Rating Rationale
June 24, 2020 | Mumbai
Ess Kay Fincorp Limited
'CRISIL A/Stable' assigned to NCD
 
Rating Action
Total Bank Loan Facilities Rated Rs.600 Crore
Long Term Rating CRISIL A/Stable (Reaffirmed)
 
Rs.100 Crore Non Convertible Debentures CRISIL A/Stable (Assigned)
Rs.50 Crore Non Convertible Debentures CRISIL A/Stable (Reaffirmed)
Rs.85 Crore Non Convertible Debentures CRISIL A/Stable (Reaffirmed)
Rs.86 Crore Non Convertible Debentures CRISIL A/Stable (Reaffirmed)
Rs.100 Crore Non Convertible Debentures CRISIL A/Stable (Reaffirmed)
Rs.100 Crore Non Convertible Debentures CRISIL A/Stable (Reaffirmed)
Rs.150 Crore Non Convertible Debentures CRISIL A/Stable (Reaffirmed)
Rs.300 Crore Non Convertible Debentures CRISIL A/Stable (Reaffirmed)
Rs.32 Crore Long Term Principal Protected Market Linked Debentures CRISIL PP-MLD Ar/Stable (Reaffirmed)
Rs.50 Crore Long Term Principal Protected Market Linked Debentures CRISIL PP-MLD Ar/Stable (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has assigned its 'CRISIL A/Stable' rating to Rs 100 crore of non-convertible debentures of Ess Kay Fincorp Limited (Esskay) and reaffirmed its 'CRISIL A/CRISIL PP-MLD Ar/Stable' ratings on the existing debt instruments and bank facilities. CRISIL has also withdrawn its rating on the non-convertible debentures of Rs.200 crore (See Annexure 'Details of Rating Withdrawn' for details) on confirmation from the debenture trustee as they are fully redeemed. The rating is withdrawn and is in line with CRISIL's policy.
 
CRISIL's rating continues to reflect the strong track record of the company in vehicle finance (over 25 years), the company's healthy capitalization metrics and its comfortable earnings profile. Owing to its experience in used vehicle financing, the company has grown its book at a compounded annual growth rate (CAGR) of 51% during fiscal 2015-2019, growing further by 50% (annualised) to reach Rs 2,754.8 crore as on December 31, 2019 whilst maintaining adequate asset quality metrics. However, the company remains relatively small with modest scale of operations and geographical concentration. While Esskay has established its market position in Rajasthan, its ability to sustainably scale up its operations in other geographies whilst maintaining asset quality metrics is a key monitorable.
 
The nationwide lockdown (originally till April 14, 2020) declared by the Government of India to contain the spread of the Novel Coronavirus (Covid-19) will have near-term impact on disbursements and collections of Esskay. The lockdown is now further extended till June 30, 2020 in containment zones with re-opening of the prohibited activities in a phased manner in areas outside containment zones. However, certain states have extended the lockdown till June 30, 2020. Herein, CRISIL believes that eventual lifting of restrictions will continue to be in a phased manner. Vehicle finance and Secured SME finance are the two main segments that Esskay operates in. Both these segments could witness challenges as cash flows for the underlying borrowers has been impacted amidst the lockdown. The company has given moratorium on opt-in basis to its borrowers and around 59% of their overall loan book is under moratorium as on April 30, 2020. However, Esskay has seen some traction in collections with collection efficiency ranging from 30 to 35% of the total monthly billing including the book under moratorium during April 2020. However, upon relaxations in the lockdown since the starting of May 20, the company is seeing some borrowers who had earlier opted for the moratorium making payments. Nevertheless, any delay in return to normalcy is likely to put further pressure on collections and asset quality metrics and CRISIL will continue to monitor the same.
 
On the liability side, the Reserve Bank of India (RBI) announced regulatory measures under the Covid-19 Regulatory Package, whereby lenders were permitted to grant moratorium (originally till May 31, 2020) on bank loans which is now further extended till August 31, 2020. Esskay has requested its lenders for seeking moratorium. However, CRISIL understands that the approval of moratorium request by lenders is still under process.
 
