Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL A-/Stable’ rating on the long-term bank facilities of Encore Asset Reconstruction Company Private Limited (Encore ARC).

 

The rating factors in expectation of support from the ultimate parent, Encore Capital Group Inc (Encore Capital Group), and Encore ARC’s comfortable capitalisation. These strengths are partially offset by the small scale of operations and modest earnings.

Analytical Approach

For arriving at the rating, CRISIL Ratings has assessed the standalone credit risk profile of Encore ARC and has factored in the strong support that it receives from its parent. This considers the strategic importance of Encore ARC to the parent, the shared brand, and 90% shareholding by Encore Capital Group as on December 2, 2024.

Key Rating Drivers & Detailed Description

Strengths:

• Strategic importance to, and support from, Encore Capital Group: Encore ARC is strategically important to Encore Capital Group as it is in the same business and in line with the parent’s strategy. Also, it provides geographic diversification to the overall operations of the parent.

 

Encore ARC benefits from operational, financial, and managerial support from Encore Capital Group. The company's board comprises of senior functional executives from Encore Capital group. Further, the investment committee of Encore ARC has members from the parent. The parent company is committed to support the Indian entity with required capital support. Previously, the parent entity infused Rs 142.5 crore of capital in Encore ARC, out of which Rs 52.5 crore was infused in January 2021. After the capital infusion, the shareholding of Encore Capital Group had increased to 55% as on January 2021 (from 50% as on December 31, 2020). The parent further increased its shareholding to 90% as of December 2, 2024, by acquiring additional stakes from International Finance Corporation (IFC) in March 2023 and from ADV Partners in December 2024.

 

CRISIL Ratings believes close operational, managerial and financial linkages and shared brand, imply that Encore Capital Group will continue to support Encore ARC.

 

• Comfortable capitalisation, supported by regular capital infusion by the shareholders.: The Company had a networth of Rs 256.1 crore as on September 30, 2024 (Rs 248.2 crore as on March 31, 2024). The shareholders (Encore Capital Group and ADV Partners) have infused Rs 256 crore in the company till date, out of which Rs 75 crore was infused in January 2021. As on September 30, 2024, Encore ARC continued to have nil gearing. The gearing is expected to remain comfortable and in the range of 1.5-1.6 times over the medium term. Furthermore, the company operates in the granular asset classes of small and medium enterprises (SME) and retail, which results in reduced asset-side risks.

 

Weaknesses:

• Small scale of operations: Encore ARC started operations in March 2017, and the overall size remains small. It has taken a measured approach in terms of growing its business, especially during the covid-19 pandemic when there were challenges related to recoveries as well as fewer assets brought to the market and restrictions impacting the due diligence process on the assets. This, along with the cautious approach by the management of Encore ARC, resulted in a significant slowdown in acquisition of assets to Rs 110 crore in fiscal 2023, as against Rs 313 crore in fiscal 2020. However, acquisitions picked up to Rs 339 crore for fiscal 2024, mainly due to a few large SME deals from a couple of NBFC seller entities. The company redeemed SRs of Rs 156 crore in fiscal 2024 which was slightly lower than the Rs 192 crore of SRs redeemed in fiscal 2023, due to slowdown in acquisition of assets especially during the covid-19 pandemic . However, cumulative redemption ratio has been steadily improving from 46.9% as on March 31, 2023 to  51.0% as on March 31, 2024 and further to 55% as on Sep 30, 2024. In the first half of fiscal 2025, the company did not make any acquisitions, this coupled with the redemption in SRs, resulted in a decrease in assets under management (AUM) of the company to Rs 606 crore as on September 30, 2024  compared to Rs 664 crore as on March 31, 2024. Typically, the company has seen asset acquisition to pick up in the second half of the fiscal and same is expected for the current fiscal as well. The company has also tied up with a foreign portfolio investor for a USD 100 million (around Rs 850 Crore) fund to scale up the AUM.

 

The company operates mainly in the SME and retail segments. Of its total outstanding AUM as on September 30, 2024, around 97% is in SME and the residual in the retail segment, resulting in a granular portfolio. However, the company’s ability to scale up operations while managing recovery will remain a key monitorable.

 

• Modest, albeit improving earnings: Given the high operating expenditure during the initial years of establishing the business, Encore ARC’s earnings remain subdued. Furthermore, as per regulatory requirements, the waterfall mechanism governs the distribution of recovered funds. Under this approach, the trust issuing the Security Receipts (SRs) prioritizes payments in the following order: operational and asset-resolution expenses, servicing fees (management fees and incentives) payable to the pool servicer (typically ARCs), and finally, redemption of SRs to security receipt holders. Only after these obligations are met does Encore ARC earn any upside income or yield from the recovered amounts.

 

ARCs generate revenue primarily through servicing income (management fees, incentives, etc.) and profits from investments in portfolios (upside, yield, etc.).

 

However, profitability improved gradually with an improvement in revenues and recovery. The company reported a profit of Rs 9.7 crore with a return of assets of 3.7% for fiscal 2024 as against a PAT of Rs 7.5 crore with a Return on Assets (RoA) of 3.0% for fiscal 2023. The improvement is driven by improvements in revenues and operating expenses. While its cost-to-income ratio remains elevated, it has moderated to 73.8% for fiscal 2024 as against 70.3% for fiscal 2023, it is better than 99.0% of fiscal 2020 and is expected to improve with the pick-up in pace of acquisitions. Nevertheless, Encore ARC’s ability to sustain the recent improvement in profitability will remain a key monitorable over the medium term. 

Liquidity: Strong

The company has cash and cash equivalent of Rs 144 crore and unutilised bank lines of Rs 20 crore as on September 30, 2024, against nil debt obligation.

Outlook: Stable

CRISIL Ratings believes Encore ARC will continue to receive strong support from Encore Capital Group and maintain comfortable capitalisation. However, its ability to scale up operations while maintaining sound recovery and improving earnings will need to be demonstrated.

Rating sensitivity factors

Upward factors:

• Upward revision in the credit view of CRISIL Ratings on Encore Capital Group
• Significant improvement in the market position of Encore ARC with a steady increase in earnings on a sustained basis

 

Downward factors:

• Reduction in the expected support to Encore ARC by Encore Capital Group, or a downward revision in its credit view by CRISIL Ratings on the parent
• Deterioration in redemption rate of SRs, resulting in continued losses (RoA <0%) over an extended period

About the Company

Encore ARC is an asset reconstruction company (ARC) registered with the Reserve Bank of India (RBI) under the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (SARFAESI). It received its ARC license from RBI in September 2016 and started operations in March 2017. It is promoted by the US-based Encore Capital Group, which owns 90% of the shares in the company and the other shareholder of the company is ADV Partners (10%) as on December 2, 2024.

 

Encore ARC focusses on the SME and retail segments. It had an AUM of Rs 664 crore as on March 31, 2024, with SME contributing around 97% of the AUM.

Key Financial Indicators

As on/for the period ended	Unit	September 30, 2024	March 31, 2024	March 31, 2023	March 31, 2022
Total assets	Rs crore	279.5	277.6	253.5	244.6
Total income	Rs crore	32.2	41.1	36.4	30.7
Profit after tax	Rs crore	8.0	9.7	7.5	6.0
Return on assets	%	5.7*	3.7	3.0	2.5
Adjusted gearing	Times	0.0	0.0	0.0	0.0

*Annualised

Any other information: Not Applicable