Detailed Rationale

CRISIL Ratings has reaffirmed its 'CRISIL A3+' rating on the Rs 200 crore commercial paper and Rs 100 crore short-term non-convertible debentures of CapFloat Financial Services Pvt Ltd (CapFloat; previously Zen Lefin Pvt Ltd).

 

The rating reflects the adequate capitalisation and experienced management of CapFloat. These strengths are partially offset by weak profitability and asset quality, primarily driven by legacy portfolio.

 

The overall credit risk profile of CapFloat continues to be supported by timely capital raises, aggregating Rs 1,157 crore since inception, from marquee investors and modest gearing levels. Consolidated tangible networth stood at Rs 379 crore as on March 31, 2022, with gearing at 1.2 times. The company plans to raise another round of capital in fiscal 2024, which should further support the capital profile. From a growth perspective, the company plans to have an asset-light model with a mix of on-book as well as off-book growth, which will be through co-lending partnerships, thereby reducing the requirement for growth capital. The company already has a co-lending partnership with one partner and is in the process of entering into more partnerships.  

 

Assets under management (AUM) grew to Rs 1,085 crore as on September 30, 2022, from Rs 681 crore as on March 31, 2022. Of the overall AUM, 93% was the consumer finance book and the remaining 7% (down from 60% as on March 31, 2021) was the discontinued book of products offered to small and medium enterprises (SMEs). The company’s product strategy has changed from a multiple product lender prior to 2018 to an SME and consumer finance lender in 2018 and 2019 and now entirely to a consumer finance lender. The company has paused SME financing since the Covid-19 pandemic on account of the impact on the borrower cash flow.

 

In consumer financing, the company primarily focuses on online checkout finance and personal loan, which is a cross-sell product. The company has disbursed Rs 2,033 crore to consumer finance borrowers in the first half of fiscal 2023 (Rs 2,071 crore in fiscal 2022), for which it has entered into partnerships with Amazon, Makemytrip and Razorpay, among others. Traction in the consumer finance product has resulted in the product’s AUM increasing to Rs 1,006 crore as on September 30, 2022, from Rs 526 crore as on March 31, 2022. Of the consumer finance AUM, personal loan AUM stood at Rs 341 crore as on September 30,2022 (Rs 100 crore as on March 31, 2022). Personal loan is one of the key focus areas for the company; given that it is a high yielding product, it should support profitability going forward.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of CapFloat and its subsidiary, Axio Digital Pvt Ltd [erstwhile Thumbworks Technologies Pvt Ltd (Walnut)], because the two entities have significant operational, financial and managerial integration.

 

Please refer Annexure - List of a Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

Adequate capitalisation with a track record of raising capital from marquee investors

Capital position is adequate for the company’s scale of operations. CapFloat has a demonstrated a track record of raising capital from marquee investors, such as Lightrock, Ribbit Capital, Elevation Capital, Amazon, Sequoia Capital, Creation Investments and Aspada Investments. Since its inception, it has raised total capital of about Rs 1,157 crore, of which Rs 357 crore was raised in October 2021. The management plans to raise another round of equity in the first half of fiscal 2024, which will further support capitalisation levels.

 

At a consolidated level, tangible networth and gearing stood at an estimated Rs 379 crore and 1.2 times, respectively, as on March 31, 2022 (gearing at 1.6 times as on March 31, 2021). On a steady-state basis, gearing is expected to remain below 3 times. Capitalisation, too, should remain adequate over the medium term, supported by the proposed capital raise.

 

Competent management team, that benefits from the experience and involvement of the board members

CapFloat was started in 2013 by the co-founders and an experienced management team that had worked in the lending business for 15-20 years. The team has experience across the risk, credit, technology and operation segments.

 

The company also benefits from the experience of its investors. CapFloat has eight board members, four of whom have been nominated by key investors. They provide guidance and support by connecting with global peers, bringing in partnerships, establishing best practices and enhancing governance standards. All of this should stand the company in good stead as it scales up its business hereon.

 

Weakness:

Weak asset quality in legacy SME book and profitability

CapFloat has been reporting losses, driven by delay in achieving operating efficiency and elevated credit cost. At a consolidated level, the company incurred loss of Rs 128 crore on total income of Rs 110 crore in fiscal 2022 against losses of Rs 174 crore on total income of Rs 123 crore in fiscal 2021. One of the reasons for delay in achieving operating efficiency was decline in AUM, which stood at Rs 681 crore as on March 31, 2022, declining from Rs 1,404 crore as on March 31, 2019, leading to lower income levels.