With the extension of moratorium, NBFCs face a prolonged period wherein asset-side collections will be limited while liability-side outflows continue as per schedule. In this context, CRISIL believes that Esskay has sufficient liquidity to manage this period. As of June 06, 2020, the liquidity cover for Esskay for payments (principal repayments) until August 2020 was comfortable at around 1.6 times. The company had cash and cash equivalents of Rs 353.4 crore and unutilized CC/WCDL lines of Rs 61.7 crore against total debt payments of Rs 265.1 crore (excluding debt obligations where the company has already received moratorium) over the next 3 months till August 2020. Furthermore, it has Rs 310 crore of unutilized term loan lines, NCD lines and securitization lines. Any incremental collections will further support the liquidity position of the company.

Analytical Approach

CRISIL has evaluated the standalone business and financial risk profile of Esskay.

Key Rating Drivers & Detailed Description
Strengths:
* Strong experience of promoter and management team in vehicle finance segment
Esskay has a vintage of almost 25 years in the used vehicle finance segment and has built in-depth knowledge of its target segment. It started off as a direct selling agent in 1994 for entities such as Anagram, Escorts, SRF finance, Kotak Mahindra Prime etc. for two & three wheeler and commercial vehicle (CV) financing. Since 2005, the company transitioned to an assignment-based player for AU Financiers, ICICI Bank, Shriram Transport Finance Company Ltd. and HDFC Bank. After receiving a first round of growth capital of Rs 23 crore in fiscal 2012 (Rs.18 Crore from Banyan Tree Growth Capital & Rs. 5 Crore from the promoters), the company started growing its own on-book lending portfolio and has scaled up significantly since then. In fiscal 2015, the company also launched MSME financing in areas where it was well penetrated through CV financing which constituted for around 9% of the overall portfolio as on December 31 2019. Esskay plans to grow it to 15% of the overall portfolio over the medium term. The promoter has also built a strong management team with rich experience in similar lines of business. As a team, they have also been strengthening and digitizing the systems and processes of the company, which will support the planned scale-up.
 
* Healthy capitalization
Esskay has comfortable capitalization with sizeable networth of Rs 857.4 crore, and Tier I and overall capital adequacy ratios of 29.3% and 31.1%, respectively, as on December 31, 2019. The adjusted gearing too was comfortable at 2.8 times (on-book gearing at 2.7 times) as on December 31, 2019; while it will increase from current levels, the company's philosophy is to maintain gearing at under 4-5 times on a steady state basis. Net worth to Net NPA ratio also remained comfortable at 13.9 times as on December 31, 2019 from 13 times as on March 31, 2019.
 
Capitalization metrics have been supported by the regular capital infusions in the past with Esskay having raised Rs 751 crores since inception. The company recently raised another Rs 235 crore of capital in November 2019. The promoter too has participated in various rounds, infusing around Rs 24 crores during the same period. The ratings also factor in the expectations of additional capital that the company can raise as and when required to support their growth plans. CRISIL expects capitalisation to remain comfortable as the company will focus more on collections and is not likely to grow the book significantly over the next six months, thus providing a cushion against asset-side risks.
 
* Comfortable earnings profile with the company being profitable since inception
While profitability has been constrained in the past because of high operating expenses, earnings profile has been improving and is expected to remain comfortable going forward. Given the segment of operations, Net Interest Margins (NIMs) tends to be high and have ranged between 11 to 13% during the last 3 years driven by the high yields on the portfolio given the inherent borrower profile and improving cost of funds. However, RoMA (return on managed assets) stood  at 2.3% (annualised) for the nine months ended December 31, 2019 (2.6% for fiscal 2019) on account of increase in credit cost. Further, operating expenses of the company remain higher than peers due to the branch and geographic expansions, but is expected to normalise over the medium term owing to techonological initiatives taken by the company and as the recently opened branches achieve scale. Nevertheless, ability to manage asset quality in the near term amidst the lockdown and hence volatility in credit cost is a key monitorable.
 
Weaknesses:
* Vulnerability of asset quality; risks inherent in used vehicle financing
Esskay's focus has been on used vehicle financing (greater than 70% of the portfolio over the past three fiscals). This, coupled with the target segment of rural and semi-urban customers, leads to asset quality remaining susceptible to slippages.
 
