Detailed Rationale

CRISIL Ratings has assigned its 'CRISIL BBB/Stable' rating to Rs 25 crore of non-convertible debentures of Mangal Credit And Fincorp Limited (MCFL).

 

The rating is driven by comfortable capital position, improving asset quality metrics, healthy profitability metrics. These strengths are partially offset by the moderate scale of operations with geographical concentration and average resource profile.

 

MCFL was incorporated in the year 2012 after acquiring a 50 year old company TAK Machineries & Leasing Ltd (TMLL), a company dealing in machinery and its leasing. The company was acquired by its current promoter in 2013 i.e. Mr. Meghraj Jain who has vast experience in leasing & finance related business and has over 25 years of experience in Jewelry business. Furthermore, the board and top management profile of MCFL comprises of professionals having extensive experience in banks, Non-banking finance companies (NBFC’s), Micro Finance institutions, Housing Finance companies (HFC’s), Auding and consulting firm etc.

Analytical Approach

For arriving at the ratings, CRISIL Ratings has evaluated the standalone business and financial risk profile of MCFL.

Key Rating Drivers & Detailed Description

Strengths:

• Comfortable capital position

MCFL’s capital position is comfortable in relation to its current and expected scale of operations. As of June  30, 2022, the company has networth of Rs 107.5 crore and comfortable gearing at 0.3 times as against networth of Rs 80.1 crore and gearing of 0.1 time as on March 31, 2018 (Networth of Rs 106 crore and gearing of 0.3 times as on March 31, 2022). The capital position of the company is supported by timely capital infusion by promoters and healthy net accruals. Since Fiscal 2015, the promoters have infused Rs 40 crore in the company. The last capital infusion of Rs 12 crore was done in Fiscal 2018.Furthermore, as secured segment contributes 41% of assets under management, the lower asset side risk, supports capitalisation. Based on the discussion with the management, we understand that the promoters are willing to infuse capital as and when required by the company. CRISIL Ratings believes that MCFL will remain adequately capitalized with gearing also remaining at comfortable level over the medium term.

 

• Improving asset quality

As on June 30, 2022, the 90+ dpd of the company stood at 3.8% as compared to 2.4% in fiscal 2022 (4.9% in fiscal 2021). The slight increase in 90+ for June 30th, 2022, is mainly on account of increase in delinquency in gold loan segment. The asset side risk is comparatively low given the segment is secured by gold which is liquid and is in the lender’s possession. Over the past two years, the asset quality performance of the company has witnessed volatility on account of imposed lockdown due to pandemic, however the company was able to improve its 90+ dpd during the same period by focusing on collections. Prior to Fiscal 2020, the company faced asset quality issue in single quarter in fiscal 2019 on account of high concentration risk and high tickets size which led to deterioration in 90+ dpd that incre6ased to 33.% in September 2019 as compared to 11.7% in June 2019. The company was able to close the delinquent accounts within 3-4 months. Also, given that the company recognizes GNPA at 180+ dpd, the expedition in collections were only witnessed post account slips 90+ days bucket. Since going forward, the company has to eventually move to 90+ dpd for recognizing NPAs, the management as a cautious approach took decision to act stringently towards recovering delinquencies before they hit 90+ bucket. The management decided to lower their average ticket size and reduce concentration risk. High concentration risk of top 10 borrowers in fiscal 2019 accounted for 53% of the overall book which has now reduced to 16%. All these measures taken by the management, helped them to gradually improve their 90+ dpd. Furthermore, as part of one-time restructuring, the company has not restructured any accounts till date. CRISIL Ratings believes that the ability of the company to sustain its asset quality performance while scaling up its portfolio will be monitorable factor.

 

• Healthy profitability metrics

In terms of profitability, the average return on assets for MCFL for the past 3 years stood comfortable at 5.9%. The company reported profit after tax of Rs 6.1 crore in fiscal 2022 as compared to Rs 5.7 crore in fiscal 2021. In Q1 fiscal 2023, the company reported profit after tax of Rs 1.6 crore. The operating cost of the company stood comfortable at 2.5% (annualized) during quarter ended June 30th, 2022 (2.2% in fiscal 2021). Going forward with scaling up of business, the operating expenses are expected to slightly be elevated primarily on account of employee costs , IT enhancement and branch expansions. However, given the company operates all segments through single branch, the operating expenses will not impact the earnings profile to a great extent. The ability of the company to sustain its earnings profile will remain key monitorable.