 

De-growth in the AUM was driven by the discontinuation of a few products and the management’s cautious stance on incremental disbursements in light of the impact of Covid-19-induced lockdowns on the economy. This affected the unit economics and resulted in pre-provisioning operating loss of Rs 105 crore in fiscal 2022 and Rs 95 crore in fiscal 2021.  

 

The company’s credit cost had moderated to 1.9% in fiscal 2022 from 6.2% and 6.8% in fiscals 2021 and 2020 because of reversal of excess Expected Credit Loss (ECL) provisions. However, credit cost has inched up in the first half of fiscal 2023. The high level of credit costs was due to the asset quality challenges in the discontinued book, however, the company has adequately provided for the discontinued book and therefore, incremental credit costs from this book is expected to be low.

 

Overall on book gross non-performing assets (NPAs) increased to 3.5% as on September 30, 2022, from 3.0% as on March 31, 2022 (3.4% as on March 31, 2021). Absolute gross NPAs for the period increased to Rs 27.1 crore from Rs 13.6 crore (Rs 18.9 crore as on March 31, 2021). Nevertheless, for the first half of fiscal 2023, write-offs as a percentage of average loans fell to 5% from 13% and 17% in fiscals 2022 and 2021, respectively. This was due to reduced write offs in discontinued book. 90+ days past due of consumer finance book was 2.6% as on September 30, 2022, whereas SME book’s 90+ days past due was 8.5%, albeit on a reduced AUM; SME book reduced to Rs 77 crore as on September 30,2022 from Rs 150 crore as on March 31, 2022 (Rs 407 crore as on March 31, 2021). Within consumer finance, 90+ days past due of online checkout finance stood at 3.7% as on September 30,2022 (1.1% as on March 31, 2022) and that of personal loan was 0.3% (0.9%) as on same date.  With a nominal proportion of the SME book outstanding, asset quality performance of the consumer finance book will determine the company’s overall asset quality. Ability to control credit costs and bring in operating efficiency while scaling up the portfolio will be key to improving profitability over the medium term.

Liquidity : Adequate

As a policy, the company maintains six months of operating expense and debt repayment in the form of liquid investments. According to the asset liability management statement as on September 30, 2022, it has positive cumulative mismatches in all the buckets. Total liquidity as on November 30,2022, was Rs 317.8 crore, of which Rs 6.3 crore is in the form of cash and equivalents, while Rs 311.6 crore is liquid mutual investments. Against this, debt repayment is Rs 258 crore for the next three months.

Rating Sensitivity factors

Upward factors

• Improvement in the earnings profile, with the company reporting return on managed assets greater than zero on a sustained basis
• Increase in scale of operations while improving asset quality

 

Downward factors

• Deterioration in capitalisation metrics, with adjusted gearing increasing to above 4 times on a steady-state basis
• Delay in improvement of the earnings profile, with the company reporting continuous losses

About the Company

CapFloat is a non-banking financial company (NBFC) registered with the Reserve Bank of India. It was founded in 2013 by Mr Sashank Rishyasringa (holding 7.7% as on December 31, 2021) and Mr Gaurav Hinduja (7.7%) after they graduated from Stanford Graduate School of Business. Since its inception, CapFloat has raised total capital of Rs 1,157 crore from marquee investors, such as Lightrock (holding 19.8% as on September 30, 2022), Elevation Capital (13%), Sequoia Capital (10.7%), Ribbit Capital (8.9%), Amazon (8%), Creation Investments (8%) and SOROS Economic Development Fund (4%); the remaining is with employees, angel investors and individuals.

 

CapFloat rebranded its three product offerings under the name of CapFloat, Walnut and Walnut 369 as Axio in July 2022.

 

CapFloat is one of the first fintech NBFCs in India. It started operations in 2014 with a focus on the SME segment and diversified into the consumer finance segment in 2018. For this, it partnered with Amazon for an online checkout finance (Buy Now Pay Later, BNPL) product. As a part of its strategy to grow in the consumer finance industry, in September 2018, it acquired 60% stake in Walnut (now Axio), a personal finance app available on Android and iOS and used for personal loans.

 

CapFloat uses technology in its underwriting and risk management processes. The company has developed in-house models through which credit decisions are taken with minimal human intervention.

 

On a standalone level, CapFloat reported loss of Rs 66 crore on total income of Rs 73 crore for the first half of fiscal 2023. It reported loss of Rs 18 crore (including gain on account of exception item of Rs 62 crore) on total income of Rs 115 crore in fiscal 2022 against Rs 126 crore loss on total income of Rs 127 crore in the previous fiscal.