The company has put in place adequate underwriting practices and risk management practices which are separate for both of its segments i.e. Vehicle and MSME Finance. In case of vehicle finance, there are three layers of credit assessment which includes assessment at field, branch and headquarters level whereas in case of MSME finance, credit assessment is looked at from 3 different ways i.e. asset related, customer related and business related. Because of stringent credit assessment procedure, the company has demonstrated its ability to manage asset quality metrics as 90 days past due (dpd) percentage of the company has hovered from 3% to 5% over past 6 fiscals; the higher level (90+ dpd of 5%) was primarily in the post-demonetization period.
 
As on December 31, 2019, 90+ dpd stood at 4.0% and 2.8% for vehicle and MSME finance, respectively, (3.3% and 1.2%, respectively, as on March 31, 2019) with MSME book lacking seasoning owing to limited track record of operations. Consequently, 90+ dpd for overall portfolio stood at 3.9% as on December 31, 2019 as against 3.1% as on March 31, 2019. 
 
However, till now the company has been operating in Rajasthan, Gujarat and has in last 3 years started expanding in other geographies. The ability of the company to manage asset quality while scaling up in new geographies needs to be demonstrated. Also, in light of RBI's Covid-19 regulatory package, the company has given moratorium on opt-in basis to its borrowers and around 59% of their overall loan book is under moratorium as on April 30, 2020. However, Esskay has seen some traction in collections with collection efficiency ranging from 30 to 35% of the total monthly billing including the book under moratorium during April 2020. However, upon relaxations in the lockdown since the starting of May 20, the company is seeing some borrowers who had earlier opted for the moratorium making payments. Nevertheless, any delay in return to normalcy is likely to put further pressure on collections and asset quality metrics and CRISIL will continue to monitor the same.
 
* Diversified resource profile with relatively high cost of borrowings
Historically, the borrowing mix of the company has majorly constituted bank loans, non-convertible debentures (NCDs), securitization, and loans from financial institutions. Over the years, Esskay has diversified towards more of capital market borrowings as opposed to bank borrowings as capital market borrowings (NCD, MLD, bonds & Securitization)  and Bank/financial institutions loans constituted around 73% and 27%, respectively, as on December 31, 2019 as against 29% and 71% respectively as on March 31, 2016. The company has also been able to raise funds quite comfortably even post the tight liquidity tightening.
 
Having said that, while cost of funds of the company improved to around 12.1% (annualized) in first nine-months ended December 2019 from 12.7% in fiscal 2019, it still remains higher compared to similarly CRISIL rated peer companies. However, with the growth in assets under management (AUM) and the company's efforts to diversify its investor base, CRISIL expects an improvement in cost of funds over the medium term.
 
* Modest scale of operations with limited geographical presence
The company's scale of operations remains modest with AUM at around Rs 2,755 crores as on December 31, 2019. Portfolio comprised commercial vehicle (56.2 %), tractor (16.8 %), Car (15.3 %), MSME (8.9 %) and two-wheeler (2.7 %) as on December 31, 2019. Further, Rajasthan dominates the portfolio with 72% of the portfolio originated in the state while Gujarat constitutes another 15%. The company has been diversifying into nearby regions such as Madhya Pradesh, Maharashtra, Haryana and Punjab. While CRISIL expects a rapid scale up in the portfolio going forward as and when normalcy returns over the long term, however, the growth will be subdued over the near to medium term on account of Covid-19 related challenges and the entity would remain a small player in the overall vehicle finance segment.
Liquidity Strong

Esskay has an adequate ALM profile as on December 31, 2019 with no cumulative negative mismatches in the up to one year buckets (excluding unutilized bank lines) indicating that business inflows also support repayments.
 
With the extension of moratorium, NBFCs face a prolonged period wherein asset-side collections will be limited while liability-side outflows continue as per schedule. In this context, CRISIL believes that Esskay has sufficient liquidity to manage this period. As of June 06, 2020, the liquidity cover for Esskay for payments (principal repayments) until August 2020 was comfortable at around 1.6 times. The company had cash and cash equivalents of Rs 353.4 crore and unutilized CC/WCDL lines of Rs 61.7 crore against total debt payments of Rs 265.1 crore (excluding debt obligations where the company has already received moratorium) over the next 3 months till August 2020. Furthermore, it has Rs 310 crore of unutilized term loan lines, NCD lines and securitization lines. Any incremental collections will further support the liquidity position of the company.

