This rating rationale (RR) is being published in continuation to the RR dated December 27, 2024, which communicated that the rating was under appeal. Upon due consideration of the additional information received, the rating has been reaffirmed at  ‘CRISIL A+/CRISIL PPMLD A+’ while revising the outlook on the long term ratings from ‘Negative’ to ‘Stable’

 

Detailed Rationale

CRISIL Ratings has revised its outlook on the bank facilities and debt instruments of Edelweiss Asset Reconstruction Company Limited (EARC) to ‘Stable’ from ‘Negative’ while reaffirming the rating at ‘CRISIL A+/CRISIL PPMLD A+’.

 

The revision in outlook factors in the comfortable market position and adequate capitalisation of EARC. Any impact on the earnings profile due to the delay in resumption of business growth or volatility inherent in the distressed assets business will need to be monitored.

 

During the restriction period, given the embargo on acquisitions, and continued recoveries, assets under management (AUM) declined to Rs 28,908 crore as on September 30, 2024, from Rs 29,905 crore as on June 30, 2024, and Rs 31,590 crore as on March 31, 2024. Previously, AUM had declined from Rs 37,500 crore as on March 31, 2023, due to multiple factors which included a write off of Rs 5,324 crore as well as structural factors around lower corporate non-performing assets (NPAs) available in the market, limited stock of retail NPAs available for sale and healthy recoveries from earlier acquisitions.

 

In fiscal 2024, total recoveries were healthy at Rs 9,416 crore, of which EARC’s share was Rs 2,841 crore. Recovery trends continued to be favourable, with total recoveries of Rs 2,858 crore in the first half of fiscal 2025 of which Rs 2,414 crore were from wholesale acquisitions and Rs 843 crore was EARC’s share.

 

Accordingly, the company reported profit of Rs 176 crore in the first half of fiscal 2025, improved from Rs 162 crore in the same period of fiscal 2024 and Rs 355 crore in fiscal 2024. This translated into return on assets (RoA) of 6.9%, 5.5% and 6.3%, respectively.

 

Profitability was supported by increase in net gain on fair value changes to 9.9% of average total assets in the first half of fiscal 2025 from 5.6% in the same period of fiscal 2024 and 9.0% in fiscal 2024.

 

In the first half of fiscal 2025, EARC has repaid high cost debt due to limited fund requirement on the back of halt in acquisitions. Resultantly, outstanding debt reduced to Rs 1,404 crore as on September 30, 2024, from Rs 1,974 crore as on March 31, 2024.

 

As on December 15, 2024, EARC had liquidity of Rs 534 crore in the form of bank balances and fixed deposits This is expected to be sufficient to meet debt obligations and operating expenses for more than six months, even in the unlikely scenario of nil business inflow and no incremental fund raising. While there is unpredictability in the stressed assets business, cash flow from recoveries should support the liquidity of EARC.

 

CRISIL Ratings will continue to closely monitor traction in fund raising, resumption in business and any impact on profitability.

 

The ratings continue to reflect demonstrated sustainability in the performance of EARC with comfortable market position, adequate capitalisation and an experienced management team. These strengths are partially offset by the modest, albeit improving, redemption record and the volatility in earnings inherent in the distressed assets business

Analytical Approach

CRISIL Ratings has considered the standalone business and financial risk profiles of EARC.

Key Rating Drivers & Detailed Description

Strengths:

• Comfortable market position

EARC is the largest asset reconstruction company (ARC) in India, with outstanding security receipts (SRs) of Rs 28,910 crore as on September 30, 2024 (Rs 31,590 crore and Rs 37,100 crore as on March 31, 2024, and March 31, 2023 respectively). Previously, the company’s business was largely corporate focused, but now it has increased focus on acquiring retail assets and has put in place the requisite infrastructure for the same. Of the overall outstanding AUM as on September 30, 2024, 7% comprised retail SRs.

 

EARC plans to focus on recoveries mainly through restructuring and rehabilitation of the portfolio companies acquired. Over the medium term, acquisitions will be done where the risk-reward equation is within a pre-decided range with a focus on the fee-based business model.

 

With the lifting of the embargo, the company is expected to continue its focus on retail acquisitions. The company’s growth is expected to be modest when compared to the past as retail acquisitions are not AUM accretive.

 

• Adequate capitalisation

EARC’s capitalisation remains adequate, with networth of Rs 3,326 crore as on September 30, 2024, against Rs 3,150 crore on March 31, 2024.

 

Edelweiss Financial Services Ltd is the promoter of EARC, with ~60% holding followed by Caisse de dépôt et placement du Québec (CDPQ), one of North America’s largest pension fund managers, holding ~20% stake.

 

The outstanding borrowing reduced to Rs 1,404 crore as on September 30, 2024, from Rs 1,974 crore as on March 31, 2024, as the company has prepaid some debt in line with the limited requirement of funds given the restriction on acquisitions. Resultantly, the company’s leverage reduced to 0.42 time as on September 30, 2024, and 0.63 time as on March 31, 2024. EARC’s capitalisation is largely supported by internal cash accrual. Going forward, leverage is expected to remain modest.

