Detailed Rationale

CRISIL Ratings has upgraded its rating on the long-term bank facilities of Profectus Capital Pvt Ltd (Profectus) to ‘CRISIL A-/Stable’ from ‘CRISIL BBB+/Stable’ and reassigned ‘CRISIL A1’ rating to the short term bank facility.

 

The upgrade reflects the demonstrated portfolio performance of the company during the challenging macro environment as well as gradual improvement in the resource profile, with diversification in the lender base. The company also turned profitable in fiscal 2021. Nevertheless, its ability to continue to scale up the loan book while maintaining adequate asset quality and profitability will be closely monitored.

 

Profectus offers secured advances to micro, small and medium enterprises (MSMEs) and focuses on enterprises with limited access to channels of formal financing. Asset quality metrics remained relatively steady over the year, with gross non-performing assets (NPAs) at 0.2% as on March 31, 2021. Even on a lagged basis, the number was low at 0.4%. While the company’s 0+ days past due inched up to 4.4% as on March 31, 2021, from 0.3% a year earlier, they were better than those of peers. Also, restructuring under the June 2019 MSME restructuring scheme announced by the Reserve Bank of India (RBI) was low at Rs 13 crore of loans (1.5% of the overall portfolio) as on March 31, 2021.

 

However, the second wave of the Covid-19 pandemic has resulted in intermittent lockdowns and localised restrictions. Consequently, collection efficiency is expected to fall to 89-90% in May and June 2021 from 96% in March 2021. Reported delinquencies in June 2021 could, therefore, be higher than those in March 2021. This is expected to recover from July onwards, as the lockdowns ease and economic activity normalises. Supply chain disruptions on account of the second wave of the pandemic may pressurise the asset quality, as cash flow of the underlying borrowers remains uncertain. Furthermore, any change in the payment discipline of borrowers can weaken delinquency levels. Therefore, the ability to manage the asset quality will be closely monitored. 

 

While the company continues to rely on loans from banks and non-banking finance companies (NBFCs), it has been able to successfully diversify the lender base and now has relationships with over 14 lenders compared with only two a year earlier. Consequently, overall borrowings increased to Rs 443 crore as on March 31, 2021, from Rs 103 crore as on March 31, 2020, and Rs 40 crore as on March 31, 2019. Involvement of Actis in fundraising activities has helped the company leverage the former’s relationships. The company’s cost of borrowing at around 10% was comparable with that of peers. It also plans to tap into capital markets over the medium term to further diversify its resource mix.

 

The rating also reflects the healthy capitalisation of Profectus, supported by capital commitment from the 100% shareholder, Actis, and extensive experience of the senior management in the financial services space. These strengths are partially offset by small scale of operations and modest earnings.

Analytical Approach

CRISIL Ratings has assessed the standalone business and financial risk profiles of Profectus and has also factored in the capital commitment from Actis.

Key Rating Drivers & Detailed Description

Strengths:

Healthy capitalisation, supported by capital commitment from Actis

Capitalisation is healthy, supported by networth of Rs 658 crore and gearing of 0.7 time as on March 31, 2021, compared with Rs 550 crore and 0.2 time, respectively, a year earlier. Capitalisation is supported by regular capital infusion from Actis, which committed investment of USD 140 million (Rs 900-1,000 crore). The company has already received Rs 655 crore since its inception in June 2018, of which the latest tranche of Rs 100 crore was infused in March 2021. The remaining commitment of around Rs 350 crore is expected to fructify in the next 12-18 months in 2-3 tranches as per the business requirement.

 

Although the gearing will increase as the company scales up its operations, it should remain below 2-3 times over the next few fiscals and 5-6 times on a steady state basis. Furthermore, Actis is committed to regularly infusing capital as and when required in order to meet business growth over the medium term.

 

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 the core members of the top management have worked with each other 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.

