Rating Rationale
April 16, 2020 | Mumbai
Profectus Capital Private Limited
'CRISIL BBB+/Stable' assigned to bank debt
 
Rating Action
Total Bank Loan Facilities Rated Rs.200 Crore
Long Term Rating CRISIL BBB+/Stable (Assigned)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has assigned its 'CRISIL BBB+/Stable' rating to the long-term bank facility of Profectus Capital Private Limited (Profectus Capital).
 
The rating reflects healthy capitalisation, supported by capital commitment from the 100% shareholder, Actis Capital (Actis). The rating also factors in the extensive experience of the senior management in the financial services space. These strengths are partially offset by a small scale of operations and modest earnings.
 
The nationwide lockdown (originally till April 14, 2020) declared by the Government of India to contain the spread of the Novel Coronavirus (Covid-19) will have a near-term impact on disbursements and collections of companies. The lockdown is now extended till May 3, 2020, and there is high likelihood that eventual lifting of restrictions will be in a phased manner. Any delay in return to normalcy will put further pressure on collections and asset quality metrics of non-banking financial companies (NBFCs). Additionally, any change in the behaviour of borrowers on payment discipline can affect delinquency levels.
 
On the liabilities side, the Reserve Bank of India (RBI) announced regulatory measures under the Covid-19 - Regulatory Package, whereby lenders were permitted to grant moratorium on bank borrowings. However, CRISIL understands that the approval of the moratorium request by many lenders is still under process. The recent uncertainty on whether NBFCs are considered eligible for moratorium has resulted in some delay in decision-making by the lenders. In the absence of this facility, liquidity of a few NBFCs could come under pressure.
 
Profectus Capital has indicated that it is currently not planning to avail the moratorium on its bank borrowings. CRISIL will continue to monitor the situation closely for all its rated companies.
 
Micro, small and medium enterprise (MSME) finance, wherein the company primarily operates, could witness challenges as the income streams of borrowers have been affected by the lockdown. CRISIL believes Profectus Capital has adequate liquidity, on a standalone basis, to manage this period wherein asset-side collections will be negligible while liability-side outflows continue as per schedule. In terms of liquidity, as on March 31, 2020, the company had liquidity of Rs 204 crore (Rs 8 crore of cash and equivalents, Rs 173 crore of liquid investments and Rs 23 crore of unutilised bank lines). Against this, it has total debt repayment of Rs 4 crore (including interest) over the three months through June 2020.

Analytical Approach

For arriving at its rating, CRISIL has assessed the standalone business and financial risk profiles of Profectus Capital, and also factored in the capital commitment from Actis.

Key Rating Drivers & Detailed Description
Strengths:
* Healthy capitalisation, supported by capital commitment from Actis
Profectus Capital has a healthy capital position with a networth of Rs 452 crore and gearing of 0.2 time as on December 31, 2019 (Rs 239 crore and 0.2 time, respectively, as on March 31, 2019). Capitalisation metrics have been supported by regular capital infusion from Actis, which has committed to invest USD 140 million (Rs 900-1,000 crore). The company has already raised Rs 550 crore in the past two fiscals including Rs 100 crore in February 2020 and the remaining portion of the committed capital is expected to be infused in the next 12-18 months in one or more traches as per business requirement.
 
While the gearing could increase over the next few fiscals with pick-up in disbursements, it should be maintained at 5-6 times on a steady-state basis. Actis is committed to regularly infusing capital as and when requited to meet business growth over the medium term.
 
* Experienced management team
The company was founded by Mr K.V. Srinivasan who has extensive experience and a track record in successfully building and running a retail MSME finance business. The core management team including Mr Srinivasan have worked together in their previous organisation and have a good repute of successfully managing the retail finance businesses.
 
Backed by their significant experience, the management has been able to put in place strong systems and risk management processes at an early stage. That's especially important given the inherent vulnerability of the underlying asset quality; and susceptibility to risks inherent in the MSME segment. The management is also focused on building sound governance systems and has an experienced Board. The experience of the management should continue to help scale-up the loan book.
 
