Detailed Rationale

CRISIL Ratings has assigned its 'CRISIL A3+' rating to the Rs 200 crore commercial paper programme of CapFloat Financial Services Private Limited (Capital Float; previously Zen Lefin Pvt Ltd); the rating on the short-term non-convertible debentures has been reaffirmed at ‘CRISIL A3+’.

 

The rating reflects the adequate capitalisation and experienced management of the company. These strengths are partially offset by weak asset quality in the legacy SME portfolio and profitability.

 

In line with the measures announced by the Reserve Bank of India (RBI) for Covid-19, Capital Float had given moratorium to its borrowers, primarily in the legacy SME portfolio. Though collections declined during the initial months of the moratorium, they have improved since then. However, the second wave of the pandemic resulted in intermittent lockdowns and localised restrictions, which again impacted collections in the legacy book. Although the impact has been moderate compared to the past fiscal, any change in the payment discipline of borrowers may affect delinquency levels.

 

Capital Float witnessed an inch up in overall delinquencies during Q1 of fiscal 2022 from March 2021 levels, owing to the 2nd wave induced lockdowns; it however improved to some extent in the subsequent quarter. While the Gross NPA increased to 4.4% as on September 30, 2021 as against 3.9% as on March 31, 2021, the same has been driven by the year-to-date degrowth in AUM (13% in H1FY22); absolute gross NPA were more or less stable at Rs 26 Crore in September 2021 as against Rs 27 crore as on March 2021 (June 2021, Rs 33.7 crore). However, on an absolute basis, 90+ dpd (including past 12 months write-offs) increased to Rs 136 crore (23%) as on September 2021 as against Rs 129 crore (19%) as on March 2021. Furthermore, under the RBI’s August 2020 Resolution Framework for COVID-19-related Stress, Capital Float has restructured around 9% (Rs 57.7 crore) of its portfolio as on October 30, 2021, primarily in the legacy SME book - performance of this portfolio will need to be seen. The impact of the third wave of the pandemic, in terms of its spread, intensity and duration will also be closely monitored.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of Capital Float and its subsidiary, Thumbworks Technologies Pvt Ltd (Walnut), because the two entities have significant operational, financial and managerial integration.

 

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:

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

Capital position is adequate for current scale of operations. The company has a demonstrated track record of raising capital from marquee investors such as Lightrock, Ribbit Capital, Elevation Capital, Amazon, Sequoia Capital, Creation Investments and Aspada Investments. Since inception, it has raised total capital of about Rs 1,157 crore, of which Rs 357 crore was raised in October 2021; Rs 37.1 crore in fiscal 2021; Rs 72.7 crore in 2020; Rs 124.3 crore in 2019; Rs 292.5 crore in 2018; Rs 170.0 crore in 2017; and Rs 97.9 crore in 2015.

 

At a consolidated level, capitalisation was adequate, with reported networth of Rs 589 crore (estimated) and gearing of ~0.8 times, as on October 31, 2021 (1.6 times as on March 31, 2021). On a steady-state basis, gearing is expected to remain below 3 times. Capitalisation should continue to be adequate over the medium term and expected improvement in profitability, thus providing a cushion against asset-side risks.

 

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

Capital Float was started by co-founders in 2013 and an experienced management team, which had worked in the lending business for most of their career of 15-20 years, was also brought in -- the team has experience across risk, credit, technology and operations.

 

The company also benefits from the experience of its investors. Capital Float has eight board members, four of whom have been nominated by key investors. They provide guidance and support through connect 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 business hereon.

 

Weakness:

• Weak asset quality in legacy SME book and profitability

Capfloat has been reporting losses primarily driven by high operating expenses and elevated credit costs. At a consolidated level, the company incurred loss of Rs 174 crore on total income of Rs 123 crore in fiscal 2021, against loss of Rs 185 crore on total income of Rs 245 crore in the previous fiscal. In fiscal 2021, decline in assets under management (AUM) of around 34%, leading to lower income levels, was an additional contributor to the losses.

 

The de-growth in the AUM was driven by the cautious stance of the management on incremental disbursements on the back of Covid-19-induced lockdowns and its impact on the economy. This affected the unit economics and resulted in pre-provisioning operating loss of Rs 95 crore in FY21 and Rs 77 crore in FY20. Also, operating expenses, continue to remain high at Rs 144 crore (15% of total assets) for fiscal 2021 and Rs 216 crore (18%) for fiscal 2020 on account of continued investment in strengthening the tech infrastructure and maintaining  collection initiatives and personnel. While credit costs remained elevated at 8.2% (Rs 79 crore) of average assets for fiscal 2021 against 9.1% (Rs 108 crore) for 2020, the company has well provided for its SME book and gross NPAs. 