 

Weakness:

Small scale of operations

The company started disbursements in November 2017, and the scale of operations remains small as on date. The total portfolio was Rs 893 crore as on March 31, 2021, against Rs 454 crore a year earlier. While growth in the loan book is expected to pick up in the near term as the pandemic subsides, the size will remain small over the medium term. 

 

Modest earnings

Profitability will remain modest, with elevated operating costs, which happened because of expansion of the branch network, related recruitment and investment in technology. Nevertheless, the company broke even in fiscal 2021 (under Ind-AS) with profit after tax (PAT) of Rs 6.8 crore against loss of Rs 0.7 crore a year earlier, along with rise in scale. Return on assets were 0.7% in fiscal 2021 against negative 0.1% in the previous fiscal. Credit cost was broadly stable at 0.5% in fiscal 2021 compared with 0.4% the previous fiscal. However, under IGAAP the company had broke even in the first half of fiscal 2020.

 

Profitability is expected to improve further, as the company ramps up its loan book and benefits from operational leverage accrual. However, given the relatively unseasoned portfolio, delinquencies and the company’s ability to manage its credit costs will be closely monitored.

Liquidity : Adequate

As on May 31, 2020, cash and bank balance was Rs 9 crore, liquid investments were Rs 212 crore and unutilised bank lines were Rs 55 crore vis-à-vis debt obligation of Rs 52 crore, over the five months through October 2021. Liquidity is further supported by the presence of Actis as the 100% shareholder, which can infuse funds within a short while in case of any exigency.

Outlook Stable

Profectus will maintain its healthy capitalisation, supported by the regular capital infusion from Actis. The experienced management is expected to help increase the company’s revenue along with reasonably healthy asset quality.

Rating Sensitivity factors

Upward factors

• Significant improvement in the market position, while maintaining the asset quality
• Improvement in profitability, with return on managed assets beyond 2.5% on a sustained basis

 

Downward factors

• Change in capital raising plans over the next few years leading to increase in gearing to beyond 6 times on a sustained basis
• Challenges in regularly raising funds from diversified sources and at optimal rates
• Significant and sustained weakening of the asset quality coupled with the company continuously reporting losses

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 RBI as a systemically important, non-deposit-taking NBFC. It has a presence in 19 cities across 12 states and union territories. Actis, a global private equity firm, held a 100% stake in the company as on March 31, 2021.

 

Actis, founded in 2004 (after a spin-off from CDC Group plc, earlier known as Commonwealth Development Corporation), has raised USD 14 billion and has assets under management of over USD 10 billion. It has made more than 200 investments and over 160 exits globally. Actis has 15 offices globally and employs more than 200 people, including 120 investment professionals, in 10 countries.

 

In fiscal 2021, net profit was Rs 6.8 crore on total income (net of interest expense) of Rs 79.4 crore against loss of Rs 0.7 crore on total income (net of interest expense) of Rs 48.3 crore in the previous fiscal.

Key Financial Indicators

As on/for the year ended  (Ind-AS)	Unit	March 2021	March 2020
Total assets	Rs crore	1,148	676
Total income (net of interest expense)	Rs crore	79.4	48.3
PAT	Rs crore	6.8	-0.7
Gross NPAs	%	0.2	0.2
Gearing	Times	0.7	0.2
Return on assets	%	0.7	-0.1

 

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN Name of instrument Date of allotment Coupon rate (%) Maturity date Issue size (Rs crore) Complexity level Rating outstanding with outlook NA Proposed long-term bank loan facility NA NA NA 60 NA CRISIL A-/Stable NA Term loan  05-Sep-2020 NA 05-Sep-2022 20 NA CRISIL A-/Stable NA Term loan  29-Feb-2021 NA 29-Feb-2024 10 NA CRISIL A-/Stable NA Term loan  31-Mar-2021 NA 31-Mar-2024 10 NA CRISIL A-/Stable NA Term loan  28-Feb-2021 NA 28-Feb-2022 75 NA CRISIL A1 NA Cash Credit NA NA NA 25 NA CRISIL A-/Stable