Detailed Rationale

CRISIL Ratings has revised its rating outlook on the long-term bank facility of Chemmanur Credits and Investments Ltd (Chemmanur Credits) to 'Negative' from ‘Stable’ while reaffirming the rating at 'CRISIL BBB-‘.

 

The revision in outlook primarily factors in deterioration in Chemmanur Credit’s asset quality metrics along with inability to conduct timely auctions, which led to pressure on its profitability during first quarter of fiscal 2022. Since the company largely operates out of Kerala, it faced significant impact due to state and local level lockdowns. The asset quality as reflected in 90+ dpd and 180+ dpd increased to around 33% and 19.5% as on June 30, 2021 (from 22% and 0.68% as on March 31, 2021). The impact of deterioration in asset quality was also visible on profitability as the company had to reverse the accrued interest on non-performing asset (NPA). This resulted in the company reporting loss of Rs 14.5 crore during first quarter fiscal 2022 as against profit of Rs 9.2 crore during fiscal 2021. Further, due to local level lockdowns within Kerala region, the company was also not able to hold its auctions which would have resulted in recovery from NPA accounts. Nevertheless, the company started auctions process from early October 2021 and has made considerable progress in recoveries from NPA accounts. As on October 27, 2021, the company was able to recover (either through auctions or normal collections) almost 62% of its 90+ dpd accounts. On absolute basis, company’s 90+ dpd (under gold loans) stood at Rs 98.6 crore as on June 30, 2021, this has been reduced to Rs 37.85 crore as on October 27, 2021. While the company has made considerable progress in resolving overdue accounts, its ability to continue with same pace of auctions and recover from all delinquent accounts will be a monitorable. Further, company’s ability to recover the interest portion along-with principal will also be critical to write-back the reversed interest income on NPAs and thereby get its profitability back to normal levels.

 

The rating continues to reflect an established brand of Chemmanur in the gold jewellery business in Kerala and adequate capitalisation for scale of operations. These strengths are partially offset by a small scale of operations with regional level concentration and a modest resource profile. 

Analytical Approach

For arriving at its rating, CRISIL Ratings has evaluated the standalone business and financial risk profile of Chemmanur Credits.

Key Rating Drivers & Detailed Description

Strengths:

* Established brand of Chemmanur Jewellers

Promoters have been operating in the jewellery business for more than a century. The jewellery business has its presence in USA, Middle East, Malaysia and in India. Chemmanur has emerged as an established brand in Kerala and which has benefited the promoters to establish Chemmanur Credits’ presence in gold loan segment within a period of around 10 years. The established brand has benefited the Chemmanur Credits to expand its operations across Kerala.

 

* Adequate capitalisation for the current scale of operations

Company’s capital position remains adequate for scale of operations; with steady accretions its networth grew and stood at Rs 88 crore as on March 31, 2021 (Rs 79 crore as on March 31, 2020). However, capital position was affected during the first quarter of fiscal 2022 because of company reporting loss of Rs 14.5 crore. This resulted in networth reducing to Rs 73.5 crore as on June 30, 2021. Chemmanur Credits adjusted gearing increased to 3.5 times as on June 30, 2021 (2.9 times as on March 31, 2021). Nevertheless, CRISIL Ratings understand that company has made considerable improvement in its recovery from delinquent accounts (which was primary reason for losses during Q1 fiscal 2022). The capital position, therefore, could be restored based on extent of recovery of these accounts. Historically, the promoters have infused equity capital of Rs 20 crore (during past six years) and also continue to have the ability to infuse more equity when required. Additionally, they had also extended Rs 45 crore unsecured loans in the past. The company has indicated that it expects to maintain a steady-state gearing of around 5 times. Any increase in gearing beyond the committed threshold and further deterioration in networth will be a key rating sensitivity factor.

