Detailed Rationale

CRISIL Ratings has revised its outlook on the existing non convertible debentures of Seeds Fincap Private Limited (Seeds Fincap) to ‘Positive’ from ‘Stable’ while reaffirming the rating at 'CRISIL BB+'.  CRISIL Ratings has also assigned its 'CRISIL BB+/Positive' rating to Rs.15 crore non-convertible debentures of Seeds Fincap.

 

The revision in outlook primarily takes into consideration steady improvement in capital position owing capital raising done during Q2 fiscal 2024. Seeds Fincap raised first round equity capital of Rs 32 crore from institutional investors in the second quarter of the fiscal. This resulted in networth rising to Rs 63.7 crore and improvement in adjusted gearing to 3.4 times as on December 31, 2023, from Rs 36.2 crore and 4.1 times, respectively, as on March 31, 2023. The capital position is expected to improve further with another round of infusion expected by the middle of the fourth quarter of fiscal 2024 — the company is in advance stage of raising Rs 40 crore with shareholding agreement for the same finalised and regulatory approval awaited. Post this capital raising, the company’s networth will cross Rs 100 crore by the end of fiscal 2024. CRISIL Ratings believes Seeds Fincap has demonstrated its ability to raise sizeable capital at a relatively early stage of operations. This capital is expected to support its growth plans over the medium term.

 

The rating also reflects the company’s ability to improve earnings as indicated by profits in the past 2-3 months. This was primarily because most of the branches operational for more than 12 months have started reported profits. As on December 31, 2023, the company had 84 branches, of which, 37% were profitable. Nevertheless, as the company is in growth phase and is enhancing its branch network, operating expense remained high in the range of 12-15%. However, post the expected capital infusion, the company will be able to enhance its growth and this in-turn will result in improvement in profitability. Nevertheless, the ability of the company to maintain its month-on-month trajectory in profitability and ultimately turn profitable on overall basis will remain a key rating sensitivity factor.

 

The ratings continue to factor in the company’s ramp-up in operations while maintaining asset quality and the extensive experience of the promoters in the micro-lending sector. These strengths are partially offset by modest, though improving, earnings and susceptibility to risks associated with the micro-lending segment.

 

Assets under management (AUM) stood at Rs 246 crore as on December 31, 2023 (year-to-date growth of about 15%) as against Rs 208 crore as on March 31, 2023. The business model is focused on lending to micro, small and medium enterprises (MSMEs), which formed 81% of the portfolio, while the microfinance sector accounted for the remaining 18%. As on December 31, 2023, the company had 84 operational branches and catered to more than 43,570 customers.

 

Seeds Fincap also benefits from its strong management team with extensive experience in the micro-lending space. This has enabled the company to build relationships with over 30 lenders in a short time and raise sufficient funds from non-banking finance companies (NBFCs) and small finance banks (SFBs). The strong pedigree of the management has helped the company build risk management systems with stringent underwriting norms. Asset quality metrics have been comfortable with 90+ days past due (dpd) at 0.5% as on December 31, 2023. Collection efficiency was 98-99% as the majority of customers are first-cycle borrowers.

Analytical Approach

CRISIL Ratings has evaluated the standalone business and financial risk profile of Seeds Fincap.

Key Rating Drivers & Detailed Description

Strengths:

• Adequate capitalisation supported by regular infusions: The company is well-capitalised for its current scale of operations, supported by the ability of the promoters to raise capital at regular intervals. Seeds Fincap raised first round equity capital of Rs 32 crore from institutional investors in the second quarter of the fiscal, which raised the networth to Rs 63.7 crore and improved the adjusted gearing to 3.4 times as on December 31, 2023, from Rs 36.2 crore and 4.1 times, respectively, as on March 31, 2023. The company is in the advanced stage of raising Rs 40 crore with shareholding agreement for the same finalised and regulatory approval awaited. This will improve the capital position further with networth crossing Rs 100 crore by the end of fiscal 2024, and will support the growth plans over the medium term — Seeds Fincap aims to expand its branch network to build a portfolio of over Rs 400 crore in the next two years as projected by the management. Ability to raise equity capital at regular intervals and maintain comfortable gearing will be monitorable.

 

• Extensive experience of the promoters: The founders, Mr Subhash Chandra Acharya (managing director and chief executive officer) and Mr Avishek Sarkar (chief risk officer) have experience of more than 15 years in the financial sector. Mr Acharya previously headed operations at Satya Microcapital Ltd, and Mr Sarkar headed the credit department at Satya Microcapital Ltd and was the vice-president (operations) at Satin Creditcare before that.

 

• Comfortable asset quality with sound risk management practices: The asset quality has been comfortable with 90+ dpd at 0.5% as on December 31, 2023. The collection efficiency has remained strong with low delinquencies for loans originated in the past 12-18 months. This has resulted in lower incremental credit cost. Ability to sustain the asset quality as the portfolio seasons will remain monitorable. Seeds Fincap has developed adequate risk management systems and practices over the past two years as it expands operations to new markets. This has enabled the company to maintain its asset quality performance in existing regions. The company has extensive credit and risk teams, which do a thorough cash flow analysis. Seeds Fincap has assigned one credit officer for each branch to maintain portfolio quality. In terms of geographic diversity, as of December 2023, the company had presence in seven states, with the highest exposure to a single state being 55.7% and the top 5 districts comprising 30% of the overall portfolio. Besides geographical expansion, the robust growth over the past two years was supported by adequate monitoring of operational parameters, such as calibrated increase in ticket size and AUM exposure per branch.

