| Encore Asset Reconstruction Company Private Limited | ||||
| Rating reaffirmed at 'CRISIL A- / Stable' | ||||
| Rating Action | ||||
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| 1 crore = 10 million | ||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has reaffirmed its ‘CRISIL A-/Stable’ rating to 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 early stage of operations and modest earnings.
From an industry perspective, the nationwide lockdown to contain the spread of the Covid-19 pandemic had impacted recovery process of asset reconstruction companies.
Encore ARC has been able to manage the challenges in the external environment in the last one year with improvement in recoveries. While recoveries remained muted at Rs 7.1 crore in the first quarter of fiscal 2021 due to strict countrywide lockdown, it picked up from the second quarter and reached Rs 27.2 crore; recoveries stood at Rs 88.1 crore till February 2021. This is against the recoveries of Rs 97.8 crore in fiscal 2020. |
Analytical Approach For arriving at the rating, CRISIL has assessed the standalone credit risk profile of Encore ARC and has factored in the strong support that it receives from its parent. This is considering the strategic importance of Encore ARC to the parent, the shared brand, and 55% shareholding by Encore Capital Group. |
Key Rating Drivers & Detailed Description Strengths:
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 senior functional executives from Encore Capital group, ensuring strong support of its performance. Encore Capital Group is committed to support the Indian entity with required capital support. It has infused Rs 142.5 crore of capital in Encore ARC, out of which Rs 52.5 crore has been infused in January 2021. After the capital infusion, the shareholding of Encore Capital Group increased to 55% as on January 2021 from 50% as on December 31, 2020.
CRISIL believes close operational, managerial, and financial linkages, and shared brand, imply that Encore Capital Group will support Encore ARC.
The company had a networth of Rs 151.5 crore as on December 31, 2020. The shareholders (Encore Capital Group, ADV Partners, and IFC) have infused Rs 255 crore in the company till date, out of which Rs 75 crore was infused in January 2021. After the capital infusion, the networth of the company has increased to Rs 226.5 crore after the infusion of Equity in January, 2021. As on December 31, 2020, Encore ARC had negligible 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 will reduce asset-side risks.
Weakness:
Encore ARC started operations in March 2017, and the overall size remains small, albeit increasing. It has taken a measured approach in terms of growing its scale as reflected in assets under management (AUM) of Rs 676 crore, as on December 31, 2020. The company operates mainly in the SME and retail segments. Of its total AUM, more than 90% is in SME and the rest in the retail segment. This makes the assets granular. The company has put in place adequate systems and processes to evaluate accounts for acquisition and has started witnessing recovery in many accounts. The cumulative security receipts (SR) redemption ratio stood at 18.2% as on December 31, 2020 (14.9% as on March 31, 2020). However, the company’s ability to scale up operations while managing recovery will remain a key monitorable.
Given the high operating expenditure during the initial years of establishing the business, Encore ARC’s earnings remain subdued. Furthermore, in line with the regulations, Encore ARC follows the waterfall approach for distribution of monies recovered. Basis this, it first pays for the expenses related to the trusts (which issues the SRs), then management fees followed by redemption of SRs. Only post this, Encore would earn any upside income or yield from the amount recovered. Hence, earnings remained muted as it reported a loss of Rs 5.3 crore in fiscal 2020 and a loss of Rs 11 crore in fiscal 2021.
However, profitability improved gradually as operating efficiencies kick in with scale-up in AUM. The company reported a profit of Rs 5.4 crore with a return of assets of 4.0% for the nine months ended fiscal 2021 driven by improvement in revenues and operating expenses. Its cost-to-income ratio improved to 59.6% for the nine months ended fiscal 2021 as against 99.1% for fiscal 2020. Nevertheless, Encore ARC’s ability to sustain the recent improvement in profitability will remain a key monitorable over the medium term. |
Liquidity: Strong Cash and cash equivalent was Rs 85 crore and unutilised bank line was Rs 35 crore as on February 28, 2021, against nil debt obligation. |
Outlook: Stable CRISIL Rating 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
Downward factors
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About the Company Encore ARC is an asset reconstruction company (ARC) registered with the Reserve Bank of India under the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002. It received its ARC licence from RBI in September 2016 and started operations in March 2017. It is promoted by the US based Encore Capital Group, which owns 55% of the shares in the company. Other shareholders of the company include ADV Partners (30%) and IFC (15%).
Encore ARC focusses on the SME and retail segments. It had AUM of Rs 676 crore as on December 31, 2020, with SME contributing to more than 90% of the AUM. |
Key Financial Indicators
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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 - 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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