Rating Rationale

Key Rating Drivers & Detailed Description

Strengths:

Strategic importance to, and expectation of strong managerial and financial support from, the parent Mizuho Leasing: The rating factors in expectations of strong support from MHLS, an affiliate of the Mizuho Financial Group (which holds 23.09% stake in MHLS) on an ongoing basis and in the event of any exigency.

MHLS (originally Pacific Lease Co Ltd) was established in 1969 as a general leasing company under the initiative of The Industrial Bank of Japan, Ltd (now Mizuho Bank Ltd) and with investment from major companies across Japanese industry. In March 2019, the company entered a capital and business alliance with Mizuho Bank Ltd, and an alliance in the lease financing business with Marubeni Corporation. It subsequently renamed itself MHLS. Mizuho Financial Group is the single largest shareholder with 23.09% stake. MHLS is the only equity-method affiliate in the Mizuho Financial Group. The company is one of the leading general leasing entities in Japan with operating assets of 3,075 billion yen as on end-Sep 2024 (2858-billion-yen as on end-March-2024 and 2,580 billion-yen as on March 2023).

MHLS is focused on expansion in emerging markets and India is key markets where MHLS plans to rapidly expand its leasing business. As a part of this expansion strategy, MHLS has forayed into Indian leasing market with acquisition of stake in MRAL. Given large population and limited leasing penetration by organized players in leasing business, India is a strategically important country for MHLS. Crisil Ratings believes CFPL will be highly strategically important for MHLS and hence the moral obligation for MHLS to support the subsidiary will always remain high.

Further, CFPL is expected to receive strong managerial and operational support from the ultimate parent - MHLS. Managerial support is reflected in the deployment of senior management personnel from Mizuho Leasing Group to oversee Indian operations. In addition to this, MHLS has higher representation on the boards of both entities, CFPL and MRAL. Also, MHLS is likely to support CFPL’s growth on asset and liability side by leveraging its relationship with Japanese and other global companies in India. MHLS is committed to provide need-based necessary support to CFPL. Any change in the extent of MHLS’s support to the Indian subsidiary remains a key rating sensitivity factor.

Extensive experience of the founders and senior management: The founders, Mr Jinesh Jain and Mr Praveen Chauhan have over two decades of experience in originating and structuring large operating lease deals, securitisation and asset life cycle management. Both the founders, Mr Jain (ex-country head, business development) and Mr Chauhan (ex-country head, account management), have worked with Rent Works India Pvt Ltd (the Indian arm of Australia-based multinational company [MNC]), which was a global leasing and residual management company for more than three decades before it decided to wind-down its business in India in 2014 (as part of a global decision). The founders have strong business acumen and considerable experience in lease rental and asset life cycle management. MRAL along with other shareholders, has set up a senior team of experienced professionals to manage and run operations. The team has extensive experience in handling various functions in similar businesses including collections, back-end operations, credit and legal. The management has focused on putting in place sound systems and risk management processes, and building sourcing and credit underwriting abilities, enabling the scaling-up of operations while maintaining operating efficiency. CFPL’s portfolio growth has been in line with its networth and hence its share of fresh business in the group is expected to scale up commensurate to its networth increase over time.

CFPL has reported consistent growth in its assets under management (AUM); the company achieved AUM of Rs 2,916 crore as on December 31, 2024, as compared to Rs 2,700 crore as on March 31, 2024 (Rs 1,873 crore as on March 31, 2023). The growth continues to be driven by both leasing as well as working capital financing (WCF) segments that stood at Rs 1,692 crore and Rs 1,203 crore, respectively, as on December 31, 2024. The company is an exclusive financing partner for a top information technology original equipment manufacturer in India, which helps with origination of deals and provides the opportunity to grow its business volumes.

Crisil Ratings notes that the company’s focus has and continues to remain predominantly on the leasing business. CFPL has been able to have healthy and consistent growth in its portfolio. Nevertheless, the ability of the company to maintain this growth, especially considering intense competition from large captive financiers in the industry, will remain key monitorable.

Healthy capitalisation metrics, driven by low gearing and regular capital raises: Capitalisation metrics have been supported by regular capital infusions in the past. MRAL has infused Rs 448 crore in CFPL since inception. This includes Rs 100 crore infused by MRAL in fiscal 2024 (down streaming of Rs 100 crore of primary equity infused by MHLS in MRAL) and Rs 125 crore in current fiscal (of its 9M-FY2025 net profit). Consequently, networth of CFPL improved to Rs 952 crore as on December 31, 2024 (Rs 754 crore as on March 31, 2024); with gearing (including inter-corporate deposits [ICD] from the parent company) of 1.9 times as on December 31, 2024 and 2.4 times as on March 31, 2024. Gearing is expected to remain within 4 times over the medium term. The company’s capitalisation metrics have also been supported by healthy cash accrual generated with returns on managed assets of over 3% in the past three years.

