutual fund investments (Rs 523 crore) and undrawn bank lines (Rs 27 crore) as on September 30, 2021, is sufficient in view of the limited scale of operations and diversified revenue streams (fee-based businesses contribute to most of the revenue).

Outlook: Stable

CRISIL Ratings believes the Avendus group will continue to maintain a healthy capital position and conservative gearing policy, which will offset the limited track record of the group in the lending business. The 'Stable' outlook also reflects the strong track record of promoters in the IB space and the synergy benefits expected from the association with KKR. The outlook may be revised to 'Positive' if there is a significant and sustained increase in scale and diversity across key businesses of the Avendus group, along with healthy asset quality and profitability in its financing business. However, the outlook may be revised to 'Negative' in case of continued deterioration in the earnings performance of the Avendus group, weak performance of the financing business or lower than expected synergies derived from association with KKR.

Rating Sensitivity Factors

Upward factors

• Significant and sustained increase in scale and diversity across key businesses of the Avendus group.
• Maintain GNPA (below 1%) and profitability metrics on a sustained basis along with increase in scale of operations.

 

Downward factors

• Deterioration in the asset quality (GNPA>3%), on a sustained basis, of its financing business thereby also impacting its profitability.
• Significant increase in leverage levels

About the Group

ACPL was founded in 1999 by Mr Ranu Vohra, Mr Kaushal Aggarwal and Mr Gaurav Deepak. The company operates in the financial services space through its subsidiaries in the areas of financial advisory, capital markets, wholesale financing, wealth management and alternative asset management. AFPL is a wholly owned subsidiary of ACPL, and offers financing products such as promoter funding, corporate finance, customised structured debt solutions, and acquisition finance.

 

ACPL via its NBFC arm has outstanding loans of about Rs 1284 crore as on September 30, 2021) and wealth management business (assets under management of around Rs 36,738 crore).

 

For fiscal 2021, ACPL (consolidated) had total income and net profit of Rs 708.5 crore and Rs 80.3 crore, respectively, against Rs 568.1 crore and Rs 11.8 crore, respectively, in fiscal 2020, primarily due to high fee-based income.

 

For the half year ended September 30, 2021, ACPL (consolidated) had total income and net profit of Rs 674 crore and Rs 142.1 crore, respectively (unaudited and provisional).

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of Instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue Size (in.Crore)	Complexity Levels	Rating Assigned with outlook
NA	Non Convertible Debentures*	NA	NA	NA	50	Simple	CRISIL A+/Stable

*Yet to be issued

Annexure - List of Entities Consolidated

Names of Entities Consolidated	Extent of Consolidation	Rationale for Consolidation
Avendus Capital Pvt Ltd*	Full	Avendus Capital Pvt Ltd*
Avendus Finance Pvt Ltd*	Full	Avendus Finance Pvt Ltd*

*Avendus Finance Pvt Ltd is a 100% subsidiary of Avendus Capital Pvt Ltd