Detailed Rationale

CRISIL Ratings has assigned its ‘CRISIL A+/Stable’ rating to the long-term bank facility of NJ Capital Private Limited (NJ Capital, part of the NJ group) while reaffirming its ‘CRISIL A1+’ rating on the short-term bank facilities.

 

The rating takes into account strong financial and managerial support that NJ Capital receives from its parent, NJ India Invest Pvt Ltd (NJ India; flagship company of the NJ group). Additionally, the rating also reflects the benefits that NJ Capital is expected to receive owing to the well-established market position of NJ India in the mutual fund distribution business, adequate capitalisation to support medium term growth plans of NJ Capital and adequate risk management policies. These strengths are partially offset by nascent stage and small scale of operations with limited track record in the lending business and modest profitability.

 

NJ India is among the largest mutual fund distributors in India, with average assets under advice (AUA) of Rs 94,096 crore as on March 31, 2021 (Rs 76,872 crore as on March 31, 2020). The company has remained among the top three mutual fund distributors over the past five years (despite facing direct intense competition from banks in this space). Furthermore, the company has achieved top position in terms of gross commissions received during the past five years. The company primarily caters to retail investors who are looking to invest in mutual funds. It has created a huge network of over 39,000 distribution partners with presence in 19 states of India. The company also has prime focus towards Tier II and below cities/locations through which it is able to tap a large market. As on March 31, 2021, they catered to more than 18 lakh active investor accounts. Believing that the vast untapped potential in the lending space presents a great opportunity, the NJ group set up its non-banking financial company (NBFC), NJ Capital, which started its operations by providing loans against mutual funds. This strong distribution set-up of NJ India provides ready market for NJ Capital to leverage and offer financing solutions.

 

The capital position at the parent level has remained comfortable with consolidated networth of Rs 663 crore and negligible gearing as on March 31, 2021 (consolidated networth of Rs 471 crore and nil gearing as on March 31, 2020). Stable accretions of over Rs 440 crore (cumulatively) during the past 4 years has enabled the company to build its current capital position. NJ Capital, being the only NBFC arm within the NJ group, will benefit from capital infusion on regular basis from its parent to support growth plans. Till March 21, NJ India has infused around Rs 25 crore of equity. Additionally, during fiscal 2022, the parent has infused Rs 18.75 crore by August 2021 and another Rs 6.25 crore is expected to be infused by September 2021.

 

As on March 31, 2021, assets under management (AUM) of NJ Capital stood at Rs 35 crore against Rs 18 crore a year ago. As on June 30, 2021, the AUM stood at Rs 42 crore. The company maintained its cautious stance in terms of incremental growth primarily due to impact of the Covid-19 pandemic in several months during fiscal 2021. NJ Capital also has limited track record of operations. While the group started laying the groundwork for its NBFC operations in fiscal 2019, they commenced lending only during fiscal 2020. Therefore, the ability of the company to grow its portfolio while maintaining asset quality will be a key monitorable.

 

NJ Capital has not faced any adverse impact due to the prevailing pandemic. The monthly collection efficiency of the company has remained in the range of 98-98.5% in June–July 2021. Furthermore, there has been no credit loss reported during fiscal 2021 in the lending business. The company has maintained its conservative stance in systems and the process for invocation of securities held by it in case of non-payment or default.

Analytical Approach

For arriving at the rating, CRISIL Ratings has assessed the credit risk profile (business and financial risk profiles) of NJ Capital on standalone basis. The standalone rating of NJ Capital has been notched-up for support that it is expected to receive from its parent, NJ India Invest Pvt Ltd.

Key Rating Drivers & Detailed Description

Strengths:

Expected financial, operational and management support from the parent, NJ India

NJ Capital is the only lending arm of the NJ group. As part of its long-term strategy, the group has forayed into the lending business by offering loans against mutual funds to its vast captive customer base. NJ Capital provides diversity in product profile to the existing client base of the group. Given full ownership, shared name, common branding and corporate identity, CRISIL Ratings believes NJ India has a strong moral obligation to support NJ Capital. Parental support is expected on an ongoing basis as well as in the event of distress. The NJ group’s founder promoters are also on the board of NJ Capital. Also, the parent has financial flexibility to infuse capital into NJ Capital to support growth. Till March 2021, NJ India has infused around Rs 25 crore of equity. Additionally, during fiscal 2022, the parent has infused Rs 18.75 crore by August 2021 and another Rs 6.25 crore is expected to be infused by September 2021.

 

Established market position in the mutual fund distribution space to benefit NBFC operations 

The NJ group is promoted by Mr. Neeraj Choksi and Mr. Jignesh Desai with over 27 years of experience in the mutual fund distribution business. The management's experience and understanding of the business has enabled the company to be among the top three mutual fund distributors with AUA of Rs 94,096 crore as on March 31, 2021 (Rs 76,872 crore as on March 31, 2020). Further, its wide distribution network has enabled steady growth of the business. NJ has over 39,000 NJ Wealth Partners (authorised distribution partners), spread across 95 branches in 19 states of India. As on March 31, 2021, they catered to more than 18 lakh active investor accounts. This strong reach and huge investor base is expected to benefit NJ Capital; the group is offering financing services to its existing customers. This provides huge opportunity and ready customer base for NJ Capital to leverage and build its portfolio. Additionally, NJ Capital will also be able to leverage on current wide distribution network of the parent without investing heavily on the same. Therefore, CRISIL Ratings believes NJ Capital will benefit from long track record of its promoters and wide distribution network of the group to scale up the business.

