Rating Rationale
September 21, 2018 | Mumbai
Centrum Broking Limited
Rating upgraded to 'CRISIL A2+', removed from 'Watch Positive'
 
Rating Action
Total Bank Loan Facilities Rated Rs.125 Crore
Short Term Rating CRISIL A2+ (Upgraded from 'CRISIL A3+'; Removed from 'Rating Watch with Positive Implications')
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has removed its short-term rating on the bank facilities of Centrum Broking Limited (CBL, part of the Centrum group) from 'Rating Watch with Positive Implications' and upgraded it to 'CRISIL A2+' from CRISIL A3+'.
 
The rating was placed on watch on April 09, 2018, following the Centrum group's announcement to sell its step-down subsidiary-Centrum Direct Ltd (CDL)-to the Ebix group for Rs 1,200 crore.  CRISIL was awaiting discussions with the management to understand the implications of the transaction on the credit risk profile of the Centrum group, deployment of the capital and future business plan of the group.
 
The watch was resolved following clarity from the management on deployment of the capital from the sale and future growth plans. The upgrade reflects significant strengthening of the capital position of Centrum group and its well diversified market presence across financial services through foray into lending businesses. The scale up in lending businesses is also expected to provide cross-selling opportunities; diversify the stream of revenues and reduce the group's reliance on capital market related businesses. However, the ability to scale up the new businesses successfully will be a key monitorable. Further, the strengths are partially offset by exposure to uncertainties inherent in capital market-related businesses and the group's modest earnings.

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). That's because of the high degree of management, business, and financial integration among the companies, collectively referred to as the Centrum group.

Key Rating Drivers & Detailed Description
Strengths
* Comfortable capitalisation
Capitalisation of the group has strengthened significantly with the sale of CDL; adjusted net worth of the group is expected to increase substantially and more than double as on March 31, 2019 from Rs. 396 crore as on March 31, 2018. While sizeable proportion of the sale proceeds will be deployed in the lending businesses, the group is also open to inorganic growth opportunities at right valuations.
 
With the scale-up in business, adjusted gearing of the group is expected to increase gradually over the medium term (2.9 times as on March 31, 2018). 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 group has hired experienced professionals at senior management positions to run the lending businesses. CRISIL believes the group is well-capitalized for the current and proposed scale up in operations for the medium term.
 
* Well-diversified product offering across financial services
The group has a well-diversified business profile with an established presence in the fee-based businesses. The group has also ventured into fund based businesses through setting up of an NBFC, HFC and micro-finance institution (MFI). This diversification should help the group expand its reach and customer base, providing increased opportunity of cross-selling its offerings.
 
In the fee based businesses, its operations are spread across investment banking, debt syndication, broking, wealth management, insurance broking and asset management. CCL is one of the leading merchant bankers with an established position in the debt capital markets with clients such as public sector units, banks, state-level undertakings, private corporates and various provident funds. The groups' wealth management business has witnessed healthy traction in recent years with assets distributed and managed increasing to Rs. 18250 crore as on March 31, 2018 registering a five- year compound annual growth rate of 43%. The group has also started distribution of insurance products and launched asset management business in fiscal 2018. . The group's equity broking operations (carried out through CBL) remains small with a low market share. However, its broking volumes have witnessed an increase in fiscal 2018 in line with increased capital market activity.
 
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, loan against shares, affordable housing finance and micro-finance. The consolidated loan book of the group stood at Rs. 650 crore as on March 31, 2018 and is expected to increase by up to four fold by March 2019. Growth in the loan book will, likely, be supported by the proposed acquisition of the supply chain finance business from L&T finance.
 
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.
 
Weakness
* Modest earnings
Overall earnings profile of the group was so far supported largely by the foreign exchange business with CDL being one of the major contributors to the revenue. As CDL was hived off in the first quarter of fiscal 2019, earnings of the group is expected to remain muted in the near term. Further, on account of setting up infrastructure in the lending business, the operating expenses of the group has increased in recent years (Rs. 409 crore in fiscal 2018 as against Rs 233 crore [adjusted for full year] in fiscal 2016). Nevertheless, going forward, with scale up in wealth management business and the new business segments, the earning profile of the group is expected to improve.
 