 

Weakness:

* Small scale of operations with regional concentration 

Chemmanur Credit’s scale of operations remains small with a loan portfolio of around Rs 322 crores (Rs 341 crore as on March 31, 2021), with a network of 131 branches, as on June 30, 2021. Operations have been largely restricted mainly to Kerala and Tamil Nadu, which accounted for about 90% and 10% of assets under management as on June 30, 2021. The higher concentration within Kerala region has resulted in significant impact primarily during second wave of Covid pandemic. During the first half of fiscal 2022, the company was not able to undertake auction due to pandemic related restrictions and lockdowns, which in turn resulted in deterioration in asset quality. However, the company started auctions process from early October 2021 and has made considerable progress in recoveries from NPA accounts. This process is scheduled to be completed by the third quarter of fiscal 2022. As on October 27, 2021, the company was able to recover (either through auctions or normal collections) almost 62% of its 90+ dpd accounts. CRISIL Ratings overall believes that higher concentration within Kerala region has primarily been reason for deterioration in both asset quality and profitability. However, with the steps taken by the management to have aggressive follow-ups for recoveries and conduct auctions may benefit the company over near to medium term. Further, the ability of the company to increase it scale and diversify in other regions/states will be critical in order to avoid such concentration risks in future.

 

* Modest resource profile

The resource profile is largely concentrated with a high proportion of privately placed non-convertible debentures and subordinate debt, which account for around 89% of the overall borrowings. The company had only one banking relationship till last year. However, during fiscal 2022, the company has made some progress on raising funds through bank loans. The company raised around Rs 15 crore in the form of term loan and cash credit from 2 more banks. Nevertheless, diversification of resource profile and increasing share of bank loans will be a monitorable.

Liquidity: Adequate

As on October 27, 2021, Chemmanur had liquidity of Rs 73.05 crore (includes Rs 68.8 crore of cash and cash equivalents and Rs 4.25 crore of unutilised cash credit limit). The liquidity buffer to cover total debt and loan repayments and operating expenses till January 2022 was covered 2.5 times. The liquidity position has improved during month of October 2021 with significant upward traction in collections from non-performing accounts. In terms of debt raising, the company raised around Rs 15 crore of bank loans.

Outlook: Negative

CRISIL Ratings believes that Chemmanur Credits will benefit from the established brand in the jewellery business and remain adequately capitalised over the medium term. However, the revision in outlook primarily factors in deterioration in Chemmanur Credits’ asset quality metrics, which led to pressure on its profitability during first quarter of fiscal 2022.

Rating Sensitivity Factors

Upward factors

• Improvement in asset quality with 90+ dpd less than 5% along with recovery in profitability
• Ability of the company to make sufficient recovery through auctions thereby improving its profitability
• Increase diversity within resource profile

 

Downward factors

• Inability to have substantial recovery from NPA accounts and 90+ dpd remains above 10%
• Increase in overall gearing to over 5 times
• Inability to report profits in fiscal 2022

About the Company

Chemmanur Credit was registered in 2008 and started operations in 2011. The company is promoted by Chemmanur International Jewellers Group. The chief promoter is Mr Chemmanur Devassykutty Boby, popularly referred to as Boby Chemmanur. The promoter has expanded the family-run business of more than 150 years of retail gold jewellery stores and has branches in USA, Middle East, Malaysia and in India. The promoter has other business interests in real estate, Nidhi and chit funds. At present the company has 131 branches spread across Kerala and Tamil Nadu. It has a major presence in Kerala and a few branches in Tamil Nadu.

Key Financial Indicators

Particulars March 31	Unit	Q1FY22*	2021	2020
Total Assets	Rs crore	377	385	339
Total Income	Rs crore	7.7	75	72
Profit after tax	Rs crore	-14.5	9.2	8.5
Gross NPA (180+dpd)	%	19.5	0.7	0.3
90+dpd	%	33.0	22.0	6.5
Gearing	Times	3.5	2.9	3.0
Return On Assets	%	-15.2^	2.5	2.6

*Based on Provisional Numbers

^Profit/Loss annualized

Any other information: Not applicable