Key Rating Drivers & Detailed Description
Strengths:
- Adequate capitalization for the current scale of operations
Capitalisation metrics are adequate supported by the recent capital infusion. The company has, since inception, raised a total equity capital of around Rs147 crore from the marquee investors such Sequoia Capital and Unitus Capital, out of which Rs 100 crore was raised in fiscal 2022. Consequently, the reported networth of the company improved to Rs 112.4 crore with an adjusted gearing of 0.8 time as on December 31, 2021 as against Rs 24.2 crore and 2.6 times, respectively, as on March 31, 2021. The company is expected to follow an asset light model with 30% of the AUM being on-balance sheet of the company, which should reduce the capital requirement for the business. Further, the company is also in a process to raise ~$30-40 million over the next few quarters. Capitalisation is expected to remain adequate over the medium term, thus providing a cushion against asset-side risks.
- First mover advantage in a niche segment
Eduvanz is in the business of financing courses related to education and the company has created, over the past few years, a database around the courses, institutes, placement opportunities, salary hikes based on the courses of the partner institutes/platforms. The company has also ratings on the performance of the courses of the partners. The same data is used for the underwriting of the loans. It helps Eduvanz in taking informed decisions on the underwriting and provides better approval rates for the courses thereby strengthening the relationship with the partner institutes/platforms. Further, the company has end-to-end digital onboarding of the customer allowing the company to take the decisions on the course and borrower profile within a few minutes. While there is a credit officer looking at the borrower profile before the disbursement, digital systems and processes make the business model of the company scalable once the sourcing and underwriting infrastructure is in place. The same has also helped in the business in scaling up the AUM and the disbursements in the last 12-18 months. Its disbursements have increased to Rs 337 crore for the nine months ended fiscal 2022 as against Rs 195 crore for fiscal 2021. The company’s ability to scale-up once the competitive landscape in this space heats up, will need to be seen.
Weaknesses:
- Modest earnings due to high operating expenses
Owing to nascent stage of operations, operating expenses of the company remained high due to heavy investments in setting up technology infrastructure and hiring of several employees at senior management level. Consequently, the company is yet to break even, which is reflected by the company reporting a loss of Rs 11.7 crore for the nine months ended fiscal 2022, as against, a loss of Rs 10.5 crore for fiscal 2021. While operating expenses have come down to ~18% (annualized) of average total assets for the nine months ended fiscal 2022 as against ~25% of average assets for fiscal 2021, it still remains high. Nevertheless, owing to high reliance on technology for the processes, the company should achieve operating efficiencies and hence operating expenses are expected to be moderate gradually over the medium term.
Furthermore, yield remained adequate with internal rate of return (IRR) ranging from 18%-20%, thereby supporting the core earnings. However, owing to higher funding cost at around 13-15%, the net interest margins are constrained at 5-6%. In terms of credit cost, the company has been able to keep it under control, so far, at below 2.5% (as a % of average managed assets) for the last two fiscals. The credit costs stood at 0.9% (annualized) for the nine months ended fiscal 2022.
However, the loan book is not yet seasoned. Therefore, ability of the company to scale up the book profitably while maintaining adequate performance will remain a key monitorable.
- Limited diversification in funding profile
The resource profile of Eduvanz is concentrated with 90% of the on-book resources from NBFCs or financial institutions. Consequently, the funding cost has remained high at around 13-14% for the past few months, nevertheless the same has improved, since the capital raise of Rs 100 crore in first half of fiscal 2022, from 14-16% earlier. Nevertheless, the company has been focusing on off balance sheet partnerships with banks and larger financial institutions. The company has around five live off balance sheet partnerships, with an first-loss-default-guarantee (FLDG) arrangement and is in a process to increase the same. While the company’s primary focus is on the off-balance sheet book, on-book resources will help the company in faster turn-around and better approval rates of the loans for the partner institutes and platforms CRISIL Ratings notes that the company is in talks with a few banks to access funds, which will diversify the lender base of the group. Nevertheless, the same needs to be seen, therefore, the ability of the company to diversify its resource profile and bring down its borrowing cost will remain a key monitorable.
- Nascent stage of operations
Stage of operation of Eduvanz is, currently, nascent. While the company has witnessed a year-to-date growth of ~111%, the same has been on a small base. As on December 31, 2021, the AUM of the company remains at Rs 288 crore as against Rs 137 crore as on March 31, 2021 and Rs 64 crore as on March 31, 2020. Nevertheless, the company has made investments in required infrastructure and manpower for the growth and the scale-up in the AUM.
The asset quality in terms of 90+ dpd on AUM witnessed an inch-up during the second wave of covid-19 pandemic. The 90+ dpd increased to 4.4% as on March 31, 2021 from 0.3% as on March 31, 2020. With economic activities picking up, the company’s 90+ dpd improved to 3.1% as on December 31, 2021 and further to 2.8% as on February 28, 2022. Also, the company has done minimal write-offs so far with restructured advances also being negligible. However, as the substantial scale up in loan book has happened in the last 12-18 months, the seasoning of the loan book remains limited.
Nevertheless, Eduvanz has put in place the required risk management systems and policies using technology for underwriting the loans. The company has a proprietary business rule engine for the assessment of each application based on the institute, course and the borrower background. Further, the company has a well-diversified portfolio.
Ability of the company to manage its collections as well as asset quality metrics as the portfolio scales up will remain a key monitorable.