Rating Rationale

Strengths
* Established market position across asset financing segments
The group has a healthy and competitive market position across asset-financing segments with overall loan assets under management (AUM) of Rs 15483 crore as on June 30, 2017 (Rs 16101 crore as on March 31, 2017). Though portfolio had de-grown in the last few quarters due to demonetisation, loan AUM is expected to increase at a moderate pace over the medium term supported by a diversified product suite. The group continues to focus on high-yielding product segments such as used vehicles, tractors, small and medium enterprises (SME), and mortgage financing. The proportion of these product segments has increased to nearly 62% of the loan AUM as on June 30, 2017, from around 35% as on March 31, 2013, and is expected to increase to 70% over the next few years. Growth in new commercial vehicle (CV), construction equipment (CE), car and utility vehicle (UV) financing has also slowed down in the past few years because of macroeconomic challenges. The group will benefit from its diversified product suite and maintain its competitive market position across asset-financing segments over the medium term.

* Moderate capitalisation
Capitalisation is moderate with adjusted networth of Rs 2158 crore as on June 30, 2017 (Rs 2113 crore as on March 31, 2017) against loan AUM of Rs 15483 crore (Rs 16101 crore as on March 31, 2017). Equity capital of Rs 500 crore was raised in fiscal 2016 to support growth plans over the medium term. Tier-I and overall capital adequacy ratios were also moderate at 16.2% and 21.2%, respectively, as on June 30, 2017 (15.4% and 20.4%, respectively, as on March 31, 2017). CRISIL, in its analysis of capitalisation, factors in the total outside liabilities, including the extent of off-balance-sheet assigned or securitised loans, in addition to on-balance-sheet liabilities. External liabilities (including principal outstanding on off-balance-sheet securitisation and assignment transactions) declined to 6.3 times of adjusted networth as on June 30, 2017, from 6.7 times as on March 31, 2017. Though, external liabilities (including principal outstanding on off balance-sheet securitisation and assignment transactions) to networth may increase over the medium term with the growth in scale of operations, the group is expected to maintain moderate capitalisation by infusing capital at regular intervals.

* Experienced and competent management team
Most of the senior management personnel have been in the financial services industry for more than a decade, and have extensive experience in their business segments. The company is also making significant investments in people, infrastructure, systems, and processes to support current and future growth plans.

Weakness
* Modest albeit improving asset quality
Gross non-performing assets (NPAs; based on 120+ days past due NPA recognition) remains elevated at 6.7% as on March 31, 2017. However, it has declined from 8.1% as on March 31, 2016 because of sale of delinquent assets to asset reconstruction companies in last quarter of fiscal 2017. Despite better monsoon and measures undertaken to improve collections, asset quality was impacted in fiscal 2017 because of demonetisation. Asset quality though is likely to improve over the medium term as loans disbursed in asset-financing business since December 2015 are exhibiting better performance compared to loans of prior vintage at similar level of amortisation. These loans were disbursed under the revised structure where same staff is employed for both sales and collections and are expected to account for 80% of the group's asset-financing business as on March 31, 2018. Asset quality though remains a key rating sensitivity factor as GNPAs remains elevated and seasoning profile of the loans originated under the revised structure is low.

* Modest earnings profile
Return on managed assets (RoMA), at around 1.0% (annualised) in the first quarter of fiscal 2018, was lower than industry average of around 1.8%. The group sold assets worth Rs 679 crore to asset reconstruction companies in last quarter of fiscal 2017 and incurred a one-time loss of Rs 145 crore. As a result, the group's profit after tax (PAT) and RoMA declined to Rs 12.7 crore and 0.1%, respectively, for fiscal 2017 as against PAT and RoMA of Rs 213.5 crore and 1.0%, respectively, for the previous fiscal. Profitability in the past was constrained primarily because of high credit costs. Profitability though will improve gradually with increase in net interest margin (NIM; including securitised income) following increase in proportion of high-yielding customer and product segments. Ability to control credit costs nevertheless remains critical.