Detailed Rationale

CRISIL Ratings has downgraded its rating on the long-term bank facility of Pioneer Finance Company Pvt Ltd (Pioneer Finance) to ‘CRISIL B+/Stable’ from CRISIL BB-/Stable’.

 

The rating action is primarily driven by continued deterioration in asset quality metrics and its consequent impact on earnings profile. Company’s asset quality has continued to remain in stress post the impact it faced during Covid first and second wave. The 90+ dpd increased to around 52.4% as on December 31, 2021, from 26.9% as on March 31, 2021, and 12.2% as on March 31, 2020. The deterioration in Gross NPA percentage is more visible on account of de-growth in asset base in last 2 fiscals. The company has been doing very minimal disbursements since last 4-6 quarters which has resulted in portfolio reducing to Rs 16.5 crore as of December 31, 2021, from Rs 28.2 crore as of March 31, 2021 (~Rs 37 crore as of March 31, 2020). The 90+ dpd, on an absolute basis, remained largely similar at Rs 8.7 crore as of December 31, 2021 (~Rs 7.6 crore as of March 31, 2021). CRISIL Ratings understand that the management has taken steps of arbitration against majority of its delinquent borrowers and have also deployed recovery agencies to increase pace of recoveries through repossession of vehicles. Nevertheless, the ability to improve collections (primarily from overdue accounts) and reduce delinquencies substantially from present level will remain key rating sensitivity factor.

 

Deterioration in asset quality continues to weaken earnings profile. Pioneer finance has struggled for the last 2-2.5 years primarily due to higher credit losses. Further, reduction in portfolio is also resulting in reduction in top line.  There was a net loss of Rs 2.5 crore in fiscal 2021 (Rs. 2.8 crore in fiscal 2020). The company wrote-off loans worth Rs 0.4 crore during fiscal 2021 (Rs 1.4 crore in fiscal 2020); this impacted the bottom line. At pre-provision level also, company made a loss of Rs 2.1 crore in fiscal 2021 and Rs 1.4 crore in fiscal 2020.

 

The rating continue to reflect the extensive experience of the promoters in the two-wheeler finance business ad moderate capital position.

Analytical Approach

For arriving at the rating, CRISIL Ratings has assessed the standalone business and financial risk profiles of Pioneer Finance.

Key Rating Drivers & Detailed Description

Strengths:

Extensive experience of the promoter

The promoter, Mr Rabindu Nalinkumar Shah, has an experience of more than 15 years in the two-wheeler financing segment which should continue to support the business over the medium term. Additionally, Mr Shah also has a fair knowledge about the area/locations wherein the company operates. All the key processes such as underwriting and credit are designed by him. Apart from the current challenges (due to the pandemic), the company has not faced any major asset quality issues in the past 4-5 years. In order to increase collections and curtail delinquencies, the promotor has taken significant measures like hiring a solicitors’ firm and expanding the in-house collection team. The promoter also took stringent steps on reducing operating costs during fiscal 2021. Employee costs were reduced through salary cuts and linking of the pay structure for a majority of the employees to their performance.

 

Moderate capitalisation

Capital position of Pioneer Finance has been moderate with networth of Rs 8.9 crore (including loans from promoter/shareholders of Rs 3.0 crore). The capital position has been affected due to negative accretions during last 2.5 years. The absolute networth of the company has reduced by around Rs 3.5 crore during last 2-3 years owing to negative accretions. In terms of gearing, it has shown declining trend, given the company has reduced focus on growth. The gearing has reduced to 2.4 times (estimated) as on December 31, 2021 from 3.0 times as on March 31, 2021. Nevertheless, the promoter is committed in infusing additional funds of Rs 2-2.5 crore during Q4 fiscal 2022 (in March 2022). Apart from equity capital, the promoter (along-with other shareholders) have infused funds in form of loans in the past (Rs 3.0 crore as of March 31, 2021).

 

Weakness:

Deterioration in asset quality

Pioneer finance’s asset quality has seen sharp deterioration during fiscal 2022. Asset quality, in terms of Gross NPAs increased to around 52.4% as on December 31, 2021, from 26.9% as on March 31, 2021, and 12.2% as on March 31, 2020. The absolute Gross NPA has deteriorated marginally from Rs 7.6 crore as of March 31, 2021 to Rs 8.7 crore as of December 31, 2021.  The deterioration in Gross NPA percentage is more visible on account of de-growth in portfolio in last 2 fiscals; and during last 2-3 quarters the company has been doing very minimal disbursements as a result asset base reduced to Rs 16.5 crore as of December 21, 2021 from Rs 28.2 crore as of March 31, 2021 (Rs 36.8 crore as of March 31, 2020).

