| Profectus Capital Private Limited | ||||||
| Ratings Reaffirmed | ||||||
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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 reaffirmed its ‘CRISIL A-/Positive/CRISIL A1’ ratings on the existing bank loan facilities and non convertible debentures (NCDs) of Profectus Capital Private Limited (Profectus).
The rating continues to reflect the expectation of improvement in profitability alongside steady scale up in business, while capitalisation is maintained at healthy levels. The ratings also factor in experience of the senior management team of Profectus. These strengths are partially offset by the limited track record of operations and modest, albeit improving scale of operations.
Having turned profitable in fiscal 2020, the company’s return on assets were 1.5% in fiscal 2024, marginally higher than 1.2% for the previous fiscal and 0.6% for fiscal 2022. This traction in profitability was driven by rationalisation of operating expenses as a percentage of total average managed assets, to 4.4% for fiscal 2024 from 4.9% in fiscal 2023 and 6.1% in fiscal 2022.
Apart from gradually improving profitability, the company’s financial risk profile remains supported by its healthy capitalisation marked by an absolute net worth of Rs 1,114 crore and an on-book gearing of 1.8 times, as on March 31, 2024 compared to Rs 1,065 crore and 1.7 times as on March 31, 2023. Actis – the 100% shareholder of Profectus, has infused Rs 1025 crore into the company since inception which is in line with its initial capital commitment.
During fiscal 2024, the management recalibrated its growth strategy in some of the segments like enterprise mortgage loans, trader financing and supply chain financing basis emerging asset quality trends and favourability of macro-economic factors. The company decided to limit its exposure to trader segment and higher ticket size market during the year which led to a moderately lower than anticipated growth in AUM. Nonetheless, this strategy is expected to impart granularity to the portfolio and, support asset quality in the normal course of business. As of March 31, 2024, the portfolio mix comprised business loans against property or enterprise mortgage loan (36% of AUM), equipment financing (17%), school funding (24%), supply chain financing (13%) and non-banking finance company (NBFC) & micro finance lending (10%). |
Analytical Approach CRISIL Ratings has assessed the standalone business and financial risk profiles of Profectus. |
Key Rating Drivers & Detailed Description Strengths: Healthy capitalisation along with improving diversity of lender base Capitalisation remains healthy with a net worth of Rs 1,114 crore as on March 31, 2024 compared to Rs 1,065 crore a year ago, which factors in Rs 1025 crore of equity infused by Actis – the 100% shareholder of Profectus – in line with the investor’s initial commitment. The last tranche of this capital came in March 2023. The company’s on-book leverage ratio has also remained low at 1.8 times as on March 31, 2024, compared to 1.7 times on March 31, 2023. While this metric is expected to increase from current levels as the book scales up, the company intends to maintain it within 4 times over the medium term.
In terms of debt funding, Profectus has been gradually diversifying its lender base and has 35 established lender relationships as on March 31, 2024, as compared with merely two around March 31, 2020. The lender base majorly comprises of private sector banks (57% of the total borrowings as on March 31, 2024), public sector banks (16%), NBFCs (12%), and small finance banks (11%). This resource franchise of the company has also benefited from its association with Actis. In the last two fiscals, the company has also tapped into capital markets through its listed NCD issuance and, has also done direct assignments and pass through certificates recently.
Improving earnings profile There has been gradual improvement in the company’s profitability over the last few fiscals. As compared to an RoMA of 0.7% in fiscal 2021 – which was the first profitable year for the company, Profectus reported a RoMA of 1.2% for fiscal 2023 which subsequently improved to 1.5% for fiscal 2024. This traction in profitability was a factor of economies of scale which offset the impact of a marginal decline in interest margins witnessed during the past fiscal.
The net interest income as a percentage of average managed assets (NII) compressed from 6.5% in fiscal 2023 to 6.2% in fiscal 2024 on account of increase in average cost of funds to 9.6% in fiscal 2024 compared to 8.1%, for the previous fiscal corresponding to a decline in interest income due to lower AUM growth. However, the contraction in NII was compensated by a decline of ~50 bps in operating expenses as a percentage of average managed assets to 4.4% in fiscal 2024, resulting in a marginally higher RoMA for the year. Lastly, credit costs have remained stable during the year at 0.4% of average managed assets.
With revision in business strategy specially around target segments, the ability of the management to sustain the improvement in profitably while scaling the book, will remain a key monitorable.
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. Majority of the company’s top management has worked together prior to joining Profectus and, has demonstrated ability to successfully manage 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 involvement of Actis in the company’s strategic and business decisions, periodic performance reviews, stakeholder management and, support in fundraising activities.
Weaknesses: Modest, albeit improving scale of operations With an AUM of Rs 3,090 crore corresponding to a market share of ~0.1% as on March 31, 2024, the company remains a small player in the overall NBFC sector.
In the recent past, the management took a strategic call to recalibrate its business plan considering segment specific developments. The company has reduced its disbursements to the trader segment due to inherently high delinquencies and shifted its focus towards the manufacturing segment which offers the same effective yield. Within the EML segment, the management decided to limit its exposure to higher ticket size market, to obtain higher granularity. Apart from this, some of the macro-economic factors like capital expenditure in the private sector and business volumes in the manufacturing sector did not align with the company’s initial assumptions and thus, disbursements in fiscal 2024 were flat.
The management has already rolled out its plan as per the revised strategy and the same is expected to gain momentum in the medium to long term. As the business model relies on direct sales team for sourcing customers, the company has added to its employee base in the past few years – which shall help in further improving its scale of operations in the medium term. Until then, the traction in market share is expected to remain low.
Limited track record of operations The company started disbursing loans in fiscal 2018 and reached an AUM size of Rs 3,090 crore as on March 31, 2024 with a sizeable proportion of the book having been originated in the last two years. The average tenure of the loan book is between 5-6 years that makes the portfolio relatively less seasoned.
Thus far, asset quality metrics have remained under control with gross NPAs at 1.4% as on March 31, 2024 (1.7% on a one-year lagged basis) as compared with 1.3%, a year ago. This has been supported by an average monthly collection efficiency of ~100% for fiscal 2024 and, therefore ultimate credit costs have remained low. However, with the portfolio gaining size and vintage, the ability to manage asset quality and overall profitability will be a key monitorable. In the medium term, the company is expected to register a healthy growth pace, however, will remain a relatively small player in the overall NBFC sector. |
Liquidity: Adequate As on March 31, 2024, Profectus had a liquidity of Rs 288 crore in form of liquid investments unutilised bank lines and cash balance against debt obligation of Rs 158 crore over 3 months ending June 2024. No cumulative negative mismatches were found in the Asset Liability positions as on March 31, 2024. |
Outlook: Positive Profectus is expected to sustain 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 28 cities across 14 states and union territories. Actis, a global private equity firm, held a 100% stake in the company as on March 31, 2024.
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 fiscal 2024, net profit was Rs 48.2 crore on total income (net of interest expense) of Rs 221.2 crore against Rs 29.3 crore and Rs 163.9 crore, respectively, in the previous fiscal. |
Key Financial Indicators
Note: March 2024 numbers in the rational are provisional numbers |
Any other information: Not Applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
*Yet to be issued &Interchangeable with short term facilities |
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Criteria Details
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