Detailed Rationale CRISIL Ratings has revised its outlook on the long debt programmes of SK Finance Limited (SK) to ‘Positive’ from ‘Stable’ while reaffirming the rating at ‘CRISIL A+/CRISIL PPMLD A+’.
CRISIL Ratings has also withdrawn its rating on Rs.331 crore of non-convertible debentures, Rs 95 crore of long-term principal protected market linked debentures and Rs 50 crore commercial paper at the company’s request and on receipt of requisite documentation. This is in line with CRISIL Ratings’ policy on withdrawal of ratings.
The revision in outlook is driven by expectation of strong scale up in business along with sustenance of healthy profitability, asset quality, as well as strengthening capitalisation metrics.
The loan book of the company has shown healthy growth momentum, growing at a 5-year compounded annual growth rate (CAGR) of 42% till fiscal 2023 with AUM reaching Rs 7,378 crore as on March 31, 2023. During the first quarter of fiscal 2024 as well, the AUM grew at an annualised rate of 30.3% reaching around Rs 7,937 crores as on June 30, 2023. This growth was accompanied by comfortable asset quality metrics - collection efficiency ratio[1] remains range bound at 95%-100% till June 2023. This consequently resulted in resilient and controlled asset quality metrics in terms of 90+ dpd which stood at 1.95% as on June 30, 2023, as against 1.6% as on March 31, 2023, and 2.3% as on March 31, 2022. The ability of the company to maintain its asset quality along with the scale up in the portfolio will continue to be a key rating sensitivity factor.
With controlled asset quality metrics, SK has been able to control its credit costs which has supported the earnings profile. The company had made higher provisioning during fiscal 2020 and fiscal 2021 to combat any stress on the book arising from the pandemic and hence the credit costs remained elevated at around 2.9% in fiscal 2020 and 2.3% in fiscal 2021. During fiscal 2022, the company wrote back its provisions worth around Rs 32.1 crore (0.7% of AUM as on March 31, 2022) and hence reported a credit cost of only 0.3% during the fiscal. The credit costs returned to the pre-pandemic levels in fiscal 2023, with SK reporting credit cost of 1.2% in fiscal 2023. During the first quarter of fiscal 2024, the credit costs stood at 1.5% (annualized). Subsequently the company reported a return on managed assets of 2.5% (annualized) during the first quarter of fiscal 2024 as against a RoMA of 2.8% during fiscal 2023.
Moreover, SK’s capitalization metrics have been supported by the regular and timely equity raising with company raising around Rs 1144.3 crore since inception. This is also supported by healthy internal accruals generated with return on managed assets being in the range of 2%-3% in the last 4 years. Consequently, the net-worth of the company stood at Rs 1,901 crores with adjusted gearing of 4.3 times as on June 30, 2023. SK’s capital base is expected to be further bolstered by the primary equity raise of Rs 899.5 crore from both existing and new investors, of which Rs 663.6 crore has already been received and the remaining is expected to be received shortly, post receipt of regulatory approvals. Gearing too is expected to improve with the capital infusion and is expected to remain within 4 times over the medium term.
The rating also takes note of the company’s strong experience of promoter and management team in vehicle finance segment and its ability to consistently maintain diversified borrowings portfolio and raise funds at competitive rates. It raised a total of Rs 5,896.7 crore in fiscal 2023 and another Rs 1,505 crore in first quarter of fiscal 2024 with the incremental fund raising being at around 8-9.5%. These strengths are partially offset by the company’s scale vis-à-vis the larger financial sector. [1]Calculated as Total collections including overdue but excluding prepayments divided by current billing |
Analytical Approach CRISIL Ratings has evaluated the standalone business and financial risk profile of SK Finance Limited for arriving at the ratings. |
Key Rating Drivers & Detailed Description Strengths: Comfortable earnings profile with the company being profitable since inception Given the segment of operations, the net Interest Margins (on total income basis) tends to be high and have remained over 10% during the last 3 years driven by the high yields on the portfolio given the inherent borrower profile and improving cost of funds.
