Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL A/Stable’ rating on the bank loan facilities of Ratnaafin Capital Private Limited (RCPL).

 

RCPL is a group company of the Ratnamani Sanghvi Family Group, whose flagship company is Ratnamani Metals and Tubes Ltd (rated CRISIL AA/Stable/ CRISIL A1+). The financial services business of the group comprises of the lending arm i.e., the NBFC which is RCPL, the IRDA registered insurance broking business which is carried through Ratnaafin Insurance Broking Private Ltd (RIBPL) and the advisory business wherein the group generates loans for other financiers in the housing finance and construction finance via Ratnaafin Management Services LLP (RMS). The promoters hold majority stake in the main holding company Ratnaafin Enterprises Pvt Ltd (REPL). REPL has three subsidiaries - with 100% stake in RCPL and majority stake in RIBPL and RMS. Given the interlinkages between the entities in terms of operational support, common management team and similar line of business operations, CRISIL Ratings has evaluated the consolidated financial and business risk profile of all the financial services arm within the group all together referred to as “Ratnaafin”.

 

The reaffirmation of the rating factors in continued expectation of strong support from Ratnamani Sanghvi Family Group in terms of capital support, strategic importance of financial services vertical for the group, competitive advantage stemming from the group’s ecosystem in terms of reference checks, management oversight, established relationships with bankers/ lenders of the group and name sharing. The promoters have committed to infuse around Rs 450 crores of equity by 2024 subject to the scale up in the business. Of this, they have already infused around Rs 235 crores in form of equity till November 2023 and another Rs 59 crore by way of unsecured loans (which will be subsequently converted to equity). CRISIL Ratings expects managerial, operational and financial support from the Ratnamani Sanghvi Family Group to Ratnaafin to continue over the medium term.

 

The standalone credit profile continues to be supported by comfortable capitalisation metrics and well diversified loan book profile. While the asset quality metrics remain comfortable so far and profitability too remains healthy, the nascent scale of operations given that the business started operation in 2020 leads to limited seasoning in the portfolio. Ability to scale up business operations whilst maintaining comfortable asset quality metrics and sustenance of healthy earnings profile remains key monitorables.

Analytical Approach

CRISIL Ratings has analysed the consolidated financial and business risk profile of all the entities providing financial services within the group i.e. Ratnaafin Enterprise Private Limited consolidated with its subsidiaries (RCPL, RIBPL and RMS), all together referred to as “Ratnaafin” and factors in the expectation of strong support from Ratnamani Sanghvi Family Group both on an ongoing basis and in the event of distress.

 

CRISIL Ratings has also taken note of the preference share capital in the books of REPL having high residual maturity, its subordinate position in the capital structure, nominal dividend payout with flexibility to defer dividend distribution, if called upon. Furthermore, it is entirely held by the promoter family.

 

Similarly, CRISIL Ratings has taken note of the management’s plans to convert long term inter-corporate deposits in the books of RCPL into equity once it crosses a particular threshold. Furthermore, it is entirely held by the parent company REPL.

Key Rating Drivers & Detailed Description

Strengths:

Expectation of strong support from the Ratnamani Sanghvi Family Group

The financial services vertical is of high strategic importance to the Ratnamani Sanghvi Family Group and is one of the group’s focussed sectors for growth amongst other sectors. The business was started to cater to the SME segment with the expertise of the group. The processes and systems in place are aligned with that for the other group entities.

 

The promoters have infused funds of around Rs 235 crore in form of equity and Rs 59 crore in form of unsecured loans in Ratnaafin till November 2023, out of total committed capital of Rs 450 crores of equity by 2024 subject to the scale up in the business.

 

Further, the operational interlinkages between the group are high with the group supporting in terms of generating leads as well as for reference checks for borrowers. The promoters currently have complete management oversight and board control and are actively involved in the strategy formulations of the group along with the current management team. Further, the NBFC is also expected to benefit from the established relationships with bankers/lenders of the group.

 

Additionally, name sharing with the group also enhances the moral obligation on the group to support Ratnaafin. The promoters also intend to keep additional buffers in terms of liquid lines to support the business operations in case of any unforeseen exigency. CRISIL Ratings expects managerial, operational and financial support to Ratnaafin to continue over the medium term.