Outlook: Stable

CRISIL believes that Esskay will benefit from its experienced promoters and management team and will maintain its comfortable capitalisation metrics going ahead. However, asset quality performance will be demonstrated only over time.

Rating Sensitivity Factors
Upward Factors
* Sustainable improvement in asset quality with 90+ dpd remaining under 3.5% as the portfolio scales up
* Substantial ramp up in operations with earnings and capitalisation metrics continuing to remain comfortable

Downward Factors
* Any adverse movement in asset quality with 90+dpd increasing beyond 7% and earnings profile of the company getting impacted.
* Stress in capitalisation metrics with significant jump in gearing while scaling up the portfolio.

About the Company

ESS KAY Fincorp Ltd, incorporated in 1994 is engaged in the business of providing financing for income generation activity (CV and MSME lending against self-occupied property), the company also extends loans for purchase of two-wheelers, tractors, construction equipment; and cars. Portfolio comprised commercial vehicle (54%), tractor (18%), Car (14%), MSME (10%) and two-wheeler (3%) as on March 31, 2019
 
Profit after tax (PAT) was Rs 52.2 crore on total income of Rs 365 crore in fiscal 2019 against a PAT of Rs 22 crore on total income of Rs 227.3 crore in the previous fiscal. Profitability improved in fiscal 2019 owing to improvement in net interest income and reduction in operating expenses.
 
In first nine-months of fiscal 2020, Esskay reported PAT of Rs 52.5 crore on total income of Rs 405.7 crore.

Key Financial Indicators (Standalone)
As on/for the quarter/for the year ended Unit Dec-19** Mar-19 Mar-18
Total assets Rs crore 3304 1993 1221
Total income Rs crore 406 365 227
Profit after tax Rs crore 53 52 22
90+ days past due (dpd) % 3.9 3.1 3.3
Overall capital adequacy ratio % 31.1 33.0 20.5
Adjusted gearing Times 2.8 3.2 5.5
On-book gearing Times 2.7 2.3 4.3
Return on managed assets^ % 2.3* 2.6 1.8
^based on year end averages
*annualized
**IND-AS and provisional
Note: All the financial figures for as on December 2019 are provisional and as per IND-AS

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.
Annexure - Details of Instrument(s)
ISIN Name of Instrument Date of Allotment Coupon Rate (%) Maturity Date Issue Size (Rs.Cr) Complexity levels Rating Outstanding with Outlook
NA Long term Principal Protected Market Linked Debentures^ NA NA NA 11.75 Highly Complex CRISIL PP-MLD Ar/Stable
NA Non-Convertible Debenture^ NA NA NA 100.00 NA CRISIL A/Stable
NA Non-Convertible Debenture^ NA NA NA 40.00 NA CRISIL A/Stable
NA Non-Convertible Debenture^ NA NA NA 35.00 NA CRISIL A/Stable
INE124N07424 Non-Convertible Debenture 22-Jun-20 11.00% 22-Jun-23 25.00 Simple CRISIL A/Stable
INE124N07416 Non-Convertible Debenture 18-Jun-20 11.00% 18-Jun-23 25.00 Simple CRISIL A/Stable
INE124N07408 Non-Convertible Debenture 16-June-20 11.00% 16-June-23 50.00 Simple CRISIL A/Stable
INE124N07382 Non-Convertible Debenture 08-Jun-20 11.25% 08-Jun-23 10.00 Simple CRISIL A/Stable
INE124N07358 Non-Convertible Debenture 23-Dec-19 12.05% 23-Dec-25 86.00 Complex CRISIL A/Stable
INE124N07317 Non-Convertible Debenture 13-Aug-19 11.00% 13-Aug-22 50.00 Complex CRISIL A/Stable
INE124N07325 Non-Convertible Debenture 16-Aug-19 11.00% 16-Aug-22 50.00 Complex CRISIL A/Stable
INE124N07309 Non-Convertible Debenture 01-Aug-19 12% 01-Aug-23 300 Complex CRISIL A/Stable
NA Proposed Long Term Bank Loan Facility NA NA NA 315 NA CRISIL A/Stable
NA Term Loan NA NA 05-Jul-20 55 NA CRISIL A/Stable
NA Term Loan NA NA 16-May-23 15 NA CRISIL A/Stable
NA Term Loan NA NA 09-May-22 40 NA CRISIL A/Stable
NA Term Loan NA NA 07-Sep-22 25 NA CRISIL A/Stable
NA Term Loan NA NA 29-Jun-23 15 NA CRISIL A/Stable
NA Term Loan NA NA 31-Dec-20 20 NA CRISIL A/Stable
NA Term Loan NA NA 28-Dec-21 15 NA CRISIL A/Stable
NA Term Loan NA NA 28-Dec-22 100 NA CRISIL A/Stable
INE124N07259 Long term Principal Protected Market Linked Debentures 07-Jun-19 Linked to reference index (Sensex Linked) 04-Jun-21 36.65 Highly Complex CRISIL PP-MLD Ar/Stable
INE124N07366 Long term Principal Protected Market Linked Debentures 09-Jan-20 Linked to reference index (Sensex Linked) 09-Jan-22 33.60 Highly Complex CRISIL PP-MLD Ar/Stable
^Yet to be issued
 