 

• Experienced management

Mr Rajkumar Bansal, ceased to be the managing director (MD) and CEO effective June 2024 as the Reserve Bank of India (RBI) did not accede to EARC’s request for his reappointment. Subsequently, Ms Mythili Balasubramanian took over additional charge. In August 2024, the board sought RBI’s approval for her appointment as MD and CEO; the approval is still awaited.

 

EARC has a strong management team and there are many senior members in EARC with extensive experience in reconstruction and resolution of stressed assets.

 

The management has also put in place an ecosystem to enable resolution of assets. The company has a dedicated legal team of over 40 lawyers and professionally qualified officers, who are specialised in dealing with stressed assets, stemming from their experience in the banking and financial services industry. The infrastructure for retail assets has also been set up.

 

Weakness:

• Moderate, albeit improving redemption ratio

EARC is exposed to challenges related to the timing and quantum of recovery given its business of stressed assets, despite its adequate asset acquisition and resolution policy framework. The company had put in place resolution strategies for stressed assets of more than Rs 72,767 crore till date through employment of various mechanisms. EARC has issued SRs of Rs 73,948 crore till March 31, 2024, of which Rs 39,039 crore has been redeemed and Rs 28,910 crore is outstanding as on September 30, 2024. The overall cumulative SR redemption ratio till September 30, 2024, was 52.8% (50% till March 31, 2024, and 45.8% till March 31, 2023). This is in line with the industry average.

 

EARC’s ability to recover from its exposures in a timely manner will remain a key monitorable.

 

• Earnings remain exposed to inherent volatility in the business

EARC’s earnings profile is volatile because of unpredictable recoveries from acquired assets owing to the nature of the business. The company focuses on fee-based income by managing large trust assets, wherein a significant proportion of the SRs are held by external investors (selling entities or qualified buyers). This lends some stability to revenue as management fees have priority in the payment waterfall than payment to SR holders. For EARC, the five-year average of management fee as a percentage of total AUM was ~1.8%. For industry players, this ratio ranges at 1-2%. However, with the management fees being linked to net asset value, the ability to recover impacts management fees as well.

 

EARC’s income levels also include recovery incentive and upside income on returns post redemption of SRs, which is a part of net gain on fair value changes. The company's overall profitability has been improving with reported profit after tax (PAT) of Rs 355 crore in fiscal 2024 when compared to Rs 318 crore in fiscal 2023 and Rs 253 crore in fiscal 2022 (Rs 186 crore in fiscal 2021). RoA was 6.3% for fiscal 2024 as against 5.3% for fiscal 2023 as against 4.2% and 2.9% in fiscals 2022 and 2021, respectively. For the half fiscal ended September 30, 2024, EARC reported PAT of Rs 176 crore (RoA of 6.9% annualised) as against Rs 162 crore (5.4%) for the corresponding period of last fiscal. For the current fiscal, continued traction in recoveries and resolution is expected to support the earning profile, offsetting some impact of the restriction on acquisitions for almost two quarters. Going ahead, profitability trends would remain monitorable.

Liquidity: Adequate

EARC had liquidity of Rs 534 crore, which was in the form of bank balances, fixed deposits and bank lines as on December 15, 2024. This is expected to be sufficient to meet debt obligations and operating expenses for more than six months, even assuming nil business inflows and no incremental fund raising. Notwithstanding the unpredictable nature of the stressed assets business, cashflows from recoveries would support the liquidity position of EARC.

Outlook: Stable

The outlook factors in the comfortable market position and adequate capitalisation. Any impact on the earnings profile due to the delay in resumption of business growth or volatility inherent in the distressed assets business will need to be monitored

Rating sensitivity factors

Upward factors

• Sustained improvement in earnings profile
• Substantial improvement in the overall market position with significant increase in retail AUM share

 

Downward factors

• Challenges faced in timely fund raise
• Significant decline in earnings profile with ROA of lower than 2.5% on a sustained basis
• Weakening in recovery track record

About the Company

EARC was incorporated in October 2007 and registered with the RBI as an ARC in October 2009. The Edelweiss group currently holds 60% stake in EARC, with high-networth individuals (16%) and two foreign institutional investors (24%) holding the remaining stake. As on March 31, 2024, the company was managing AUM of Rs 31,590 crore. 

 

EARC reported PAT of Rs 355 crore on total income (net of interest expense) of Rs 623 crore for fiscal 2024, as against Rs 318 crore on total income of Rs 553 crore for fiscal 2023.

 

For the first half of fiscal 2025, the company reported a PAT of Rs 176 crore on total income of Rs 299 crore as against a PAT of Rs 162 crore on total income of Rs  271 crore for corresponding period last fiscal.

Key Financial Indicators: EARC Standalone

As on / for the year ended	Unit	Mar-24	Mar- 23	Mar-22
Total assets	Rs crore	5358	5,947	6,079
Total income*	Rs crore	623	553	444
Profit after tax (PAT)	Rs crore	355	318	253
GNPA	%	NA	NA	NA
Gearing	Times	0.6	1.0	1.3
Return on assets	%	6.3	5.3	4.2

*net of interest expense

 

For half year ended	Unit	Sep-24	Sep-23
Total assets	Rs crore	4863	6053
Total income*	Rs crore	299	271
Profit after tax (PAT)	Rs crore	176	162
GNPA	%	NA	NA
Gearing	Times	0.4	1.0
Return on assets	%	6.9	5.4

*net of interest expense

Any other information: Not applicable