Detailed Rationale

CRISIL Ratings has assigned its 'CRISIL A2' rating to the Rs 50 crore commercial paper of Quadrillion Finance Private Limited (QFPL).

 

The rating reflects the healthy capitalisation metrics and scalable business model aided by technology based sourcing and assessment. These strengths are partially offset by modest earnings due to high operating expenses, limited track record on asset quality and moderate resource profile.

 

QFPL is a wholly owned subsidiary of Garagepreneurs Internet Private Limited (GIPL), which was incorporated in 2015 as a technology platform running under the brand name – slice. The technology platform was initially used to provide loans through FLDG arrangements with other NBFC partners. However, in 2018, GIPL incorporated QFPL as its own subsidiary, which now acts as one of the lender on ‘slice’ platform along with other partner lenders.

 

The consolidated entity, referred to as ‘slice group’, offers a range of data-driven lending products to suit the millennials needs. As part of its offerings, the group, through its partnership provides prepaid cards to its customers with a predefined credit limit, which can then be used to spend in three broad categories – to take credit through slice card, to transfer money to bank and to purchase electronic gift vouchers.

Analytical Approach

CRISIL Ratings has evaluated the consolidated credit and financial risk profile of slice group i.e. Garagepreneurs Internet Pvt Ltd (GIPL) and QFPL, as there are significant operational and managerial linkages between the companies. Additionally, all the equity raises are done at the parent company i.e. GFPL, part of which is infused in QFPL.

 

Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

• Healthy capitalisation metrics

The group has raised about Rs 1260 crore of capital since inception from private equity players and promoter, with Rs. 895 crore Infusion in Dec’21 and Rs. 120 crore in Jan’22. Consequently, the networth of the group stood at Rs 994 crore with adjusted gearing at 0.5 time as on December 31, 2021. Of the total capital infusion, around Rs 340 crore has been infused in the QFPL. Consequently, at standalone level, QFPL reported a networth of Rs 359 crore with adjusted gearing of 2.7 times as on December 31, 2021. The gearing at the group level is not expected to go beyond 2.5 times in the medium term. The recent capital levels provide a cushion against the operating expenses burn. Additionally, capitalisation is expected to remain comfortable over the medium term, thus providing a cushion against asset-side risks. 

 

• Scalable business model aided by technology based sourcing and assessment

The group has adopted a branchless business model with most of the operations from origination to disbursements happening digitally. Around 35-40% of sourcing is done through digital marketing where group advertises on social media platforms along with using search engine optimization tools and remaining 60-65% of the leads are generated through referrals & organic channel. As majority of the sourcing is done online, the customer acquisition cost is fairly lower. In addition to this, the entire risk assessment process from data collection to approval to final disbursement is completely digital, with minimal manual intervention, thereby resulting in lower turnaround time.

 

The group follows an early acquisition strategy, wherein its prime focus remains on early salaried/prime salaried segment (74%) and student segment (26%), with average age of the consumer profile being in the range of 27-28 years.

 

In addition to the above, the group competes with other credit card providers with higher rewards benefits which can be instantly converted into cash and by ensuring higher transparency for customers.

 

Consequently, the group has reached a milestone of issuing around 2 lakh cards per month as of December 2021. This has also supported the growth in the assets under management (AUM) at Rs 1531 crores as on December 31, 2021 as compared to Rs 298 crores as on March 31, 2021. The growth during fiscal 2018-2021 has been at a CAGR of 140%. CRISIL Ratings understands that the sustenance in the user base also has been healthy and the same stays above 70%. Nevertheless, while, growth has been strong in both the number of cards issued and the AUM for QFPL, the sustenance in the user base as well as improvement in market share remains to be demonstrated.

 

Weaknesses:

• Earnings profile currently constrained amidst elevated operating expenses

Amidst the nascent stage of operations, operating expenses of the group remained high due to heavy investments in business promotion and therefore, customer acquisition expenses. The operating expenses constituted 30.3% of the average total assets as on December 31, 2021.

 

Additionally, in terms of credit cost, the group follows a conservative provisioning policy, provides for 75% at 90+ dpd level, and 100% at 180+ dpd level for its own book. Consequently, the credit cost stood at 4.5% as on December 31, 2021.

 

The group has been reporting losses since inception at the consolidated level. In the nine months ending December 31, 2021, the group reported a loss of Rs 127.8 crore, as against a loss Rs 8.5 crore in fiscal 2021. On the standalone level, QFPL has been reporting profits since inception, with company reporting a nine months profit after tax of Rs 17.1 crore, as against Rs 0.4 crore in fiscal 2021.

 

Nevertheless, on the unit economics basis, the group has consistently been able to report a positive contribution margin in the last nine months. The business model of the group is structured in such a manner that it provides group with an opportunity to earn from diversified streams in the form of interest, commission and fee, depending upon the nature of the product. This includes, interest income from EMIs, processing charges from bank transfer and merchant commission from e-gift vouchers. In addition to this, the group also charges service fee  from its lending partners for using the slice platform. Additionally, the funding cost of the group, albeit high, has improved over the period of time since inception, thereby providing comfort to the top line.

 

With the higher net total income supported by multiple income streams, despite the credit cost and high variable operating expenses, CRISIL Ratings note that the group has been able to generate positive contribution margins.