Weaknesses:
* Early stage of operations
The company has started disbursements only in November 2017. The scale of operations remains small with a loan book of Rs 424 crore as of December 31, 2019 (Rs 145 crore as on March 31, 2019). It provides secured lending only to MSMEs and focuses on enterprises that have limited access to formal channels of financing. While adequate risk management systems are in place, this segment is vulnerable to economic cycles. The growth in the loan book is expected to remain moderate over the near term as the company remains cautious in the current weak operating environment and has slowed down disbursements in the past few quarters while further strengthening its underwriting practices. 
 
Further, the company is yet to demonstrate its ability to raise resources at competitive costs from diverse sources, which is paramount for a lending business. Nevertheless, the presence of Actis, is expected to help in raising resources and managing the relationship with lenders as well as key stakeholders. Actis has three representatives on the board of directors and continues to influence strategic decision making.
 
The ability of to maintain asset quality and raise resources while scaling up the loan portfolio will remain a key monitorable.
 
* Modest earnings
Earnings are expected to remain modest over the medium term mainly due to high operating costs, driven by investment in setting up the business including a scale-up in branch network. Gross interest spreads are expected to be in line with similar peers over the medium term. However, the asset quality performance over the medium term, given that the bulk of the portfolio is relatively unseasoned, and the impact of this on credit costs especially due to Covid-19-related factors, would remain monitorables.
 
Nevertheless, earnings are expected to improve gradually once the pace of disbursements picks up and operating expenses stabilise.
Liquidity Adequate

As on March 31, 2020, liquidity was Rs 204 crore (primarily consisting of a cash and bank balance of Rs 8 crore, liquid investments of Rs 173 crore and unutilized bank lines of Rs 23 crore) against which, debt obligation is Rs 4 crore (including interest) till June 30, 2020. Further, liquidity is 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

CRISIL believes Profectus Capital will continue to maintain healthy capitalisation, supported by the planned capital infusion by Actis. The experience of the management team is also expected to help tide over the current challenging environment.

Rating Sensitivity factors
Upward factors
* Significant improvement in the market position while maintaining asset quality
* Improvement in profitability, with return on managed assets (RoMA) beyond 2.5% on a sustained basis
 
Downward factors
* Change in capital raising plans over the next few years, thereby leading to increase in gearing beyond 6 times on a sustained basis
* Challenges in regularly raising funds from diversified sources and at optimal rates
* Significant and sustained deterioration in asset quality, coupled with the company reporting losses on a sustained basis
About the Company

Profectus Capital 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 11 cities across five states currently. Actis, a global PE firm, held 100% stake in the company as on March 31, 2020.
 
Actis, founded in 2004 (after a spin-off from CDC), has raised USD 14 billion, and currently 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 2019, Profectus had a loss of Rs 15.2 crore on total income of Rs 12.6 crore (loss of Rs 2.0 crore on total income of Rs 0.1 crore in the previous fiscal). However, the company has broken even in the nine months through December 2019 with a profit of Rs 2.1 crores on total income of Rs 43.9.

Key Financial Indicators
As on/for the year ended  Unit Dec-19 Mar-19 Mar-18
Total Assets Rs crore 576.6 288.1 3.5
Total income Rs crore 43.9 12.6 0.1
Profit after tax Rs crore 2.1 -15.2 -2.0
Gross NPA % 0.2 - -
Gearing Times 0.2 0.2 0.0
Return on assets % 0.6 -10.4 -
 

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
ISIN Name of instrument Date of allotment Coupon
rate (%)		 Maturity
date		 Issue size
(Rs.  cr)		 Rating outstanding
with outlook
NA Proposed Long Term
Bank Loan Facility		 NA NA NA 200 CRISIL BBB+/Stable
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund-based Bank Facilities  LT/ST  200.00  CRISIL BBB+/Stable    --    --    --    --  -- 
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Proposed Long Term Bank Loan Facility 200 CRISIL BBB+/Stable -- 0 --
Total 200 -- Total 0 --
Links to related criteria
CRISILs Bank Loan Ratings
Rating Criteria for Finance Companies

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