Annexure - Details of Rating Withdrawn
ISIN Name of instrument Date of allotment Coupon Rate (%) Maturity Date Issue Size (Rs.Crore) Complexity levels
INE124N07333 Non-Convertible Debenture 13-Sep-19 11.94% 13-Sep-22 50 Complex
INE124N07267  Non-Convertible Debenture 14-Jun-19 11.85% 14-Jun-21 75 Complex
INE124N07275  Non-Convertible Debenture 14-Jun-19 11.50% 14-Jul-21 25 Complex
INE124N07283  Non-Convertible Debenture 14-Jun-19 11.50% 14-Jul-21 25 Complex
INE124N07291 Non-Convertible Debenture 14-Jun-19 11.50% 14-May-21 25 Complex
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Long Term Principal Protected Market Linked Debentures  LT  82.00
24-06-20  		CRISIL PP-MLD Ar/Stable  17-06-20  CRISIL PP-MLD Ar/Stable  16-12-19  CRISIL PP-MLD Ar/Stable    --    --  -- 
        11-06-20  CRISIL PP-MLD Ar/Stable  26-09-19  CRISIL PP-MLD Ar/Stable           
        08-01-20  CRISIL PP-MLD Ar/Stable  06-09-19  CRISIL PP-MLD Ar/Stable           
            09-08-19  CRISIL PP-MLD Ar/Stable           
            30-07-19  CRISIL PP-MLD Ar/Stable           
            30-05-19  CRISIL PP-MLD Ar/Stable           
Non Convertible Debentures  LT  971.00
24-06-20  		CRISIL A/Stable  17-06-20  CRISIL A/Stable  16-12-19  CRISIL A/Stable    --    --  -- 
        12-06-20  Provisional CRISIL AA-(CE)/Stable  26-09-19  CRISIL A/Stable           
        11-06-20  CRISIL A/Stable  06-09-19  CRISIL A/Stable           
        08-01-20  CRISIL A/Stable  09-08-19  CRISIL A/Stable           
            30-07-19  CRISIL A/Stable           
            30-05-19  CRISIL A/Stable           
            29-05-19  CRISIL A/Stable           
Fund-based Bank Facilities  LT/ST  600.00  CRISIL A/Stable  17-06-20  CRISIL A/Stable  16-12-19  CRISIL A/Stable    --    --  -- 
        11-06-20  CRISIL A/Stable  26-09-19  CRISIL A/Stable           
        08-01-20  CRISIL A/Stable  06-09-19  CRISIL A/Stable           
            09-08-19  CRISIL A/Stable           
            30-07-19  CRISIL A/Stable           
            30-05-19  CRISIL A/Stable           
            29-05-19  CRISIL A/Stable           
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Proposed Long Term Bank Loan Facility 315 CRISIL A/Stable Proposed Long Term Bank Loan Facility 315 CRISIL A/Stable
Term Loan 285 CRISIL A/Stable Term Loan 285 CRISIL A/Stable
Total 600 -- Total 600 --
Links to related criteria
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating Criteria for Finance Companies

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