| Choice International Limited | ||||
| 'CRISIL BBB-/Stable' assigned to bank debt | ||||
| Rating Action | ||||
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| 1 crore = 10 million | ||||
| Refer to annexure for Details of Instruments & Bank Facilities | ||||
| Detailed Rationale |
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CRISIL has assigned its 'CRISIL BBB-/Stable' rating to the long-term bank facility of Choice International Limited (CIL; holding company of the Choice group). |
| Analytical Approach |
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For arriving at the rating, CRISIL has combined the business and financial risk profiles of, CEBPL, Choice Capital Advisors Pvt Ltd, Choice Corporate Services Pvt Ltd, Choice Wealth Management Pvt Ltd, CFPL, Choice Retail Solutions Pvt Ltd, Choice Portfolio Management Pvt Ltd, Choice Consultancy Services Pvt Ltd, Choice Peers International Pvt Ltd, and Choice Tech Lab Solutions Pvt Ltd . All the companies, collectively referred to as the Choice group, have integrated operations, and common promoters and brand. |
| Key Rating Drivers & Detailed Description |
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Strengths: * Adequate capital position The Choice group's capital position remains adequate for its scale and nature of operations. Adjusted networth increased to Rs 105.7 crore as on September 30, 2019, from Rs 82.4 crore a year earlier, driven by a reduction in investments in associate companies and some impact of accretion to reserves. Gearing, which had been historically high at around 2 times, reduced to 0.8 time as on September 30, 2019, because of increase in adjusted networth and reduction in debt. For key group entities such as CEBPL and CFPL as well, capitalisation remains adequate in relation to their respective scale and nature of operations, supported by the promoters' ability to infuse need-based capital and the high financial flexibility within the group. Over the medium term, the group's capital position is expected to remain adequate, backed by the promoters' ability to extend timely support. Gearing, though comfortable, will remain subject to market activity, wherein the quantum of debt will vary as per the market scenario, especially in the lending business. The group's ability to sustain gearing below 2.0 times will be a key monitorable. * Diversity in revenue Diversity in the group's channels of revenue is increasing gradually, with growth in business segments such as lending, consultancy, and market making operations. While broking and allied business still account for a substantial portion of the income (almost 60%), income from other businesses has grown over the years. This has balanced the revenue profile and partly insulates the group from fluctuations in the equity or commodity markets. * Experienced leadership and management team The Choice group is promoted by Mr Kamal Poddar, who is the Managing Director of the group. He is a chartered accountant and has over 20 years of experience in the fields of financial and infrastructure consultancy, and retail broking and allied businesses. Mr Ajay Kejriwal, who heads the broking business, is a chartered accountant with over 20 years of experience. Most of the other members of the senior management team are chartered accountants with experience of 10-15 years in the fields of financial markets, merchant banking, foreign investment consultancy, and exchange control regulations. The senior leadership team has set up the group's various businesses and has successfully scaled up operations over the years. Weaknesses: * Average market position in the equity broking space The Choice group had a small market share 0.02% in the equity broking space in fiscal 2019. Despite a slowdown in the market, CEBPL, the equity and commodity broking arm of the group, sustained its market share, both in the cash and the futures and options (F&O) segment, because of its acquisition of Indi Trade, effective from December 31, 2018. The impact of this acquisition can also be evidenced from the increased market turnover volume in the cash and F&O segments which have increased from the fourth quarter of fiscal 2019. CEBPL has an active clientele of around 20,000, which primarily comprises retail and high-networth individual (HNI) clients. Previously, the company followed a debtor-driven model as part of which, the company maintained an average cover of almost 2 times on exposures and charged interest for late settlement. While there has been no material slippage in debtors in the past few years, the company's networth coverage of debtors was as low as 0.8 time on September 30, 2018. However, the ratio increased to 1.3 times by the end of fiscal 2019 after the management took a strategic call to curtail debtors below Rs 75 crore at all points in time. After a Securities and Exchange Board of India (SEBI) circular dated June 2019, the debtors for CEBPL further reduced to Rs 56.1 crore as on September 30, 2019, which resulted in an increase in networth coverage of debtors to 1.4 times. While the Choice group's share in the equity broking market is expected to remain small, its impact is partially offset by a relatively wider geographical presence across most states of India, with a network of over 52 branches and a franchisee base of about 1125. . * Modest earnings, constrained by operating expenses The group's profitability remains subdued, constrained by high operating expenses, particularly in the equity broking and consultancy business. Consolidated return on assets (RoA) for fiscal 2019 stood at 0.9% (as per IGAAP). For the half year through September 2019, RoA was 2.7% (as per IndAS). However, when adjusted for gain in fair value of securities held for trade, RoA was modest at 0.4% (as per IGAAP). Operating expenses, forming 72.5% of the total income for the first half of fiscal 2020, continue to constrain profitability. While the revenue profile has diversified across segments such as lending and consultancy, with a scale-up in these businesses, majority of the income will continue to come from the broking business, which remains the group's core competence. Additionally, given the susceptibility to fluctuations in the capital markets, the income streams will remain volatile. * Susceptibility to inherent volatility in capital markets Volume and earnings in the broking segment depend on the level of trading activity in the capital markets, which are volatile and driven by economic and political factors, and investor sentiments. Global factors also influence the fortunes of these markets. Furthermore, the Indian securities space has become increasingly competitive, with a few entrenched players and the entry of foreign broking entities. The ability to establish market position in the retail segment, given such a competitive scenario, is critical for the group's business risk profile. Also, dependence on equity markets for revenue will continue. The business risk profile will, therefore, remain susceptible to uncertainties inherent in capital market-related businesses. |
| Liquidity Adequate |
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The group had sanctioned fund-based limits aggregating Rs 88 crore and non-fund-based limits of Rs 33 crore as of September 2019. It usually relies on fund-based facilities, which are typically utilised up to 60-65%. Additionally, it had an unencumbered cash balance of Rs 4.3 crore as on September 30, 2019. The promoters are HNIs who can infuse funds as and when needed. The holding company has sanctioned lines of about Rs 14 crore which are maintained to extend instant liquidity support to any group company when needed. |
| Outlook: Stable |
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CRISIL believes the Choice group will sustain its adequate capitalisation, supported by high financial fungibility between the group companies and the promoters' ability to infuse need-based capital. The group will also benefit from improving revenue diversity and its experienced leadership team. |
| Rating Sensitivity factors |
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Upward factors * Significant and sustained improvement in market position in the broking space, while maintaining capitalisation at adequate levels. * Improvement in profitability, reflected in a steady state RoA of more than 2.5% Downward factors * Dilution in risk management practices, leading to weakening of asset quality * Increase in consolidated gearing to over 2.5 times * Losses arising from the market making business |
| About the Group |
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CIL, was incorporated on March 12, 1993, as a public limited company with the name - Choice Financial Services Ltd. The company, along with its subsidiaries, provides investment banking, stock trading, management consulting, and e-commerce services. It is registered as a non-deposit-taking non-banking financial company with the Reserve Bank of India (RBI). |
| Key Financial Indicators - (Consolidated) | |||||||||||||||||||||||||||||||||||
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Any other information: Not applicable |
| 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) | ||||||||||||||||||||||||||||||||||||
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| Annexure - List of entities consolidated | ||||||||||||||||||||||||||||||||||||
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| Annexure - Rating History for last 3 Years | |||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | |||||||||||||||||||||||||||||||||||||||
| Annexure - Details of various bank facilities | ||||||||||||||||||||||||
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| For further information contact: | ||||||
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