With controlled asset quality metrics, SK has been able to control its credit costs which has supported the earnings profile. The company had made higher provisioning during fiscal 2020 and fiscal 2021 to combat any stress on the book arising from the pandemic and hence the credit costs remained elevated at around 2.9% in fiscal 2020 and 2.3% in fiscal 2021. During fiscal 2022, the company wrote back its provisions worth around Rs 32.1 crore (0.7% of AUM as on March 31, 2022) and hence reported a credit cost of only 0.3% during the fiscal. The credit costs returned to the pre-pandemic levels in fiscal 2023, with SK reporting credit cost of 1.2% in fiscal 2023. During the first quarter of fiscal 2024, the credit costs stood at 1.5% (annualized).
Further, with newer branches achieving scale and with technological changes made in last 2.5 years, the company has been able to bring down its sourcing/collection costs, leading to operational efficiencies and improvement in the operating costs.
Consequently, return on managed assets (RoMA) also remained comfortable and stood at 2.5% for the first quarter ending June 30, 2023, as against 2.8% in fiscal 2023, 2.7% in fiscal 2022 and 2.3% in fiscal 2021. CRISIL Ratings also notes that the company has been able to sustain its profitability metrics with RoMA range bound between 2%-3% in the last four fiscals.
Strengthening capitalization Company’s capitalization has been continuously strengthening with networth increasing by ~3.5 times over last 3 years to Rs 1901 crore as on June 30, 2023, from Rs 555 crore as on March 31, 2019. Capitalization metrics have been supported by the regular capital infusions in the past with SK Finance having raised Rs 1144.3 crores since inception. SK’s capital base is expected to be further bolstered by the primary equity raise of Rs 899.5 crore from both existing and new investors, of which Rs 663.6 crore has already been received and the remaining is expected to be received shortly, post receipt of regulatory approvals.
Besides, overall capital adequacy ratios also remained comfortable at 25.5% as on June 30, 2023 (26.1% as on March 31, 2023). The adjusted gearing too was comfortable at 4.3 times (on-book gearing at 4.0 times) as on June 30, 2023 (4.1 times and 3.8 times respectively as on March 31, 2023).
This additional equity infusion is expected to further improve the gearing levels and support the company’s growth trajectory in the medium term. Further, the capitalisation metrics benefit from the healthy internal accruals of the company.
Strong experience of promoter and management team in vehicle finance segment SK Finance has a vintage of over 28 years in the used vehicle finance segment and has built in-depth knowledge of its target segment. It started off as a direct selling agent in 1994 for entities such as Anagram, Escorts, SRF finance, Kotak Mahindra Prime etc. for two & three wheeler and commercial vehicle (CV) financing. Since 2005, the company transitioned to an assignment-based player for AU Financiers, ICICI Bank, Shriram Transport Finance Company Ltd. and HDFC Bank. The promoter has also built a strong management team with rich experience in similar lines of business. As a team, they have also been strengthening and digitizing the systems and processes of the company, which will support the planned scale-up. The long track record of the company and the on-ground experience of the promoter should stand SK Finance in good stead as it scales up and diversifies its portfolio, both geographically and at the product level.
Diversified resource profile with improving cost of borrowings SK Finance has a diversified borrowings portfolio, with a large lender base and declining incremental cost of funds, as on June 30, 2023, consisting of loans from banks (44%), non-convertible debentures (NCDs, 22%), loans from financial institutions (8%), securitization (24%) and external commercial borrowings (ECBs, 2%). Over the years, SK Finance has also been able to diversify its lender profile, by bringing in more banks under its resource mix, which also led to increase in the share of loans from banks from 14.5% in March 2019 to 44% in June 2023. The company has also been able to bring its incremental cost of fund significantly down to ~9.0% in Q1FY24 from 11.99% as on Q1FY20.
Weakness: Scale up whilst improving the geographical concentration and maintaining the asset quality metrics The company’s scale of operations remained modest vis-à-vis the larger financial sector. However, growth has been healthy with portfolio growing at a 5-year compounded annual growth rate (CAGR) of 42% till fiscal 2023 with AUM reaching Rs 7378 crore as on March 31, 2023. During the first quarter of fiscal 2024 as well, the AUM grew at an annualised rate of 30.3% reaching around Rs 7937 crores as on June 30, 2023.