 

Weaknesses:

• Moderate scale of operations with geographical concentration

MCFL’s operations have grown significantly over the past 2 years. The company registered 26% growth in fiscal 2022 and 27% growth in fiscal 2021 which helped the company to achieve moderate book size of Rs 104 crore in Fiscal 2022 (Rs 65 crore in fiscal 2020). During quarter ended June 30th, 2022, the company registered growth of 3% and the AUM stood at Rs 106 crore. The asset under management comprises a wide range of asset classes including business loans (55%), gold loans (23%) and loan against property (18%) and personal loans (4%). Currently the secured and unsecured portion is in the ratio of 41:59. The company has plans to further increase its secured portfolio to more than 50%, however the composition is more likely expected to remain similar in current fiscal.

 

Additionally, operations are geographically concentrated in 3 states in western region of India, Maharashtra, Rajasthan, and Gujarat. Maharashtra dominates the portfolio with over 87% followed by Rajasthan (10%) and Gujarat (3%). The company ventured into Gujarat only in Fiscal 2022 in Surat and Rajkot districts, the asset quality performance in this state is to be closely monitored on account of low vintage of portfolio. The management has few branches in pipeline in Mumbai region which is expected to open shortly in current fiscal. Based on the discussion with the management we understand that Maharashtra will continue to contribute majority of the portfolio. CRISIL Ratings believes that, as the management wants to target secured portfolio, even though the company’s operations are concentrated in western region of India, there is high growth potential to tap other geographies as far as gold loans are concerned. Furthermore, the ability of the company to scale up its loan book in the existing geographies while sustaining its asset quality performance will remain key monitorable.

 

• Average resource profile

The company’s resource profile consists of bank loans (77%), loans from promoters (19%) and ICDs (3%) of the total borrowings as on June 30, 2022. The company gained access to bank borrowings only in Fiscal 2021, prior to that the company’s growth was supported solely through funds from promoters, ICDs and networth. The average cost of borrowing of the company as on June 30, 2022, stood at 9.53% The company has raised funds from banks like Federal bank, South Indian Bank and City Union Bank. The management is expected to raise non-convertible debentures of ~Rs 25 crore in current fiscal. Furthermore, they are currently in discussion with existing banks for enhancement and other banks and NBFCs for funding its growth. The promoters are also willing to extend ongoing support for company’s growth. The ability of the company to continue to raise funds consistently to support its future growth and reduce overall cost of borrowing while it scales up in size will remain key monitorable.

Liquidity: Adequate

MCFL’s asset-liability maturity profile was comfortable as on March 31, 2022, with positive mismatches across buckets up to 1 year. As on June 30th, 2022, the company had liquidity of Rs 20.96 crore (including cash and cash equivalent and cash credit and working capital loan). Against this, total debt obligation (including operating expense) was around Rs 1.77 crore until September 2022. This represents liquidity cover (assuming nil collections) of more than 10 times for three months. Liquidity is further supported by commitment of support by promoters at the time of exigency.

Outlook: Stable

CRISIL Ratings believes that MCFL will benefit from its comfortable capitalisation metrics over the medium term.

Rating Sensitivity factors

Upward factors:

• Asset quality remains stable with 90+ dpd being lower than 2% on steady state basis
• Ability to raise external funding though bank loans and debt instruments
• Improvement in scale of operations with ROA maintained at over 2.5% over medium term

 

Downward factors:

• Any adverse movement in asset quality with 90+ dpd exceeding 4% and its consequent impact on earnings profile
• Moderation in capitalisation metrics with a significant increase in gearing while scaling up the portfolio.

About the Company

MCFL is a non-deposit non-systemically important NBFC. Mangal Credit & Fincorp Limited was established in the year 2012. MCFL acquired TAK Machineries & Leasing Ltd (TMLL), a company dealing in machinery and its leasing. It was acquired by the existing promoters in 2013. MCFL is based in Mumbai, which is engaged in the business of providing different types of loans to Micro, Small and Medium Enterprises in the form of business loan, loan against property, gold loan and personal loan.

Key Financial Indicators

As on/for the period ending	Unit	June-22	Mar-22	Mar-21
Total assets	Rs crore	141	138	117
Total income	Rs crore	4.0	13.8	11.4
Profit after tax	Rs crore	1.6	6.1	5.7
90+dpd	%	3.8	2.4	4.9
Adjusted gearing	Times	0.3	0.3	0.1
Return on average assets	%	4.5	4.8	5.2

 

Any other information: Not applicable

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	Non-convertible debentures^	NA	NA	NA	25	Simple	CRISIL BBB/Stable

^yet to be issued