 

Capfloat had started its operations in 2014 and relooked its product strategy in 2019 with focus of incremental disbursements on SME and consumer finance. However, given the impact of Covid-19 on borrower cash flow, the company has paused financing SMEs and has now increased focus to consumer finance, especially the Buy Now, Pay Later product (largely via Amazon marketplace). The company has disbursed Rs 750 crore to BNPL borrowers in first half of fiscal 2022 (Rs 646 crore in fiscal 2021). In BNPL, the company has around 35 lakh live credit lines with a monthly addition of around 2 lakh borrowers. The company has partnered with Amazon, Make my trip, Razorpay, etc for the same. The traction in BNPL has resulted in increase the proportion of BNPL product in AUM mix to 45% as on September 2021 from 26% as on March 2021. SME finance declined to about 44% of the AUM as of September 2021 from 60% as on March 2021 (from 100% as of March 2016).

 

Overall gross NPA increased to 4.4% as on September 30, 2021 as against 3.9% as on March 31, 2021 (5.2% as on June 30, 2021; absolute gross NPA were more or less stable at Rs 26 Crore in September 2021 as against Rs 27 crore as on March 2021 (June 2021, Rs 33.7 crore). However, on an absolute basis, 90+ dpd (including past 12 months write-offs) increased to Rs 136 crore (23%) as on September 2021 as against Rs 129 crore (19%) as on March 2021.

 

The company’s SME portfolio had faced challenges in the past and remains susceptible to the challenging macroenvironment, nevertheless, incremental impact on profitability is expected to be lower given higher provisioning and Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) cover. The company has received Rs 5 crore of funds as part of the same and is expected to receive Rs 6 crore next year.

 

Further, the performance of BNPL has been better as against other products with recent originations displaying better portfolio quality. As on September 30, 2021, BNPL had 90+ dpd of 0.9% (Rs 2.5 crore) as against 1.5% (Rs 2.7 crore) March 31, 2021. Further, 90+ dpd (including past 12 months write-offs) was Rs 13.2 crore and Rs 17.8 crore (1.1% and 2.75%, respectively, as a proportion of past 12 months disbursements) as on September 30, 2021 and as on March 31, 2021.

 

Ability to control credit costs and bringing in operating efficiencies with scale up in portfolio will be key to improving profitability over the medium term.

Liquidity: Adequate

Liquidity has been strong given the short tenor of assets. 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 November 30, 2021, it has positive cumulative mismatches in all the buckets. Total liquidity was Rs 431 crore, of which Rs 231 crore is in the form of cash and equivalents while Rs 200 crore is liquid mutual investments. Against this, debt repayment is Rs 98.5 crore for the next three months.

Rating Sensitivity factors

Upward factors

• Improvement in earning 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 above 4 times on a steady-state basis
• Delay in improvement of earnings profile, with the company reporting losses beyond fiscal 2023

About the Company

Capital Float is an NBFC (non-banking financial company) registered with the RBI. It was founded in 2013 by Mr Sashank Rishyasringa (holding 7.7% as on December 31, 2021) and Mr Gaurav Hinduja (7.7%), after graduating from Stanford Graduate School of Business. Since inception, it has raised total capital of Rs 1,157 crore from marquee investors such as Lightrock (holding 19.8% as on December 31, 2021), 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.

 

Capital Float is one of the first FinTech NBFCs in India. It started operations in 2014 with focus on the SME segments and diversified in 2018 into the consumer finance segment. For this, it partnered with Amazon for an online checkout finance (BNPL) product. In BNPL, the company has cumulatively disbursed Rs 2992 crore (with a write-off of Rs 34 crore) till date. As a part of its strategy to grow into the consumer finance industry, it acquired 60% stake in Walnut in September 2018, which is a personal finance app available on Android and iOS and is used for personal loans.

 

Capital Float 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, Capital Float reported loss of Rs 39 crore on total income of Rs 62 crore for the first-half of fiscal 2022, against Rs 126 crore and Rs 127 crore, respectively, for the corresponding period previous fiscal.

Key Financial Indicators: (Consolidated)

As on/for the period ending	Unit	Mar-21	Mar-20
Total assets	Rs crore	808	1105.9
Total AUM (including off-book)	Rs crore	681	1031.0
Total on-book AUM	Rs crore	417	669.7
Total income	Rs crore	123	245.4
Profit after tax	Rs crore	-174	-184.9
90+dpd on AUM	%	3.9%	2.1%
Gearing	Times	1.6	1.4
Return on assets	%	Negative	Negative

 

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs. Cr)	Complexity level	Rating outstanding with outlook
NA	Short Term Non Convertible Debenture	NA	NA	NA	100	Simple	CRISIL A3+
NA	Commercial Paper	NA	NA	7-365 days	200	Simple	CRISIL A3+

 

Annexure – List of entities consolidated

Names of Entities Consolidated	Extent of Consolidation	Rationale for Consolidation
Thumbworks Technologies Pvt Ltd	Full	Subsidiary