Rating Rationale
November 30, 2020 | Mumbai
Avendus Capital Private Limited
  Rating Reaffirmed
 
Rating Action
Rs.50 Crore Non Convertible Debentures CRISIL A+/Stable (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL 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, asset and wealth management, and credit solutions, whose revenues are linked to investor sentiments and the performance of the Indian capital market. Given the nature of the business, the earnings tend to be volatile and hence in the current difficult 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) and also has a robust pipeline for the IB business.
 
With the nationwide lockdown restrictions being lifted steadily in a phased manner, the degree of relaxations varies across regions depending upon the severity of the Covid-19 pandemic. Intermittent lockdowns and localised restrictions could delay collections returning to normalcy and put pressure on asset quality metrics. 

The group's ability to manage asset quality and maintain healthy collections will remain a key monitorable. Nevertheless, the one-time restructuring scheme announced by the Reserve Bank of India (RBI) will provide necessary support to affected borrowers. As per initial estimates, the group expects around 5-10% of its loan book to undergo restructuring under this scheme.
 
As part of the measures for containing the pandemic, RBI had allowed lenders to grant moratorium to borrowers; around 25% of the group's loan book was under moratorium as of August 31, 2020. Nevertheless, overall collections remain healthy, supported by loan prepayments (Rs 140 crore in the first half of fiscal 2021). Further, CRISIL understands that ACPL and AFPL have not opted for any moratorium from lenders and continue to service debt obligations as per schedule.

Analytical Approach

For arriving at the rating, CRISIL 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. 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 will offer an expanded suite of products to clients, with structured credit solutions complementing its existing bouquet of services in the IB space. It has established 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 1,112 crore (reported) as on September 30, 2020, the group is adequately positioned to support the growth of its new 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 (0.6 time as on September 30, 2020).
 
* Benefits of association with KKR
KKR acquired a total of 68.8% stake in the group's flagship company, ACPL, as per a deal in November 2015, boosting the group's capital position. ACPL had raised Rs 292 crore fresh equity capital in fiscal 2018 of which Rs 150 crore was contributed by KKR, which held 64.4% stake in the company as on September 30, 2020. KKR has board representation in the group and the latter benefits from the expertise and oversight of KKR. While capital infusion by KKR will help grow the business, the association will also help to expand the client base, mainly in 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 980 crore as on September 30, 2020 (Rs 1,087 crore as on March 31, 2020, and Rs 899 crore as on March 31, 2019). The loan book declined after March 2020 due to a cautious approach adopted by the management coupled with higher prepayments in the first half of fiscal 2021. Since inception, AFPL has made gross disbursements of Rs 2,064 crore and received prepayments and scheduled collections of around Rs 1,222 crore, around 90% of which has come from cash flow generated by portfolio companies or equity infusions in these. The company has ventured into the small and medium enterprises (SME) financing business mainly for mid-market corporate clients such as vendors, dealers and distributors. The segment is still in a nascent stage with a loan book of Rs 42 crore as on September 30, 2020.
 
The promoters' strong relationships and understanding of business dynamics of mid-corporates should enable the group to scale up the lending business. 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, 2020, some of the borrowers are facing challenges given the disruptions in the operating environment. The management has indicated that around 5-10% of its loan book may undergo restructuring under RBI's one-time restructuring scheme. 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 steady performance in IB due to the advisory-based business model and a strong relationship with clients. The group's net profit declined to Rs 12 crore for fiscal 2020 from Rs 69 crore in fiscal 2019 primarily due to low fee-based income, continued investments to build the wealth and asset management businesses as well as one-offs under Ind AS accounting.
 
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 34% for the six months through September 2020. Increasing share from the 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, 2020. Liquidity cushion in the form of cash and cash equivalents (Rs 91 crore), mutual fund investments (Rs 403 crore), undrawn bank lines (Rs 25 crore) and fixed deposits (Rs 46 crore) as on September 30, 2020, 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 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 is scaling up its lending business (outstanding loans of about Rs 980 crore as on September 30, 2020) and wealth management business (assets under management of around Rs 23,440 crore).
 
For fiscal 2020, ACPL (consolidated) had total income and net profit of Rs 568 crore and Rs 11.8 crore, respectively, against Rs 624 crore and Rs 69.1 crore, respectively, in fiscal 2019, primarily due to low fee-based income, continued investments to build the wealth and asset management business as well as one-offs under Ind AS accounting.
 
For the half year ended September 30, 2020, ACPL (consolidated) had total income and net profit of Rs 251 crore and Rs 12.8 crore, respectively (unaudited and provisional).

Key Financial Indicators (ACPL - Consolidated)
For the year ended March 31 Unit 2020 2019
Total assets Rs Crore 2036 1845
Total income Rs Crore 568 624
Profit after taxes Rs Crore 11.8 69.1
Gross NPAs % - -
Gearing times 0.6 0.5
Return on  average assets % 0.6 4.3

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
(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
Consolidated Extent of Consolidation
Avendus Capital Pvt Ltd* Full
Avendus Finance Pvt Ltd* Full
*Avendus Finance Pvt Ltd is a 100% subsidiary of Avendus Capital Pvt Ltd
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
Non Convertible Debentures  LT  50.00
30-11-20  		CRISIL A+/Stable      29-11-19  CRISIL A+/Stable  26-11-18  CRISIL A+/Stable  07-11-17  CRISIL A+/Stable  -- 
All amounts are in Rs.Cr.
Links to related criteria
Rating Criteria for Finance Companies
CRISILs Criteria for Consolidation

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