 

The increase in delinquencies have been on account of lower collections following the Covid-19 waves. The company is also trying to reach out delinquent customers, however recovery from delinquent accounts is negligible at 6% (average of last 6 months). About 99% of the portfolio is concentrated only in Mumbai and Thane which were severely impacted by the lockdown. The management has initiated stringent steps to improve collections and reduce gross NPAs. With the relaxation of lockdown restrictions after second wave of lockdown, the company has increased its follow-up on overdue customers. Majority of internal staff has been deployed on the collections (both overdue and current bucket). Additionally, the company has also hired legal agency (solicitor firm) to hasten the process of arbitration for harder bucket cases. The company is also trying to reach out delinquent customers on in-person basis. Some of the steps taken by the company has shown early signs of recovery; the average monthly collections from October 2021 to December 2021 improved to 112% from around 97% from July 2021 to September 2021. CRISIL Ratings understands that company will continue to maintain focus on improving collections from overdue/delinquent buckets. Therefore, asset quality metrics and collection efficiency will continue to be closely monitored over the medium term. The ability to improve collections and reduce delinquencies substantially from present level will remain key rating sensitivity factor.

 

Weakening of earnings

Earnings have been impacted in the past 2-2.5 years primarily due to higher credit losses, declined in portfolio, leads to decline in top line. There was a net loss of Rs 2.5 crore in fiscal 2021 (Rs. 2.8 crore in fiscal 2020). The company wrote-off loans worth Rs 0.4 crore during fiscal 2021 (Rs 1.4 crore in fiscal 2020); this impacted the bottom line. At pre-provision level also, company made a loss of Rs 2.1 crore in fiscal 2021 and Rs 1.4 crore in fiscal 2020. The company has taken stringent steps to reduce operating costs during fiscal 2021 and nine months ended fiscal 2022. Employee costs have been reduced through salary cuts, and linking of the pay structure for a majority of the employees to their performance. Nevertheless, given the elevated delinquencies experienced till December 2021 and reduction in incremental growth, profitability in fiscal 2022 will remain subdued. During nine months of fiscal 2022, the company’s loss stood at around Rs 1.0 crore (on estimated basis).

Liquidity: Stretched

Pioneer Finance’s liquidity is just about sufficient to cover total debt obligation and operating expenses from January to April 2022. The company has cash balance of Rs 4.38 crore (Rs 0.13 crore of cash and cash equivalents and Rs 4.25 crore of unutilised cash credit/working capital demand loan) as on December 31, 2021. It had total outflows of around Rs 3.82 crore between January and April 2022. The liquidity buffer would be sufficient to cover the debt repayment. The promoter constantly monitors the liquidity position and has plans to infuse equity of around Rs 2.5 crore before the end of March 2022. The collections efficiency[1] were impacted during the peak of Covid second wave, dropping to 84% in April 2021 and then 81% in May 2021. However, post June 2021, the collections on month-on-month basis has shown consistent improvement reaching to over 97% in September 2021 and crossing 100% in December 2021. The company has month-on-month collections rate in range of Rs 1.2-1.8 crore during last 5-6 months.   

[1] Calculated as total collections including overdue but excluding prepayments divided by current billing

 

Outlook: Stable

Pioneer Finance should continue to benefit from the extensive experience of the promoter, and maintain moderate capitalisation over the medium term.

Rating Sensitivity factors

Upward factors:

• Improvement in asset quality with 90+ dpd reducing and maintained below 10%
• Improvement in capital position with networth increasing to over Rs 15 crore and gearing maintained below 3 times
• Substantial improvement in earnings profile with company returning to profit-making mode

 

Downward factors:

• No substantial improvement in asset quality metrics (in terms of 90+ dpd) from present level
• Deterioration in capital position with gearing increasing to over 5 times
• Substantial fall in liquidity level to cover the repayments  

About the Company

Pioneer Finance was started in 1998 as consumer finance business by Mr Rabindu Nalinkumar Shah as proprietary concern. Over the years, the firm started providing personal loans and consumer durable loans. In 2000, Mr. Shah ventured into two-wheeler financing business. Since then, the company has been focusing mainly on two wheeler financing. Presently, operations are mainly in Mumbai (western suburbs) and Thane regions. The portfolio size was Rs 16.7 crore as on December 31, 2021, against Rs 28.2 crore as on March 31, 2021 (Rs 36.8 crore as on March 31, 2020). Due to asset quality issues faced during the pandemic, the company has scaled down operations and is focusing mainly on collections.  

Key Financial Indicators

Particulars March 31	Unit	Dec-21*	2021	2020
Total assets	Rs crore	25.8	35.5	47.7
Total income	Rs crore	3.8	6.0	9.2
Profit after tax	Rs crore	-1.2	-2.5	-2.8
Gross NPA	%	52.4	26.9	12.2
Gearing	Times	2.4	3.0	3.2
Return on assets	%	-5.3**	-5.6	-4.6

*Estimated

**Annualized

Any other information: Not applicable