Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AAA/Stable/CRISIL A1+’ ratings on the long-term bank facilities and commercial paper of Bajaj Financial Securities Limited (BFSL). CRISIL Ratings has also reaffirmed the Corporate Credit Rating at ‘CCR AAA/Stable’.

 

The ratings on BFSL centrally factor in expectation of strong financial, operational, and management support from its parent, Bajaj Finance Ltd (BFL: 'CRISIL AAA/FAAA/Stable/CRISIL A1+’), both on an ongoing basis, and in the event of distress. The expectation reflects the strategic importance of BFSL to BFL, and the strong moral obligation of the parent to support the former. The rating strength is augmented by BFL’s track record in the loans against shares (LAS) segment and the demonstrated track record of support in term of timely equity infusion/support for its other subsidiary Bajaj Housing Finance Limited (‘CRISIL AAA/Stable/CRISIL A1+’).

 

BFSL, a wholly-owned subsidiary of BFL, is engaged in the retail broking and securities backed lending business. BFSL, which started operations in August 2019, is a registered member of National Stock Exchange and Bombay Stock Exchange for equities and derivative segment. BFSL is a depository participant with CDSL and NSDL.

 

The parent, BFL has emerged as one of the largest retail asset financing NBFCs in the country. It has a diversified product suite, comprising key businesses such as vehicle loans (two- and three-wheelers manufactured by Bajaj Auto Ltd), consumer durable loans, personal loans, mortgage loans, small business loans, loan against securities (LAS), commercial finance, and rural finance. BFL has been in the LAS business since fiscal 2010 and has registered comfortable performance in the book.

 

CRISIL Ratings believes BFSL is strategically important to BFL as it would be the vehicle to target the customers of BFL to offer a bouquet of products which couldn’t be done in BFL. CRISIL Ratings understands that offering of demat services and brokerage business would help BFL to offer a holistic service to its customers and also an opportunity to cross sell other products such as insurance and mutual funds. This further increases the economic incentive of BFL to support BFSL. CRISIL Ratings believes that BFSL would operate as a division of BFL with high level of management and operational support from BFL. BFSL had a sizeable start-up capital of Rs 100 crores with BFL having infused the equity in fiscal 2020. This was further enhanced by additional infusion of Rs 150 crore in fiscal 2021 to support growth. Further BFL has also extended a credit line of Rs 500 crore to support the borrowings of BFSL. The parent plans to hold 100% shareholding in BFSL in the medium term and is willing to infuse further equity or provide financing support for company's growth requirements over the medium term. BFSL plans to follow a conservative gearing policy. The top management in BFSL is set up with senior management from BFL moving to BFSL. The current CEO of BFSL also heads LAS product in BFL. Further, the board of BFSL also comprises of senior management personnel from Bajaj Finserv and BFL. The treasury team of both companies is also common thereby allowing BFSL to leverage upon the banking relations of BFL. The shared name also enhances the BFL’s moral obligation to support the company.

 

BFSL started operations in August 2019 and plans to focus on the retail broking business, distribution of mutual funds, insurance products and also offer margin trade funding (MTF) facility. BFSL offers both discount brokerage plan and conventional brokerage plans. The discount brokerage plan is to target the trading segment of customers while the conventional broking plan is to target the high networth customers. BFSL apart from its corporate office in Pune, operates through its 6 other branches in Mumbai, Ahmedabad, Indore, Delhi, Bengaluru and Kolkata. BFSL plans to start 1-2 branches in the current fiscal. As on March 31, 2021, BFSL had an outstanding of Rs 184 crore under the margin trade facility book.

 

BFSL has launched its new mobile application in May 2021 and has been in the process of rapid addition of new customers since. In Q1-2022, BFSL has acquired about 52,504 customers of its overall about 95,128 customer base as on June 30, 2021. Further, over the medium term, BFSL plans to target the existing vast base of over 5 crore customers of BFL for sourcing of new customers.

 

BFSL reported a PAT of Rs 5.5 crore and ROA 1.2% in fiscal 2021 against a PAT of Rs 2.3 crore and ROA of 1.7% in fiscal 2020. For fiscal 2021, the company recorded broking income of Rs 11.8 crore and fee and distribution income of Rs 10.6 crore on a total income of Rs 36.4 crore (a combined share of 61.7%) against a broking income of Rs 4.9 crore and fee and distribution income of Rs 1.1 crore on a total income of Rs 10.6 crore in fiscal 2020.The increase in earnings was primarily from the increased volumes of turnover and thereby growth in income from operations. However, in the near term, with BFSL planning expansion of customer base, CRISIL Ratings expects the acquisition cost to impact the profitability. However, with the scale up of operations, the volume of turnover and income from MTF facility is expected to support the earnings profile. BFL has demonstrated its ability to scale various business lines and products and CRISIL Ratings believes that BFSL with its strong linkages with BFL and experienced management would be able to scale up its operations.

 

In terms of liquidity, as on June 30, 2021, BFSL has liquid assets of Rs 29.6 crore  (cash and equivalents of Rs 8.8 crore, Rs 4.8 crore of investments and Rs 16 crore of unutilised bank lines) as on June 30, 2021 against repayments of Rs 50 crore in the next three months ending September 30, 2021. Additionally, BFSL also has Rs 500 crore from its parent BFL which can be utilised in case of any contingency.

