Rating Rationale
August 19, 2020 | Mumbai
Centrum Broking Limited
Rating Reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.70 Crore
Short Term Rating CRISIL A2+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its 'CRISIL A2+' rating on the short-term bank facilities of Centrum Broking Limited (CBL).
 
The rating continues to factor in adequate capitalisation and well-diversified product offerings of the Centrum group across the financial services domain. These strengths are partially offset by the modest earnings profile and exposure to uncertainties inherent in capital market-related businesses.
 
The Centrum group has presence across the fee-based services such as broking, wealth management, investment banking, and asset management, and fund-based businesses such as microfinance, housing finance and non-banking finance company. Given the nature of business, income from fee-based businesses tend to be volatile in-sync with the capital market activities and hence in the current difficult macro environment, on account of Covid-19, the performance of the group will remain monitorable
 
From an industry perspective, the nationwide lockdown declared by the Government of India to contain the spread of the Covid-19 pandemic has impacted the disbursements and collections of financial sector entities. The restrictions are being lifted only in a phased manner and the degree of relaxations vary across regions depending upon the severity of covid-19 pandemic. Any delay in return to normalcy will put further pressure on collections and asset quality metrics of NBFCs. Additionally, any change in the behaviour of borrowers on payment discipline can affect delinquency levels.
 
On the liability side, the Reserve Bank of India (RBI) announced regulatory measures under 'Covid-19 - Regulatory Package', whereby lenders were permitted to grant moratorium on bank loans. CRISIL understands that currently, Centrum Financial Services Ltd (CFSL) and Centrum Micro Credit Ltd (CML) are availing moratorium on its bank borrowings.
 
The group has lending operations in the form of housing finance, microfinance, SME/MSME finance, supply chain finance etc. It has offered moratorium to its borrowers and hence, the collections are expected to be below scheduled collections till August 31, 2020. Thereafter, collections could witness challenges as the income streams of the borrowers in affordable housing segment are likely to be impacted given the current challenging macro environment.
 
CRISIL believes that the group has sufficient liquidity to manage this period wherein asset-side collections will be impacted, while liability-side outflows continue as per schedule. In terms of liquidity, the group, as on July 31, 2020, has liquidity of Rs 638.41 crore (Rs 406.61 crore of cash and equivalents and Rs 231.80 crore of unutilized bank lines). Against the same, they have total debt payments of Rs 187.99 crore over the next three months till October 31, 2020

Analytical Approach

For arriving at the rating, CRISIL has combined the business and financial risk profiles of CBL, its parent and the group's flagship company, Centrum Capital Ltd (CCL), and CCL's other subsidiaries:  Centrum Wealth Management Ltd (CWML), Centrum Financial Services Ltd (CFSL), Centrum Housing Finance Ltd (CHFL) and Centrum Microcredit Ltd (CML). This is because of the high degree of managerial, business, and financial integration among the companies, collectively referred to as the Centrum group.

Please refer Annexure - Details of Consolidation, which captures the list of entities considered and their analytical treatment of consolidation.
 

Key Rating Drivers & Detailed Description
Strengths
* Adequate capitalisation
CRISIL believes the Centrum group is adequately capitalised for its current and proposed scale up of operations over the medium term. Adjusted net worth of the group increased to Rs 721 crore as on March 31, 2020, from Rs 570 crore as on March 31, 2019, following the 25% stake sale (for Rs 190 crore) of CHFL, to a fund of Morgan Stanley. While adjusted gearing improved to 2.4 times as on March 31, 2020, from 3.2 times, as on March 31, 2019, with the scale up in operations, adjusted gearing is expected to increase from the current levels over the medium term. Nevertheless, it is expected to remain in line with peers with a steady state gearing for the non-banking financial company (NBFC) and housing finance company (HFC) business at 4-5 times and 6-7 times, respectively. The impact of the group's earnings on its capitalisation levels will, however, continue to be a key rating monitorable.  
 
* Well-diversified product offerings across financial services domain
The Centrum group is present across various segments, including institutional business (investment banking, institutional broking), wealth management (private wealth, insurance broking), lending (affordable housing, NBFC and microfinance) and asset management. 
 