Profit after tax (PAT; after minority interest) increased to Rs 31.9 crore in fiscal 2018'which includes one-time gain of Rs 29 crore on stake sale in CDL-from Rs 30 crore the previous year, which includes one-time gain of Rs 113 crore. CBL had total income and PAT of Rs 62.3 crore and Rs 13.1 crore, respectively, in fiscal 2018, as against Rs 40.9 crore and Rs 1.7 crore, respectively, a year before. 
 
* Exposure to uncertainties inherent in capital market-related businesses
The group's capital market businesses (investment banking and equity broking) remain susceptible to economic, political, and social factors that drive corporate and investor sentiments. Trading volume and earnings depend heavily on the level of trading activity in the capital markets. Global events also influence the fortunes of the domestic market. Turnover and volume in the broking business move in tandem with market sentiments.
About the Group

CBL was acquired by the Centrum group from Mr Pashupati Advani in 2005. CCL's stake in CBL is 99.3% currently, as against 48.7% in fiscal 2012. CBL undertakes institutional and retail broking. The wealth management business is carried out by CWML. CCL is a Category I merchant banker registered with the Securities and Exchange Board of India, and has an established position in the debt capital market. CFSL, registered with the Reserve Bank of India, is an NBFC engaged in SME financing, real estate financing, structured finance, lending against shares, and margin funding. The group has also diversified into affordable housing with CHFL and microfinance lending with CML.
 
In fiscal 2018, the group's PAT (after minority interest) increased to Rs 31.9 crore from Rs 30.0 crore in fiscal 2017.
 
CBL had total income and PAT of Rs 62.3 crore and Rs 13.1 crore, respectively, in fiscal 2018, as against Rs 40.9 crore and Rs 1.7 crore, respectively, in fiscal 2017.

Key Financial Indicators - Centrum group (consolidated)
As on / for the period ended March 31   2018 2017
Total assets Rs crore 1998.5 1123.4
Total income Rs crore 584.8 476.9
Profit after tax (after minority interest) Rs crore 31.9 30.0
Adjusted gearing Times 2.9 1.0
Return on assets % 2.7 4.4

Any other information
Centrum group has informed BSE on September 06, 2018 that its subsidiary, Centrum Financial Services Ltd, has entered into a business transfer agreement with L&T Finance; and Centrum will acquire supply chain finance book of Rs. 800 crore of L&T finance having 50 employees, customer base of 800 and operations in 16 cities. The acquisition is expected to be completed by December 31, 2018, unless mutually extended by the parties, and no regulatory or governmental approval is required for the same.

Earlier in November 2017, the group had acquired micro finance operations having a book size of Rs. ~100 crore, customer base of 70,000 and employee strength of 300 from FirstRand Bank India.

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
ISIN Name of instrument Date of allotment Coupon rate (%) Maturity date Issue size (Rs crore) Rating outstanding
with outlook
NA Bank Guarantee NA NA NA 70 CRISIL A2+
NA Proposed Short Term Bank Loan Facility NA NA NA 55 CRISIL A2+
 
Annexure - Rating History for last 3 Years
  Current 2018 (History) 2017  2016  2015  Start of 2015
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund-based Bank Facilities  LT/ST  55.00  CRISIL A2+  09-07-18  CRISIL A3+/Watch Positive  29-09-17  CRISIL A3+  27-06-16  CRISIL A3+      CRISIL A3+ 
        09-04-18  CRISIL A3+/Watch Positive               
Non Fund-based Bank Facilities  LT/ST  70.00  CRISIL A2+  09-07-18  CRISIL A3+/Watch Positive  29-09-17  CRISIL A3+  27-06-16  CRISIL A3+      CRISIL A3+ 
        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 A3+/Watch Positive
Proposed Short Term Bank Loan Facility 55 CRISIL A2+ Proposed Short Term Bank Loan Facility 55 CRISIL A3+/Watch Positive
Total 125 -- 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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