 

Adequate capitalisation with conservative gearing policy

At a standalone level, the networth of NJ Capital stood at Rs 25 crore with 0.6 times gearing as on March 31, 2021. NJ Capital is in the initial phase of business and is expected to get capital infusion from its parent,  if required. Further, NJ India had consolidated networth of Rs 663 crore with a negligible debt as on March 31, 2021. The group primarily relies on internal accruals for its funding requirement and has negligible debt on its book. Furthermore, the group is mainly present in commission-based business wherein the capital requirement is relatively lower; the capital will be primarily required for NBFC arm. Further, the management has indicated that they will maintain gearing levels below 2.5 times at NJ Capital in the near term.

 

Weaknesses:

Small scale of operations with limited track record in the lending business

Being in the initial stage of operations, NJ Capital has a small portfolio with AUM of Rs 42 crore as on June 30, 2021 (Rs 35 crore as on March 31, 2021). As of now, it mainly caters to the customers of the NJ group. The group started laying the groundwork for its NBFC operations in 2019 as a part of diversification strategy. However, actual lending commenced in fiscal 2020. The group has limited experience in lending operation. However, they have developed a team by acquiring professionals from the industry and most of the team members have more than 20 years of experience. In addition to this, the risk in LAS book is managed by maintaining adequate security cover. Ability to scale up operations, backed by healthy asset quality, remains a key rating monitorable.

 

Modest profitability

Since NJ Capital is in the early stage of operations, company’s profitability is modest, however it is expected to stabilize over medium term. During fiscal 2021, the company reported profit after tax (PAT) of Rs 0.13 crore (Rs 0.19 crore in fiscal 2020).  High operating expense, on account of nascent stage of operations, impacted profitability over the last two years. As on March 31, 2021, NJ Capital’s opex by AUM ratio stood at 8%. Profitability is expected to improve over the medium term, with scaling up of operations. In terms of financing costs, while there has been limited debt, the company has been able to borrow at competitive rate of less than 7% during fiscal 2021. Additionally, during 2 years of operations, the company has managed to report nil credit losses. Both these factors has helped the company to report positive accretion during fiscal 2021. Nevertheless, the ability of the company to improve its profitability with growth in portfolio and managing credit costs will remain a key monitorable.

Liquidity: Adequate

On a standalone basis, NJ Capital has adequate liquidity with asset and liability management (ALM) showing positive cumulative gaps in the up to six months bucket as of March 31, 2021. As on March 31, 2021, liquidity for NJ Capital stood at around Rs 15.5 crore in the form of cash, unutilized funding limits and liquid investment in mutual funds. At the NJ group level, liquidity in the form of cash/ bank balance and investments in debt mutual funds aggregated to Rs 392 crore as on March 31, 2021. Furthermore, CRISIL Ratings understands NJ India has a policy of maintaining liquidity equivalent to one year of its overall budgeted expenditure at the group level. CRISIL Ratings expects the group to maintain free liquidity of at least Rs 300 crore on a steady state basis.

Outlook: Stable

CRISIL Ratings believes NJ Capital will continue to benefit from the strong financial, managerial and operational support from its parent NJ India Invest

Rating Sensitivity Factors

Upward Factors

• Change in CRISIL Ratings’ view on credit profile of parent (NJ India)
• Improvement in scale of operations while maintaining asset quality and earnings profile
• Sustainability in earnings profile with return on managed assets (ROMA) greater than 2.5% maintained on steady state basis

 

Downward factors

• Any change in CRISIL Ratings’ view on credit profile of parent (NJ India) or any change in stance of providing support to NJ Capital
• Deterioration in market position of NJ India or reduction in profitability thereby impacting the credit profile
• Deterioration in the earnings profile of NJ Capital
• Dilution in risk management practices, leading to weakening of asset quality with 90+days past due (dpd) in lending book increasing beyond 5%

About the Company

Incorporated in 1994, the NJ group provides a wide array of financial services, such as mutual fund distribution, portfolio management services (PMS), insurance distribution and loans against shares. The product profile of the group also includes distribution of capital market products – direct equity & exchange traded funds and fixed income products namely non- convertible debentures, company deposit etc. Over the last few years, NJ Group has expanded into other businesses, and today it also has presence in businesses of real estate, insurance broking, training & development and technology, Portfolio Management, NBFC, Payment Aggregator, Organic and Non-Organic Food and Health related social activities. The promoters of the company Mr. Neeraj Choksi and Mr. Jignesh Desai, have more than 27 years of experience in the mutual fund distribution business. As on March 31, 2021, the group has more than 39,000 distribution partners with presence in 19 states of India

 

About NJ Capital:

The company is the NBFC arm of the group, which caters mainly to NJ India Invest’s clients by primarily providing loans against mutual funds. The company was incorporated in 2009 and received Certificate of Registration as an NBFC from Reserve Bank of India in February 2019. It had a loan book of Rs 35 crore as on March 31, 2021. The company has reported nil gross non-performing assets for the past two years.

Any other information: Not applicable