Analytical Approach

For the purpose of the rating, CRISIL Ratings has factored in expectation of financial, operational and managerial support that BFSL is expected to receive from BFL, both on an ongoing basis, and in the event of distress given its high strategic importance to BFL as the company’s retail broking business and the strong moral obligation of the parent to support the same.

Key Rating Drivers & Detailed Description

Strengths:

* Expectation of strong support from BFL

CRISIL Ratings believes BFSL is strategically important to BFL as it would be the vehicle to target the customers of BFL to offer a bouquet of products which couldn’t be done in BFL. CRISIL Ratings understands that offering of demat services and brokerage business would help BFL to offer a holistic service to its customers and also an opportunity to cross sell other products such as insurance and mutual funds. This further increases the economic incentive of BFL to support BFSL. CRISIL Ratings believes that BFSL would operate as a division of BFL with high level of management and operational support from BFL.

 

The top management in BFSL is set up with senior management from BFL moving to BFSL. The current CEO of BFSL also heads LAS product in BFL. Further, the board of BFSL also comprises of senior management personnel from Bajaj Finserv and BFL. The treasury team of both companies is also common thereby allowing BFSL to leverage upon the banking relations of BFL. The shared name also enhances the BFL’s moral obligation to support the company.

 

* Strong initial start-up capital

BFSL had a sizeable start-up capital of Rs 100 crores with BFL having infused the equity in fiscal 2020. This was further enhanced by additional infusion of Rs 150 crore in fiscal 2021 to support growth. Further BFL has also extended a credit line of Rs 500 crore to support the borrowings of BFSL. The parent plans to hold 100% shareholding in BFSL in the medium term and is willing to infuse further equity or provide financing support for company's growth requirements over the medium term. BFSL plans to follow a conservative gearing policy.

 

Weakness:

* Nascent stage of operations

BFSL started operations in August 2019 and plans to focus on the retail broking business, distribution of mutual funds, insurance products and also offer margin trade funding (MTF) facility. BFSL offers both discount brokerage plan and conventional brokerage plans. The discount brokerage plan is to target the trading segment of customers while the conventional broking plan is to target the high networth customers. BFSL apart from its corporate office in Pune, operates through its 6 other branches in Mumbai, Ahmedabad, Indore, Delhi, Bengaluru and Kolkata. BFSL plans to start 1-2 branches in the current fiscal.

 

BFSL has launched its new mobile application in May 2021 and has been in the process of rapid addition of new customers since. In Q1-2022, BFSL has acquired about 52,504 customers of its overall about 95,128 customer base as on June 30, 2021. Further, over the medium term, BFSL plans to target the existing vast customer base of over 5 crore of BFL for sourcing of new customers.

 

* Earnings profile expected to be impacted in the near term

BFSL reported a PAT of Rs 5.5 crore and ROA 1.2% in fiscal 2021 against a PAT of Rs 2.3 crore and ROA of 1.7% in fiscal 2020. For fiscal 2021, the company recorded broking income of Rs 11.8 crore and fee and distribution income of Rs 10.6 crore on a total income of Rs 36.4 crore (a combined share of 61.7%) against a broking income of Rs 4.9 crore and fee and distribution income of Rs 1.1 crore on a total income of Rs 10.6 crore in fiscal 2020.The increase in earnings was primarily from the increased volumes of turnover and thereby growth in income from operations. However, in the near term, with BFSL planning expansion of customer base, CRISIL Ratings expects the acquisition cost to impact the profitability. However, with the scale up of operations, the volume of turnover and income from MTF facility is expected to support the earnings profile. BFL has demonstrated its ability to scale various business lines and products and CRISIL Ratings believes that BFSL with its strong linkages with BFL and experienced management would be able to scale up its operations.

Liquidity: Superior

In terms of liquidity, as on June 30, 2021, BFSL has liquid assets of Rs 29.6 crore  (cash and equivalents of Rs 8.8 crore, Rs 4.8 crore of investments and Rs 16 crore of unutilised bank lines) as on June 30, 2021 against repayments of Rs 50 crore in the next three months ending September 30, 2021. Additionally, BFSL also has Rs 500 crore from its parent BFL which can be utilised in case of any contingency.

Outlook: Stable

CRISIL Ratings believes BFSL will benefit from strong financial, managerial, and operational support from BFL over the medium term.

Rating Sensitivity Factors

Downward factors:

• Downgrade in the credit rating of Bajaj Finance Limited (BFL) by 1 notch or higher
• Any change in the articulation of support philosophy by BFL towards BFSL or adverse material change in ownership structure.

About the Company

BFSL, is a 100% subsidiary of BFL offering capital market solutions covering equities, mutual funds, corporate deposits, bonds, insurance, loans & distribution offerings to corporates, high-net-worth individuals and families. BFSL started operations in August 2019 and is a registered member of NSE & BSE for Equities & Derivative Segment and also a depository participant with CDSL & NSDL.

Any other information: Not applicable