The group has a well-diversified business profile, with an established presence in fee-based businesses. It has ventured into fund-based businesses through setting up of CHFL for offering affordable housing loans, a non-banking finance company, CFSL for offering business loans to small and medium enterprises and CML for providing loans to un-served and under-served borrowers operating small businesses in semi-urban areas. This diversification should help the group expand its reach and customer base, providing increased opportunity of cross-selling its offerings.
 
CCL is a merchant banker with presence in the debt capital markets with clients such as public sector units, banks, state-level undertakings, private corporates and provident funds. The groups' wealth management business has witnessed healthy traction in recent years with assets distributed and managed increasing to more than Rs. 23,000 crore as on March 31, 2020 (Rs 20,000 crore as on March 31, 2019).  The wealth management business offers distribution, investment advisory and family office services across asset classes, such as equity, fixed income, real estate and alternate investments. The group also has an insurance broking business, which placed new business premium in excess of Rs 125 crore in fiscal 2020. The group launched the asset management business in fiscal 2018. The equity broking operations (carried out through CBL) remains small with a low market share. However, its broking volume has also witnessed an improvement over the past few fiscals.
 
The group has identified lending businesses as one of the key focus areas and has kick started operations in the space by setting up of an NBFC, HFC and MFI. To scale up these new businesses, the group has hired experienced professionals from the industry and has also inorganically grown through acquisition of portfolios from other players. The group offers various products like supply chain finance, structured finance, mid-corporate finance, real estate finance, MSME business loans, affordable housing finance and micro-finance. The group has slowed down on the disbursements on the wholesale book and is focused on growing the retail and small business loans. Consolidated loan book stood at Rs 1,787 crore as on March 31, 2020 (Rs 1,703 crore as on March 31, 2019). Gross NPAs were relatively lower at 1.4% as on March 31, 2020 (1.1% as on March 31, 2019). However, the portfolio lacks seasoning and asset quality performance as the portfolio seasons will be a monitorable
 
CRISIL believes that while the group's foray into fund-based businesses will provide cross-selling opportunities and diversification to the group, its ability to scale up the same successfully will be a monitorable.
 
Weaknesses
* Modest earnings
Overall earnings profile of the group was largely supported by the foreign exchange business; stake sale in this business in fiscal 2019, has affected core profitability of the group in the last two fiscals. For fiscal 2020, the group reported profit of Rs 0.7 crore (including an exceptional item of Rs 68 crore) on a total income (net of interest expense) of Rs 282 crore. As against this, PAT of Rs 144 crore (including an exceptional item of Rs 505 crore) was reported on a total income (net of interest expense) of Rs 212 crore, for fiscal 2019.
 
Core earnings were muted in fiscal 2020, on account of subdued performance of the wealth management and investment banking businesses. Revenue of the wealth management business declined to Rs 77 crore in fiscal 2020, from Rs 125 crore in fiscal 2019, following a transition to trail-based commission from upfront commissions. Further, on account of costs related to setting up of infrastructure and a professional team in the lending businesses, the operating expenses of the lending businesses have increased to 107 crore (5.1% of average assets) in fiscal 2020 from 68 crore (4.7% of average assets) in fiscal 2019. However, with scale-up of operations and limited credit cost, all three lending businesses have reported profits in fiscal 2020. Nevertheless, on account of challenging macro-economic environment, the ability of the management to manage the asset quality and limit the credit the cost will remain a monitorable.
 
* Exposure to uncertainties inherent in capital market-related businesses; nascent stage of operations of lending business
The group's capital market businesses remain susceptible to economic, political, and social factors that drive corporate and investor sentiment. Trading volume and earnings depend heavily on the level of trading activity in capital market. Global events also influence fortunes of the domestic market. Turnover and volume in the broking business move in tandem with market sentiments.
 
Lending businesses of the group are at early stages. However, the group has focused on putting in place sound credit appraisal and risk management processes to support ramp-up, over the medium term. Ability to grow the loan book and manage asset quality, as the portfolio seasons, will be key monitorables.
Liquidity Adequate

Liquidity is adequate with, as on July 31, 2020, Rs 406.61 crore of cash and equivalents and Rs 231.80 crore of unutilized bank lines. Against the same, the group has total debt payments of Rs 187.99 crore over the next three months till October 31, 2020. Further, the group had cash and cash equivalents of Rs. 390.85 crore as on March 31, 2020.

