| Profectus Capital Private Limited | ||||||
| 'CRISIL A- / Positive' assigned to Non Convertible Debentures; rated amount enhanced for Bank Debt | ||||||
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| Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. | ||||||
| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has assigned its ‘CRISIL A-/Positive’ rating to Rs 25 crore of non-convertible debentures (NCDs) of Profectus Capital Private Limited (Profectus) and has reaffirmed its ‘CRISIL A-/Positive/CRISIL A1’ on the existing bank facilities and debt instrument.
The rating continues to reflect the expectation of improvement in profitability, supported by steady scale-up of business, healthy capitalisation and the experience of the senior management team of Profectus. These strengths are partially offset by the company’s limited track record of operations and high operating cost.
The company has been profitable since fiscal 2020, with return on assets increasing to 1.3% over the nine months through December 2022 from 0.6% in March 2022, supported by healthy net interest margin and improved loan growth. Profitability is expected to improve further as the company gains scale and benefits from the operating leverage it has created by investing in new branches, staff and information technology (IT) systems. Assets under management (AUM) grew to Rs 2,100 crore as on January 31, 2023 and are expected to witness heathy growth in fiscal 2024, with monthly disbursements gaining pace.
Capitalisation remains healthy with a net worth of Rs 936 crore, supported by regular capital infusion from 100% shareholder Actis, as reflected in the latest infusions of Rs 120 crore in March 2023, Rs 150 crore in June 2022 and Rs 100 crore in March 2022. The company had gearing of 1.5 times as on December 31, 2022, with resources raised from a diverse set of lenders.
Profectus offers secured advances to micro, small and medium enterprises (MSMEs) and focuses on enterprises with limited access to channels of formal financing. The company primarily operates in Maharashtra, Telangana, Tamil Nadu and Gujarat, with ~58% of the portfolio concentrated in these states. It offers Loan Against Property or enterprise mortgage loan (38% of AUM), equipment funding (19%), school funding (23%), supply chain financing (11%) and non-banking finance company (NBFC) lending (9%). |
Analytical Approach CRISIL Ratings has assessed the standalone business and financial risk profiles of Profectus. |
Key Rating Drivers & Detailed Description Strengths: Healthy capitalisation Capitalisation is healthy, supported by networth of Rs 936 crore and gearing of 1.5 times as on December 31, 2022, compared with Rs 767 crore and 1.1 times, respectively, as on March 31, 2022. Capitalisation is supported by regular capital infusion from Actis, which has committed USD 140 million (around Rs 1,000 crore). Profectus has already received Rs 905 crore since its inception in June 2017 and has drawn down the last tranche of the capital commitment of Actis of around Rs 120 crore (approximately) in March 2023.
While gearing is expected to increase from current levels as the book scales up, it should remain below 4 times over the medium term. The company plans to raise a fresh round of capital in fiscal 2025 from new investors.
Experienced management The company was founded by Mr KV Srinivasan, who has extensive work experience and a track record of successfully building a retail MSME loan book. All core members of the top management have worked together prior to joining Profectus and have a reputation of successfully managing the retail finance business.
Backed by its significant experience, the management has put in place strong systems and risk management processes at an early stage, which was critical to the business given the inherent vulnerability of the MSME customer segment. The company has an experienced board, and the top management is focused on institutionalising strong corporate governance principles. The experience of the management should continue to help scale up the loan book.
The management team also benefits from the presence of Actis, which, as the 100% shareholder, is actively involved in strategic and business decisions, periodic performance reviews, stakeholder management and continues to support fundraising activities.
Improved diversity in lender base Profectus has been able to successfully diversify its lender base and has established relationships with over 27 lenders compared with only two as on March 31, 2020, diversified across NBFCs, public sector banks, private sector banks and small finance banks. Involvement of Actis in fundraising activities has helped Profectus leverage the former’s relationships. Furthermore, the company was able to tap into capital markets by issuing NCDs and getting them listed in the first quarter of fiscal 2023. Cost of incremental funds raised increased to 10.25% in fiscal 2023 from 9.5% in the previous fiscal on account of the rising interest rate scenario; however, this has been partially passed on to the customers in order to maintain margin.
Weaknesses Limited track record The company started disbursements in fiscal 2018 and reached AUM size of Rs 2,030 crore as on December 31, 2022, from Rs 1,176 crore a year earlier. Therefore, a sizeable proportion of the book has originated in the last one year; given the average loan book tenure of 5-6 years, the portfolio is relatively unseasoned.
Asset quality metrics remain controlled, with gross NPAs at 1.5% as on December 31, 2022 (2.7% on a one-year lagged basis). In addition, the secured nature of loans leads to low ultimate loan loss. The restructured book (excluding stage 3 assets) stood at Rs 11.7 crore (0.6% of AUM) versus Rs 17.5 crore (1.1% of AUM) as on March 31, 2022. Collection efficiency is back to pre-Covid levels of ~100%. However, the ability to manage asset quality as operations scale up will be a key monitorable.
Furthermore, while the portfolio is expected to grow at a healthy pace, Profectus will remain a relatively small player in the overall NBFC space over the medium term.
High operating expenses impact overall earnings Operating expenses remained high at 5.5% of the total managed assets over the nine months through fiscal 2023, impacting overall profitability despite higher net interest margin. The company opened 25 branches and has made additional investment in staff and IT systems. The business model is focused on a direct sales team for sourcing customers, and hence, the company has been incurring high employee cost; optimum operating leverage could not be achieved in the past due to overall macroeconomic conditions. Operating expenses are expected to fall down over a year as operations gain scale. |
Liquidity : Adequate As on February 28, 2023, liquid investments were Rs 107 crore, unutilised bank lines were Rs 79 crore and cash balance of Rs 95 crore, aggregating to liquidity of Rs 281 crore, against debt obligation of Rs 171 crore over 3 months ending June 2023 |
Outlook Positive Profectus is expected to see improvement in its profitability metrics, supported by steady scale-up of operations and healthy capitalisation levels. |
Rating Sensitivity factors Upward factors
Downward factors
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About the Company Profectus was founded in June 2017 by Mr K V Srinivasan, who earlier headed Reliance Commercial Finance and Reliance Home Finance. The company is registered with the Reserve Bank of India as a systemically important, non-deposit-taking NBFC. It has presence in 25 cities across 13 states and union territories. Actis, a global private equity firm, held a 100% stake in the company as on December 31, 2022.
Actis, founded in 2004 (after a spin-off from CDC Group plc, earlier known as Commonwealth Development Corporation), has raised USD 19 billion and has AUM of over USD 24 billion. It has made more than 225 investments and over 165 exits globally. Actis has 17 offices worldwide and employs more than 200 people, including 120 investment professionals.
Over the nine months through fiscal 2023, net profit was Rs 19.7 crore on total income (net of interest expense) of Rs 119.5 crore against Rs 7.8 crore and Rs 104.8 crore, respectively, in the previous fiscal. |
Key Financial Indicators
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Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
^ Interchangeable with short term bank facilities *Yet to be issued |
| Annexure - Rating History for last 3 Years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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This Annexure has been updated on 04-Apr-23 in line with the lender-wise facility details as on 05-Oct-21 received from the rated entity
Criteria Details
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