Detailed Rationale

CRISIL Ratings has upgraded its rating on the bank facilities and non convertible debentures of Epimoney Private Limited (Epimoney) to ‘CRISIL BBB/Stable’ from 'CRISIL BBB-/Positive’.  Epimoney is the lending entity of the group and has a subsidiary, Flexiloans Technologies Pvt Ltd (FTPL), together referred to as the Epimoney group.

 

The rating action reflects the substantial scale up of the portfolio and improvement in the earnings profile with the group reporting full year profits for fiscal 2023 which has continued in the first quarter of fiscal 2024. The group has reported consistent profitability since September 2022 and maintained strong capitalisation backed by regular and timely equity infusions. The ratings also continue to reflect the easily scalable business model driven by technological systems and processes entailing high automation. These strengths are partially offset by limited track record of operations, inherent vulnerability of asset quality given that the portfolio comprises completely of unsecured loans.

 

The assets under management (AUM) for Epimoney have grown to Rs 1,107 crores as on June 30, 2023 as against Rs 374 crores as on March 31, 2022. This growth has come across its product segments which include EMI based loans to e-commerce merchants, POS merchants and invoice financing to supply chain finance customers. The group has also looked at growing its loan portfolio via co-lending, which constituted 44.7% as on June 30, 2023. Going forward, the group is expected to continue to report strong growth in the assets under management.

 

This growth was supported by timely and regular equity infusions with the group having raised about Rs 345 crores since inception. Of the total capital raised, Rs 75 crore was infused in Q4FY22 and Rs 135 crore was infused in Q1FY23. As a result, the networth of the group increased to Rs 293 crore as on June 30, 2023, as against Rs 89 crore as on March 31, 2021 (Rs 291 crores as on March 31, 2023). Consequently, the gearing also continued to remain comfortable at 1.4 time as on June 30, 2023, as against 1.3 times as on March 31, 2023. CRISIL Ratings expects that the low leverage will provide the group with cushion to grow its book over the medium term.

 

With improving scale, the earnings profile too has improved backed by improvement in operating expenses, albeit it continues to remain high. However, the earnings profile was supported by improving costs of funds with the group raising incremental funds at 11-11.5% over the past several quarters and control over credit costs. For fiscal 2023, the group reported a PAT of Rs 6.7 crores and return on managed assets (RoMA) of 0.8% which stood at Rs 2.4 crores and 0.8% for the first quarter of fiscal 2024. This trajectory of the improvement in the earnings profile is expected to continue going forward and the group is expected to achieve consistent quarterly PBT level profits in the near term, which remains a key monitorable.

 

However, ongoing attention to asset quality metrics remains important despite improvements. Despite the challenges posed by the pandemic, the group's asset quality experienced an impact, with 90+ days past due (dpd) and adjusted 90+ dpd (including 12-month write-offs) rising to 4.6% and 8.3%, respectively, as of March 31, 2021, from a baseline of 1.2% and 6.8% as of March 31, 2019. However, the tides turned following the second wave, leading to improvements in term of asset quality metrics, with figures standing at 2.0% and 2.5% as of June 30, 2023. Nonetheless, given the recent expansion, the relatively early stage of the portfolio underscores the need for continued monitoring of asset quality metrics.

Analytical Approach

For arriving at its rating, CRISIL Ratings has combined the business and financial risk profiles of Epimoney and its wholly owned subsidiary, Flexiloans Technologies Pvt Ltd (FTPL), together referred to as the Epimoney group. However, FTPL is currently very small, with minimal assets as on March 31, 2023. The companies have strong operational and financial linkages, common senior management, and shared brand.

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

Comfortable capital position

Capitalisation metrics are strong supported by regular capital infusions and partly by accruals which the company has achieved of late. The group has raised about Rs 345 crore of equity since inception from the promoters, high net worth individuals and institutional investors. Of the total infusion, Rs 210 crore was infused in Q4FY22 and Q1FY23. Consequently, the networth and the gearing metrics of the group improved to Rs 293 crore and 1.4 time as on June 30, 2023, as against Rs 291 crore and 1.3 time as on March 31, 2023 (Rs 152.5 crore and 0.6 time as on March 31, 2022). Additionally, with the group following an asset-light model, wherein, its co-lending book constitutes 44.7% of the overall book, the capitalisation metrics are expected to remain comfortable over the medium term, thus providing a cushion against asset-side risks.  Gearing is expected to remain under 4 times (including co-lending) at a consolidated level on a steady state basis.

 

Easily scalable business model with high focus on automation

The group has adopted a branchless business model with most of its operations (from origination to disbursements) happening digitally. Sourcing strategy involves the following: partnering with digital players/aggregators called ecosystem partners and targeting MSMEs on these platforms; and direct digital marketing. As on June 30, 2023, 46% of the assets under management (AUM) was originated through digital marketing as against 16% as on March 31, 2017 given the group’s focus on sourcing via this channel. Consequently, AUM through digital marketing channel has grown at 3-year CAGR of 66% during Mar-19 to Mar-23.

 

While growth was impacted since the onset of Covid-19 due to economic environment, however, with the comfortable capitalization metrics and by virtue of being a technology-driven enterprise, the assets under management (AUM) for the group has increased to Rs 1,107 crores as on June 30, 2023 as against Rs 189 crores as on March 31, 2021. This growth has come across its product segments which include EMI based loans to e-commerce merchants, POS merchants and invoice financing to supply chain finance customers. The group had also looked at growing its loan portfolio via co-lending, which constituted 41% as on June 30, 2023.