 

Having said that, the overall profitability continued to be constrained by high fixed operating expenses primarily consisting of employee benefit expenses and marketing cost. Additionally, the loan book is not yet seasoned and hence credit costs will remain a key monitorable. Therefore, earnings profile hinges upon the ability to scale up the book by benefiting from operating leverage while also managing its credit costs which will remain key monitorables going froward.

 

• Limited track record of operations; therefore asset quality performance needs to be seen

The group has put in place strong risk management systems and processes. The lending decision is primarily based on the output from the proprietary credit risk model. Further, the group regularly reviews the model on quarterly basis and makes timely upgrades to the model based on the performance of the portfolio/collections experience. Furthermore, the group initially offers low limit to its borrowers and gradually increase the limit based on the performance of the borrower.

 

This coupled with strong collection mechanisms has helped the group in maintaining its asset quality, with collection efficiency remaining above 94% across the pandemic. Consequently, the asset quality in terms of 90+ dpd also remained comfortable and stood at 0.5% as on December 31, 2021, at the consolidated level, as against 1.0% as on March 31, 2021. Even after including last 12 months write-offs, the adjusted 90+ dpd was comfortable at 1.3% at consolidated level, as on December 31, 2021, as against 2.5% as on March 31, 2021. Given the inherent nature of the product offering with shorter tenure loans, CRISIL Ratings has also considered the asset quality in terms of 3-months lagged 90+ dpd, which stood at 1.1% as on December 31, 2021, as against 1.3% as on March 31, 2021.

 

However, CRISIL Ratings note that the group, at the initial two years of its operations, primarily served the student segment and the share of salaried segment has only started increasing in last 1.5 years. With larger portion of the portfolio constituting the salaried segment, the average ticket size of the loans is expected to increase in the medium term. Further, the portfolio lacks seasoning given the scale up in the past 6 months and the ability to control asset quality metrics would be demonstrated only over the medium term.

 

• Moderate resource profile

The resource profile of the group is concentrated with 71% of loans from NBFCs largely due to the nascent stage of operations. Further, the bank funding remained concentrated with only two banks in the lenders profile as on December 31, 2021. Consequently, the group’s funding cost remained relatively high with the group raising around Rs 212 crore in third quarter of fiscal 2022. CRISIL Ratings note post the capital infusion in December 2021, the group has been able to receive sanctions at improving rates. Nevertheless, the ability of the group to further diversify its resource profile and bring down its borrowing cost will remain a key monitorable. 

Liquidity: Adequate

Asset-liability maturity profile of the company is comfortable as on December 31, 2021 with positive mismatches across the buckets up to 1 year. slice had cash and liquid investments of Rs 242 crores as on December 31, 2021, covering 3 months of cash outflows of Rs 218 crore from January 2022 to March 2022.

Rating Sensitivity factors

Upward factors:

• Improvement in earnings profile, with group reporting profitability on a sustained basis whilst successfully scaling up operations
• Sustainability in asset quality metrics over the medium term
• Capitalisation metrics remaining comfortable with gearing continuing to remain under 2.5 times over the medium term

 

Downward factors:

• Any adverse movement in asset quality leading to a substantial impact on the earnings profile
• Deterioration in capitalisation metrics with gearing increasing above 4 times on steady-state basis
• Inability to raise equity in a timely manner to fund business requirements

About the Company

QFPL is a wholly owned subsidiary of Garagepreneurs Internet Private Limited (GIPL).  GIPL started off as technology platform in 2015 under the brand name – slice, wherein it used to partner with other NBFCs to use its platform for customer acquisition and risk assessment, through FLDG arrangements. In 2018, GIPL incorporated its own NBFC, QFPL, which now acts as one of the lenders on slice platform.

 

The product offerings include a slice limit, which can be used in three broad categories – to take credit and transact through slice card (73% of AUM), to transfer to bank/paytm (23%) and to purchase electronic gift vouchers (4%). The group had an AUM of Rs 1531 crore as on December 31, 2021.

 

The group reported a loss of Rs 127.8 crore on the total income (net of interest expense) of Rs 125.8 crore in the nine months ending December 31, 2021, as against loss of Rs 8.5 crore on the total income (net of interest expense) of 59.5 crore in fiscal 2021.

 

At the standalone level, QFPL reported a profit after tax (PAT) of Rs 17.1 crore on the total income (net of interest expense) of Rs 90 crore in the nine months ending December 31, 2021, as against PAT of Rs 0.4 crore on the total income (net of interest expense) Rs 29.2 crore in fiscal 2021 

Key Financial Indicators: (Consolidated)

As on/for the period ending	Unit	Dec-21	Mar-21	Mar-20
Total assets	Rs crore	1675.2	220.3	72.6
Total assets under management (including co-lending)	Rs crore	1531.4	297.8	158.9
Total income	Rs crore	164.9	68.2	40.7
Profit after tax	Rs crore	-127.8	-8.5	-1.2
90+ dpd	%	0.5	1.0	1.8
Gearing	Times	0.5	2.0	0.4
Return on managed assets	%	-18.0	-5.8	-2.6

 

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs. Cr)	Complexity Level	Rating outstanding with outlook
NA	Commercial Paper	NA	NA	7 to 365 days	50	Simple	CRISIL A2

 

Annexure – List of entities consolidated

Names of Entities Consolidated	Extent of Consolidation	Rationale for Consolidation
Garagepreneurs Internet Private Limited	Full	Parent
Quadrillion Finance Private Limited	Full	Subsidiary