 

Weaknesses:

• Geographic concentration in portfolio: Seeds Fincap began operations only in April 2021 and its AUM had crossed Rs 200 crore in a short span of time by fiscal 2023. The company started operations in Uttar Pradesh (UP), owing to this the concentration in the state remains high at 55.7% as on December 31, 2023. However, UP being the most populous state, the company has been benefiting since business potential in this state has also been high, The company has been diversifying in other states as well, such as Rajasthan (18.5%), Haryana (13.5%), Bihar (10.5%) and Uttarakhand (1.6%). In terms of district level concentration, the top five districts formed 29.9% of the AUM as of December 2023. While the company has been taking steps towards diversification, the current higher geographic concentration increases susceptibility to local socio-political risks inherent in the micro-lending business. Hence, managing asset quality along with portfolio growth and geographic diversity remains key rating sensitivity factor. Ability to diversify operations and reduce geographic concentration is monitorable.

 

• Modest, though improving, earnings: Seeds Fincap incurred a loss of Rs 4.6 crore and generated total income (net of interest expense) of Rs 23.4 crore during the third quarter of fiscal 2024, as against a loss of Rs 4.2 crore and total income (net of interest expense) of Rs 20.1 crore during fiscal 2023. (During fiscal 2022, the company had a loss of Rs 6.6 crore and total income of Rs 3.8 crore.) Return on managed assets (RoMA) was negative 2.15% for the first nine months of fiscal 2024, as against negative 2.61% for fiscal 2023. Net interest margin (NIM) was constrained at 8.3-10.6% due to high cost of borrowing as the company is highly dependent on borrowings from NBFCs. Operating costs remained high, too, at 12.7% during the first nine months of fiscal 2024, mainly due to the high human resource cost. The company has one risk officer at each branch (apart from sales staff and branch manager), who is primarily responsible for analysing the credit profile of borrowers. Additionally, both the branch manager and risk officer conduct multiple independent visits to analyse the income profile of the borrower before taking any credit exposure.

 

While the earnings remain modest, the company has been profitable on a monthly basis since the third quarter of fiscal 2024 and the same has been seen for the month of January 2024 as well, reflecting that the company is in line to achieve the breakeven target by Q2-Q3 of FY25, .Most of the branches operational for more than 12 months have started reporting profits on monthly basis — 37% of the 84 branches were profitable till the end of December 2023. Nevertheless, as the company is in growth phase and has been enhancing its branch network, its operating expense remain high at 12-15%. Ability to generate profit will remain a key rating sensitivity factor.  

 

• Susceptibility to potential socio-political risk The micro lending space (MFI in particular) has witnessed two major disruptive events in the past decade — first, the ordinance promulgated by the Government of Andhra Pradesh in 2010, and second, the demonetisation of high-value currency notes in 2016. In addition, the sector has faced issues of varying intensity in several geographies. The ordinance on microfinance institutions (MFIs) by the Andhra Pradesh government demonstrated their vulnerability to regulatory and legislative risks. It triggered a chain of events that adversely affected the business models of MFIs by impairing their growth, asset quality, profitability and solvency. Similarly, the sector witnessed high delinquencies post-demonetisation and the subsequent socio-political events. This indicates the fragility of the business model to external risks. As the business involves lending to particular section of borrowers, MFIs will remain exposed to socially sensitive factors, including charging of high interest rates and consequently, to tighter regulations and legislation. Seeds Fincap, nevertheless, is not expected to have any direct impact since it is not operating as MFI. While Seeds Fincap operates in micro-lending segment, it mainly caters to individual borrowers who are better in terms of income profile (in comparison to MFI borrowers). Hence, Seeds Fincap is relatively better placed in terms of managing such risks. 

Liquidity: Adequate

As on December 31, 2023, the asset-liability maturity (ALM) profile was comfortable, with positive cumulative mismatches in the up to one-year bucket. Liquidity stood at Rs 81.16 crore (excluding the term loan), against principal repayment and interest outflow of Rs 45.72 crore for the next three months. This represents a liquidity cover of 2.6 times (assuming 75% collection efficiency) for debt obligation over the three months through March 2024.

Outlook: Positive

CRISIL Ratings believes Seeds Fincap will continue to benefit from extensive experience of its promoters and management team in the micro-lending space. The company is also expected to maintain adequate capital position and comfortable asset quality over the medium term.

Rating Sensitivity factors

Upward factors:

• Substantial improvement in earnings along with scale up in portfolio; ability to maintain RoMA over 1% on steady state basis
• Adequate capital position with gearing below 4 times on a steady-state basis

 

Downward factors:

• Weaker asset quality leading to increase in credit cost, thereby affecting the earnings
• Inability to maintain capital position with adjusted gearing exceeding 5 times

About the Company

Seeds Fincap is a non-deposit-taking NBFC, based in the National Capital Region (NCR). The Gurugram-based company aims to serve a million MSMEs in India. It was founded on January 14, 2021, by Mr Subhash Acharya and Mr Avishek Sarkar. Both are seasoned professionals from the finance industry, each having 15-plus years of experience across NBFCs and rating agencies. They have created a quality portfolio in the MSME space with a proven record. The company commenced its NBFC operations in April 2021, with initial capital mainly contributed by the promoters and the management team.

 

Lending will be the primary activity, with focus on underserved and unserved entrepreneurs across the country, with additional emphasis on Tier 2, 3 and 4 cities. The company aims to reach workers, youngsters and small entrepreneurs, for whom lack of access to formal credit curtails growth or leads to outright winding up of the business.

 

Seeds Fincap has 84 branches across Haryana, Rajasthan, UP, Bihar, Punjab, Madhya Pradesh and Uttarakhand.

 

The company targets people/enterprises operating micro or small businesses with annual turnover of over Rs 6 lakh for at least three years in the same business and location. Its customers are mainly engaged in manufacturing and trading, apart from the dairy segment and other services.

Any other information: Not Applicable