 

Healthy capitalisation metrics supported by group commitment and steady earnings

Capitalisation metrics are comfortable for the current scale of operations with equity share capital plus reserves & surplus amounting to Rs 28 crore and additionally preference share capital amounting to Rs 225 crore as on September 30, 2023. Capitalisation is supported by the regular equity infusions from the promoters. RCPL’s capital adequacy stood comfortable at 46.8% as on September 30, 2023.

 

CRISIL Ratings has taken note of the recent measures by Reserve Bank of India (RBI) covering the Banking and NBFC sector. Firstly, on the asset side for NBFCs, there is an increase in risk weights for unsecured consumer loans (including credit card receivables), by 25 percentage points to 125% from 100% earlier. This regulation applies to all retail loans except housing loans, vehicle loans, educational loans, loans against gold and microfinance/SHG loans. The increase in risk-weighted assets will lead to a decrease in the capital adequacy ratios of NBFCs (wherever applicable) but is not likely to materially impact the ratios of RCPL. CRISIL Ratings understands that the above would have a minimal impact on RCPL’s capital adequacy since it primarily caters to MSME segment and personal loans constitute a small portion of the overall book.

 

Secondly, there is an increase in risk weights for Bank’s exposure to NBFCs by 25 percentage points (over and above the risk weight associated with the given external rating) in all cases where the extant risk weight as per external rating of NBFCs is below 100%. Herein, loans to HFCs, and loans to NBFCs which are eligible for classification as priority sector are excluded. This development may potentially lead to an increase in cost of bank borrowings for NBFC sector. This could lead to diversification in the borrowings mix with higher share of capital market instruments and securitisation, amongst others. Ability of NBFCs to pass on the potentially higher borrowing costs will be monitored.

 

The reported gearing in the books of RCPL stood at 0.9x as on September 30, 2023. Ratnaafin plans to run on a conservative gearing philosophy with the gearing metrics not expected to go beyond 3.5 times on a steady state basis.

 

Capitalisation is further supported by positive internal accruals. RCPL reported net profit of Rs 6.1 crore and return on managed assets (ROMA) of 2.5% for the first half of fiscal 2024 (Rs 6.4 crore and 2.7% respectively for fiscal 2023). Additionally, advisory fees as well as insurance brokerage also add to the income diversity. On a consolidated basis, Ratnaafin earned net profit of Rs 5.7 crore for fiscal 2023 with ROA of 2.2%. The earnings profile is supported by a healthy net interest margin and controlled credit costs. Given the expectations of the group support, the external borrowings of Ratnaafin are expected to be at competitive rates. Nevertheless, as the portfolio scales up control over credit costs and therefore any substantial impact on the earnings profile will remain a key monitorable.

 

Weakness:

Limited seasoning in the portfolio, given nascent stage of operations

RCPL started its disbursal operations from August 2020 and in a span of 3 years has made cumulative disbursements of over Rs 700 crore till July 2023, on its own books. Additionally, the group has also provided advisory services in the books of RMS LLP.

 

RCPL’s loan book grew by 68% YTD to Rs 483 crores as on September 30, 2023 (from Rs 287 crore as on March 31, 2023; Rs 18 crore as on March 31, 2021). It thereafter grew to Rs 585 crores as on November 30, 2023. The lending business of the group has multiple product segments catering to the SME vertical. The loan book as on September 30, 2023 comprised of Loans against property (LAP, 44%), followed by channel funding (36%), business loans (10%), equipment finance (5%) and personal loans (4%). The MSME advisory business of Ratnaafin which is under RCPL has over Rs 680 crores of loans generated as on September 30, 2023 which is not reflected in the AUM as the operations were more aligned with that of a direct selling agent. However, the group intends to shift the advisory business to a business correspondent (BC) model which will reflect in a substantial scale up of AUM for Ratnaafin. The group has successfully tied up with two such lenders and the book sourced and underwritten by RCPL under BC model stood at Rs 67 crore as on September 30, 2023.