 

Going forward, the group is expected to continue to report strong growth in the assets under management on the back of the strengthened capitalisation metrics.

 

Weaknesses:

Asset quality susceptible to risks inherent in unsecured loans; loan book lacks seasoning

Given the focus on unsecured MSME loans, asset quality is susceptible to risks associated with the weak credit risk profiles of borrowers. The MSME segment is vulnerable to cash flow cyclicality, which could result in potential slippages, and given the unsecured nature of the loans, recovery could also be limited.

 

This trend became apparent during the COVID-19 period when the mentioned segment faced challenges. Delinquency rates rose, with 90+ days past due (dpd) and adjusted 90+ dpd (including 12-month write-offs) reaching 4.6% and 8.3% as of March 31, 2021, compared to 1.2% and 6.8% as of March 31, 2019. However, there was a positive turn after the second wave, leading to gradual improvement to 2.8% and 3.5% as of June 30, 2023. Even in terms of early-stage delinquencies, the group has shown progress, with 30+ dpd and 60+ dpd decreasing to 4.3% and 3.0% respectively, as of June 30, 2023, from 7.2% and 5.8% as of March 31, 2021

 

The improvement in asset quality metrics was on account of comfortable recoveries, with collection efficiency remaining in the range of 98%-100% across months post the second-wave, as the group had heavily invested to strengthen its collections team.

 

The group has put in place comfortable credit risk management systems. Epimoney uses a proprietary credit risk model, which provides the score for each application filed that is used to evaluate credit decisions. The group relies heavily on analysing multiple data sets for doing the risk assessment of its customers. In order to extract data from multiple sources on real time basis, it has developed proprietary algorithms. Furthermore, by virtue of having partnership with digital players, the company gets access to additional set of information about the customer. Multiple proprietary algorithms are then used to analyse different types of data to arrive at a final score, based on which lending decision is taken. Currently, the model has been in use for seven years and the group keeps on making timely upgrades to it based on the performance of the portfolio/collections experience. Additionally, having first charge over the funds getting transferred from anchor partner to the borrower as a result of presence of escrow mechanism agreement with the partner also provides additional comfort.

 

Nevertheless, given the scale up in the recent past, the portfolio is relatively unseasoned and therefore, performance of asset quality metrics remains a key monitorable.

 

Moderate earnings profile constrained by improving yet elevated operating expenses

With improving scale, the earnings profile too has improved backed by improvement in operating expenses, albeit it continues to remain high (8.6% of average total managed assets in June 2023). However, the earnings profile was supported by improving costs of funds with the group raising incremental funds at 11-11.5% over the past several quarters and control over credit costs.

 

For fiscal 2023, the group reported a PAT of Rs 6.7 crores and return on managed assets (RoMA) of 0.8% which stood at Rs 2.4 crores and 0.8% for the first quarter of fiscal 2024.

 

Nevertheless, operating expenses continue to remain elevated as the group has hired senior management in key positions in the recent past. However, with the company achieving scale, the operating expenses are expected to reduce going forward with effects of operating leverage kicking in and already beginning to be visible with company starting to report profit after tax from Q3 FY23 onwards. This trajectory of the improvement in the earnings profile is expected to continue going forward and the group is expected to achieve consistent profits in the near term, which remains a key monitorable.

Liquidity: Adequate

Asset-liability maturity profile was comfortable as on March 31, 2023, with positive mismatches across buckets up to 1 year. As on June 30, 2023, the group had cash and liquid investments stood at Rs 16 crore, against repayments (including interest) of Rs 86.8 crore (from July 2023 till September 2023). Furthermore, average monthly collections for the last six months amounted to Rs 155 crore on an average, which supports the liquidity.

Outlook: Stable

CRISIL Ratings believes the Epimoney group will benefit from its experienced promoters and management and will maintain its healthy capitalization metrics over the medium term. However, sustainable improvement in asset quality metrics and earnings profile remains a key monitorable.

Rating Sensitivity factors

Upward factors:

* Continued comfortable capitalisation metrics with adequate gearing metrics

* Improvement in earnings as the portfolio scales up with RoMA of more than 2.0%

 
Downward factors:

*Any adverse movement in asset quality with 90+dpd, leading to impact on the earnings profile

* Moderation in capitalisation metrics with adjusted gearing inching to beyond 3 times

About the Company

Epimoney was set up in February 2016 as an online lending platform to solve the problem that SMEs face in accessing quick, flexible and adequate funds for growing their businesses. The platform houses proprietary lending model, evaluation from which leads to a lending decision. The focus is on providing unsecured business SME loans at a fast pace that are customised to borrowers’ needs.

 

For the period ending June 30, 2023, Epimoney reported a profit after tax of Rs 2.4 crore on a total income of Rs 48.2 crore, compared to Rs 6.7 crore and Rs 109.7 crore, respectively, in fiscal 2023.

Key Financial Indicators: Standalone

As on/for the period ending	Unit	Jun-23	Mar-23	Mar-22	Mar-21
Total assets	Rs crore	749	695	276	213
Total assets under management (including co-lending)	Rs crore	1107	1067	374	189
Total income	Rs crore	48	110	52.1	33.1
Profit after tax	Rs crore	2.42	6.67	-10.8	-16.5
90+dpd (excluding write-offs)	%	2	1.5	3.1	4.6
Adjusted gearing	Times	1.4	1.3	0.6	1.2
Return on managed assets	%	0.8	0.8	NM	NM

Note: All financial information pertaining to Jun-23 is provisional

Any other information: Not applicable