| Rare Asset Reconstruction Limited | ||||
| 'CRISIL BBB / Stable' assigned to Bank Debt | ||||
| Rating Action | ||||
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| 1 crore = 10 million | ||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has assigned its ‘CRISIL BBB/Stable’ rating to the bank facilities of RARE Asset Reconstruction Ltd (RARE ARC).
The rating factors in RARE ARC’s adequate capitalisation, supported by regular capital infusion by the promoters and debt repayments being largely linked to recoveries in underlying assets. The rating also factors in the extensive experience of the management. These strengths are partially offset by the nascent stage of operations and modest, albeit improving, earnings profile. |
Analytical Approach CRISIL Ratings has considered the standalone business and financial risk profiles of RARE ARC. |
Key rating drivers and detailed description[1] Strengths * Adequate capitalisation RARE ARC is adequately capitalised, as indicated by networth of Rs 164 crore (including Rs 20 crore share application money pending for allotment) as on March 31, 2021. This is supported by regular capital infusion by the promoters; the equity infused by shareholders till date is Rs 133 crore. Adjusted gearing[2] was 4.9 times as on same date. While gearing is higher than that seen for peers, the nature of the repayments support the capital profile of the company. A large portion of the acquisitions done by RARE ARC is funded by external investors via inter-corporate deposits (ICDs) and security deposits (SDs). For such assets that are funded by investors, the timing and quantum of interest and principal payment is linked to recoveries in the associated asset. This reduces the asset-side risks arising from concentration in investments as well as limited recovery from these assets.
The company, however, has recently also started borrowing from banks for the acquisition of assets. Nevertheless, such borrowings are expected to continue to be relatively lower in proportion as compared to peers, as well as in relation to borrowings through ICDs and SDs. CRISIL Ratings believes RARE ARC will maintain adequate capitalisation over the medium term for its planned scale of operations.
* Extensive experience of the management team The rating factors in the extensive experience of the management team in the relevant space. The promoter and Managing Director, Mr Anil Bhandari, has 27 years of experience including 13 years in banking and the remaining in advisory services with regards to debt syndication, resolution of stress cases and raising of additional finance for borrower companies through structured arrangements to facilitate their revival. The chief executive officer Mr Sandeep Vrat also has an experience of around 30 years including 18 years in banking and the remaining 12 years in ARC industry. The company leverages the experience of the promoter and the management to get proposals and investors for acquisition of assets. The connections of the promoters and management has helped the company acquire assets and generate recovery.
CRISIL Ratings believes RARE ARC will continue to benefit from the experience and relationships of the management.
Weakness: * Nascent stage of operations Having started operations in December 2016, RARE ARC has witnessed healthy growth, with 4-year compound annual growth rate (CAGR) of 117%, albeit on a small base, to reach an assets under management (AUM) of around Rs 3,195 crore as on March 31, 2021 (of which, investment by RARE ARC is Rs 924 crore). The company focuses on corporate accounts and works with investors who are either interested in eventually acquiring the asset or in returns generated from resolution of the account. However, focus on corporate accounts makes the asset book chunky. In terms of investment in ARC’s book, the top 10 investments accounted for around 60% of the total investment as on March 31, 2021.
While AUM growth has been healthy, the trend in recoveries needs to be established. Even as recoveries have started in many accounts, a significant proportion (around two third) of the recoveries, till date, is contributed from the sale of one large account to another ARC. Consequently, the cumulative SR redemption ratio stood at around 16% as on March 31, 2021. Hence, the track record on recoveries on a larger set of accounts will need to be demonstrated.
The company’s ability to scale up operations, while maintaining the recovery performance and improving the SR redemption ratio, will remain a monitorable.
* Modest, albeit improving, earnings profile The earnings profile is modest, with return on assets (RoA) of 0.9% for fiscal 2021, on account of relatively high operating cost structure; the operating expenses to total income ratio stood at 18.5% for fiscal 2021. However, the earnings have improved with the company reporting a profit after tax (PAT) of Rs 7.8 crore for fiscal 2021, against Rs 2.0 crore the previous fiscal.
The income profile primarily comprises of management fee (formed around 70% of total income for fiscal 2021), followed by recovery incentive fee and upside recovery income. Nevertheless, earnings are expected to be volatile given the uncertainty in recovery of acquired assets, both in terms of quantum and timing, as is inherent in the ARC industry.
The ability of the company to effect a trend of significant recoveries, and thereby, demonstrate continued improvement in earnings profile will to be monitored. [1] All numbers for fiscal 2021 and as on March 31, 2021 are provisional [2] Includes security deposits as borrowings |
Liquidity: Adequate Liquidity is adequate as repayment of a large proportion of borrowings is linked to the recovery in the underlying assets. As on April 30, 2021, the company had cash and equivalents of Rs 44.13 crore, with no principal and around Rs 3.15 crore interest payment coming due over the next 6 months. |
Outlook Stable CRISIL Ratings believes RARE ARC will maintain adequate capitalisation and will continue to leverage the extensive experience of the management. However, the ability to scale up operations while maintaining sound recovery profile and improve earnings will need to be demonstrated. |
Rating Sensitivity factors Upward factors:
Downward factors:
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About the Company RARE ARC (erstwhile Raytheon Asset Reconstruction Pvt Ltd) is an asset reconstruction company, incorporated in September 2015. The company received its ARC license from the Reserve Bank of India on September 29, 2016. The registered office is located in Ahmedabad, Gujarat.
RARE ARC is promoted by Mr Anil Bhandari and Mr Praveen Jain, with their direct holding of 2.51% and 19.58%, respectively, as on March 31, 2021. Other shareholders as on same date were Renaissance Fiscal Services Pvt Ltd (RFSPL; promoted by Mr Anil Bhandari; 41.36%), Vardhaman Investments Pte Ltd (promoted by Mr Praveen Jain; 9.85%), Sunita Jain (9.85%), Priyanka Jain (9.84%), Sweta Jain (6.22%) and others (0.79%).
For fiscal 2021, RARE ARC reported a PAT of Rs 7.8 crore on a total income of Rs 55.8 crore, as against Rs 2.0 crore and Rs 50.8 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: CRISIL Ratings' complexity levels are assigned to various types of financial instruments. The CRISIL Ratings' complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL Ratings' 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)
*Interchangeable with short term bank facilities |
| Annexure - Rating History for last 3 Years | |||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | |||||||||||||||||||||||||||||||||||||||
| Annexure - Details of Bank Lenders & Facilities | |||
| Facility | Name of Lender | Amount (Rs.Crore) | Rating |
| Proposed Long Term Bank Loan Facility& | Not Applicable | 40 | CRISIL BBB/Stable |
Criteria Details
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