 

Going forward, the growth in the loan portfolio is expected to remain strong with LAP continuing to constitute bulk of the portfolio followed by channel finance. Additionally, with more BC and Co-Lending partnerships in place will also support growth and earnings.

 

Amidst the scale up in the portfolio, the asset quality metrics currently remained healthy with the 90+ dpd on the loans written on own books stable at 0.12% as on September 30, 2023 and March 31, 2023. The group has put in place strong systems and processes to support on the underwriting which includes a check on the credit history of the borrower, reference check for the borrower and a complete cash flow based assessment. As a result, the bureau score mix of the portfolio remained healthy, with 98% of the portfolio composed of customers having CIBIL Score of more than 700 as on September 30, 2023.

 

Nevertheless, given the nascent stage of operations, the seasoning in the portfolio is limited. Furthermore, given the lending segment focused on Gujarat, the company would be exposed to geographic concentration risk. Ability to scale up the portfolio while diversifying the book and maintaining asset quality metrics remains to be seen. Any higher than anticipated uptick in the asset quality metrics will remain a key monitorable.

Liquidity: Strong

As on Sept 30, 2023, RCPL had a cash and bank balance of Rs 18.3 crore against which external debt obligations stood at Rs 17.1 crore for 3 months ending December 31, 2023. The entity intends to maintain liquidity for 2 quarters on an ongoing basis, covering the debt repayments and sanctions in pipeline in the form of cash/ liquid investments. Further, the promoters have also committed to keeping additional buffers available to support the business in case of any unforeseen exigency. The ALM profile as on September 30, 2023 also stood comfortable with positive cumulative mismatches upto 1 year bucket.

Outlook: Stable

CRISIL Ratings believes Ratnaafin will continue to receive strong support from the Ratnamani Sanghvi Family Group. The rating will remain sensitive to any change in CRISIL Ratings’ rating on Ratnamani Metals & Tubes Limited.

Rating Sensitivity Factors

Upward factors:

• Ability to successfully scale up the portfolio whilst sustaining the earnings profile with ROA above 2.5%
• Comfortable asset quality metrics while the portfolio scales up

 

Downward factors:

• Downward change in the credit risk profile of Ratnamani Metals and Tubes Ltd or Ratnamani Sanghvi Family Group by one notch or higher could have a similar impact on the ratings
• Any significant deterioration in the asset quality metrics leading to its consequent impact on the earnings profile

About the Company

RCPL was incorporated in November 2018 and commenced lending operations after receiving NBFC license in June 2020. RCPL primarily caters to the MSME segment and its product offerings include Loan against Property (LAP), business loans, working capital term loans, channel finance, equipment finance and personal loans.

 

It is a wholly owned subsidiary (WOS) of Ratnaafin Enterprise Private Limited (REPL, formerly known as Ratnaafin Holdings Pvt Ltd), which is held by the founders namely Ratnamani Sanghvi Family Group (60%), Mr. Malav Desai & family (20%) and Mr. Dhaval Patel & family (20%). REPL also has other subsidiaries, Ratnaafin Insurance Broking Pvt Ltd, incorporated in October 2019 and Ratnaafin Management Services LLP.

 

RCPL is co-founded by the Ratnamani Sanghvi Family Group, who are the promoters of Ratnamani Metals and Tubes Ltd (rated CRISIL AA/Stable/ CRISIL A1+), which is engaged into manufacturing of a wide range of Stainless Steel Welded & Seamless Tubes, Stainless Steel Welded Pipes and Carbon Steel Welded Pipes; with 3 manufacturing facilities in Gujarat. In addition, Ratnamani Sanghvi Family Group also has presence in engineering, pharmaceuticals, plastics and real estate.

 

The Ratnamani Sanghvi Family Group has committed capital infusion of Rs 450 crores by 2024 subject to the scale up in the business into the NBFC through REPL, of which Rs 235 crores in form of equity and Rs. 59 Cr in form of long-term unsecured loan has been infused till November 2023. The AUM of RCPL stood at Rs 550 crore (on book loans of Rs 483 crore and off book through BC partnership at Rs 67 crore) as on September 30, 2023.

Any other information: Not Applicable