In addition to this, MRAL will continue to invest a substantial portion of its net profit in CFPL to strengthen the networth. Expected planned incremental capital and stable accretion to reserve will help CFPL to support the increasing scale of operations while maintaining comfortable gearing. The company’s ability to raise equity capital in a timely manner is important from growth and credit perspectives.

Strong earnings profile: The company has exhibited a good track record of profitability since inception. The return on assets (RoA) has been over 3% for the past three years. During fiscal 2024, the company reported profit after tax (PAT) of Rs 78 crore and RoA of 3.2% (against Rs 76 crore and 4.5%, respectively, in fiscal 2023). For nine months of fiscal 25, the company reported a PAT of Rs 73 crore on a total income of Rs 293 crore with RoA of 3.1% (annualised). There has been some moderation in yields during the year, as a result of further risk-controlled underwriting, which has impacted overall profitability. Nevertheless, comfortable asset quality and lower operating expenses on account of operational linkages with parent has supported profitability. CFPL’s ability to maintain healthy operating margin as it scales up will be a key monitorable.

Comfortable asset quality backed by sound risk-controlled business model: The company reported gross NPAs of 0.79% as on December 31, 2024 (0.84% as on March 31, 2024). The asset quality for lease finance is backed by strong collateral to mitigate counterparty credit and end-of-lease-term risks. In the WCF segment, the credit risk profiles of the customers are varied such as MNC subsidiaries in India, startups, Indian corporates and companies backed by anchors. The tenure of the loan is 30-120 days and linked to the anchor’s working capital cycle. The company has structured inherent checks for effective risk management that include defined lending policy, rigorous underwriting process and dedicated due diligence team, which helps to maintain asset quality. The credit team evaluates key points while assessing the credit risk profile of a client, such as purpose of transaction, long-term assessment, financials, bank statements and management quality. The disbursement is concluded after passing several levels of scrutiny and checks, mainly centered on cash flow evaluation, and credit bureau and reference checks. The company has a high rejection rate for applications wherein there is lack of visibility or inadequate cash flow. The ability of the company to maintain overall asset quality while growing the business from current levels will be a key monitorable.

Improved resource profile: As on December 31, 2024, CFPL had funding relationships with more than 18 lenders. The funding profile comprises term loans, non-convertible debentures, cash credit and working capital loans, pass through certificate transactions and ICDs from the parent. CFPL raised around Rs 880 crore (including long term and short-term borrowings and excluding rollover facilities) during nine months of fiscal 2025 and continues to demonstrate the ability to raise funds in a timely manner at competitive pricing. The company may continue having a strong and diversified resource base and benefit from lower borrowing costs.

Weaknesses:

Modest track record in the WCF business: The company’s vintage into the WCF segment is moderate since the company ventured into this business only in fiscal 2021. As on December 31, 2024, the AUM for WCF stood at 1203 crore as compared with Rs 1392 crore on March 31, 2024. The portfolio witnessed de-growth temporarily during this period on account of management’s cautious stance on certain client segments. The borrower profile and underwriting process in this segment is similar to that of the leasing portfolio. The customers include MNC subsidiaries in India, startups, Indian corporates, and companies backed by anchors. Furthermore, the company takes adequate collateral to mitigate the asset quality risk. Since the company has witnessed minor slippages in the portfolio, its ability to scale-up the portfolio while maintaining healthy asset quality is a key monitorable.

Exposure to counterparty and end-of-lease-term process risks: Revenue comes from interest and lease rental income on financing solutions offered on assets given on lease, along with the value derived at the end of the asset life cycle in the form of re-leasing, redeployment or sale of asset. Earnings are supported by comfortable asset quality metrics and low gearing. Nevertheless, counterparty risk persists as the company has also extended leases and financing to unrated entities and startups, albeit with adequate collateral. Furthermore, in the WCF segment, the business model being different from that of the leasing business involves counterparty risk. As the overall portfolio scales up, the ability to maintain healthy return on managed assets will be a key rating sensitivity factor. The ability to generate value at the end of the asset life cycle on a steady-state basis over the medium term will be a key monitorable.