Rating sensitivity factors
Upward factors
* Substantial and sustained improvement in market position across businesses while maintaining credit quality metrics
* Improvement in earnings profile with the group reporting RoA>1% over an extended period
 
Downward factors
* Deterioration in asset quality leading to increase in the credit costs impacting the capitalisation of the group
* Subdued earnings profile with the group reporting losses at core earnings level (RoA<0%)

About the Group

The Centrum group is being led by Mr. Jaspal Bindra, who is the Executive Chairman of Centrum group. The centrum group has presence across various segments including institutional business (investment banking, institutional broking), wealth management business (private wealth, insurance broking), lending businesses (affordable housing, NBFC and microfinance) and asset management business. As on March 31, 2020, NBFC, HFC and MFI had an AUM of Rs 878 crore, Rs 440 crore and Rs 469 crore, respectively.
 
CBL is the Brokerage arm of Centrum Group that offers brokerage, equity research, portfolio management services, depository participant and financial product distribution services to non- institutional clients. it also offers research, brokerage and placement services to institutional clients. The Company is a member of BSE and NSE (Equities & Currency segments), a Depository Participant (of CDSL), SEBI Registered Research firm and a Portfolio Manager. CCL ultimately hold 96.7% in CBL.
 
Centrum group reported a PAT of Rs 0.7 crore (including an exceptional gain of Rs 68 crore) on a total income of Rs 480 crore in fiscal 2020 as against a profit of Rs 144 crore (including an exceptional item of Rs 505 crore) on a total income of Rs 366 crore in the corresponding period previous fiscal.
 
CBL had total income and loss of Rs 62 crore and Rs 1 crore, respectively, in fiscal 2020, as against total income and PAT of Rs 85 crore and Rs 1 crore, respectively, in fiscal 2019.

Key Financial Indicators - Centrum Group (consolidated)
As on / for the period ended March 31   2020 2019
Total assets Rs crore 2929 2840
Total income Rs crore 480 366
Profit after tax Rs crore 0.7 144
Adjusted gearing Times 2.4 3.2
Return on assets % 0.0 5.9

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 (Rs crore) Complexity level Rating outstanding
with outlook
NA Bank guarantee NA NA NA 70 NA CRISIL A2+
 
Annexure - List of entities consolidated
Entity consolidated Extent of consolidation Rational for consolidation
Centrum Retail Services Limited Full Subsidiary
Centrum Broking Limited Full Subsidiary
Centrum Wealth Management Limited Full Subsidiary
Centrum Investment Advisors Limited Full Subsidiary
Centrum Financial Services Limited Full Subsidiary
Centrum Housing Finance Limited Full Subsidiary
Centrum Insurance Brokers Limited Full Subsidiary
Centrum Microcredit Limited Full Subsidiary
Centrum Alternative Investment Managers Limited" Full Subsidiary
Essel-Centrum Holding Limited Full Subsidiary
Centrum Capital International Limited Full Subsidiary
Centrum International Services Pte Limited Full Subsidiary
Centrum Alternatives LLP Full Subsidiary
Centrum Rema LLP Full Subsidiary
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
Fund-based Bank Facilities  LT/ST    --    --  31-12-19  Withdrawal  21-09-18  CRISIL A2+  29-09-17  CRISIL A3+  CRISIL A3+ 
                09-07-18  CRISIL A3+/Watch Positive       
                09-04-18  CRISIL A3+/Watch Positive       
Non Fund-based Bank Facilities  LT/ST  70.00  CRISIL A2+      31-12-19  CRISIL A2+  21-09-18  CRISIL A2+  29-09-17  CRISIL A3+  CRISIL A3+ 
                09-07-18  CRISIL A3+/Watch Positive       
                09-04-18  CRISIL A3+/Watch Positive       
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Bank Guarantee 70 CRISIL A2+ Bank Guarantee 70 CRISIL A2+
-- 0 -- Proposed Short Term Bank Loan Facility 55 Withdrawn
Total 70 -- Total 125 --
Links to related criteria
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating Criteria for Securities Companies
CRISILs Criteria for Consolidation

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