Portfolio comprised commercial vehicle (46%), tractor (14%), Car (18%), MSME (18%) and two-wheeler (4%) as on June 30, 2023. In the last few years, the company has diversified its geographical composition and currently has a presence in 11 states such as Rajasthan, Gujarat, Madhya Pradesh, Maharashtra, Haryana, Punjab, Chhattisgarh, New Delhi, Uttarakhand, Himachal Pradesh and Uttar Pradesh. However, Rajasthan, Madhya Pradesh and Gujarat continued to dominate the majority of the portfolio with share of 55%, 13.7% and 11.5%, respectively as of June 30, 2023, which too has improved from 73%, 5.7% and 16%, respectively, as of March 31, 2019.
The focus for SK Finance has been on used vehicle financing (greater than 60% of the portfolio over the past three fiscals). This, coupled with the target segment of rural and semi-urban customers, leads to asset quality remaining susceptible to slippages. Nevertheless, the company has put in place adequate underwriting practices and risk management practices which are separate for both of its segments i.e. Vehicle and MSME Finance. In case of vehicle finance, there are three layers of credit assessment which includes assessment at field, branch and headquarters level whereas in case of MSME finance, credit assessment is looked at from 3 different ways i.e. asset related, customer related and business related. The company has further strengthened its underwriting and risk management practices post Covid-19.
Because of stringent credit assessment procedures, the company has demonstrated its ability to manage asset quality metrics as 90 days past due (dpd) percentage of the company has hovered from 1.5% to 4% over past 3 fiscals.
The collection efficiencies[1] for the company, remained between 95%-100% during fiscal 2023 as well as during first quarter of fiscal 2024. Consequently the 90+ dpd also remained comfortable at 2.0% as on June 30, 2023, as against 1.6% as on March 31, 2023. Additionally, the restructured assets done during the pandemic also remained low at 0.3% as on March 31, 2023.
Nevertheless, given the higher geographical concentration in Rajasthan, Madhya Pradesh and Gujarat currently, as the company scale up its operations in the newer geographies, its ability to manage asset quality metrics while scaling up needs to be demonstrated and will remain a key monitorable. [1] Calculated as Total collections including overdue but excluding prepayments divided by current billing |
Liquidity: Strong SK Finance has an adequate ALM profile as on June 30, 2023, with no cumulative negative mismatches in the up to one year buckets (excluding unutilized bank lines) indicating that business inflows also support repayments. As on June 30, 2023, the company had cash and cash equivalents of Rs 1,796 crore of cash and liquid investments and unutilized CC/WCDL lines of Rs 93.4 crore as on same date against total repayments (including interest and DA/PTC payouts and salary/opex) of Rs 1049 crore for the next three months till September 2023. As a policy, the company plans to maintain a liquidity cover of 3 months (excluding collections/prepayments) at all times. |
Outlook: Positive CRISIL Ratings believes that SK Finance will continue to scale up its operations while maintaining healthy capitalization, asset quality and profitability metrics going ahead. Moreover, company will continue to benefit from its experienced promoters and management team. |
Rating Sensitivity Factors Upward Factors:
Downward Factors:
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About the Company SK Finance Limited (Erstwhile ESS KAY Fincorp Ltd), incorporated in 1994 by Mr Rajendra Kumar Setia and his family members. The company is engaged in the business of providing financing for income generation activity (CV and MSME lending against self-occupied property), the company also extends loans for purchase of two-wheelers, tractors, and cars.
SK Finance has a legacy of over 28 years in used vehicle finance segment and has, over a period of time, evolved from being a direct selling agent to originate to sell model to a full-fledged NBFC. The company had an AUM of Rs 7,937 crore as on June 30, 2023.
The company reported a profit after tax (PAT) of Rs 61 crore on total income of Rs 403 crore for the quarter ending June 30, 2023, as against PAT of Rs 223 crore on total income of Rs 1314 crore in fiscal 2023. |
Key Financial Indicators
^based on year end averages *IND-AS
^based on year end averages |
Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
^Yet to be issued
Annexure - Details of Rating Withdrawn
#Not yet issued |
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Criteria Details
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