Detailed Rationale

CRISIL Ratings has downgraded its rating on the long-term debt instruments and bank loan facilities of Shapoorji Pallonji Finance Private Limited (SPFPL) to ‘CRISIL BBB+/Stable’ from ‘CRISIL A-/Stable’.

 

The rating action is driven by a change in analytical approach to arrive at ratings on the debt instruments of SPFPL. The ratings previously factored in the standalone business profile of SPFPL together with support expected from the promoters. CRISIL Ratings has now evaluated SPFPL on a standalone basis given the significant increase in the funding requirement of other businesses of the promoters. SPFPL has now pivoted to a new business model of supply chain financing (SCF) and has completely exited the wholesale lending segment in Q1FY25. The company will undertake the SCF business via a co-lending partnership arrangement and has accordingly partnered with a few banks to offer this product. The company has also developed a proprietary technology-enabled platform to facilitate its end-to-end digital lending process. Going ahead, ability to grow this book while managing asset quality and improving profitability remains a key rating monitorable.

Analytical Approach

For arriving at the ratings, CRISIL Ratings has analysed the standalone business and financial risk profile of SPFPL.

Key Rating Drivers & Detailed Description

Strengths:

• Comfortable capitalisation

SPFPL’s business has been largely funded by networth with no borrowings as on March 31, 2024. The net worth was adequate for the scale of operations at Rs 494 crore as on March 31, 2024 as against Rs 477 crore as of March 31, 2023. In fiscal 2018, SPFPL raised Rs 239 crores of capital including Rs 132 crores raised via rights issue in March 2018 from both its shareholders – Rs 67 crore from SPCPL and Rs 65 crore from SSG group; the latter became a shareholder of SPFPL in March 2018. Later, in fiscal 2021 and fiscal 2023, SSG sold its stake in the company to promoters and thereby as on June 30, 2024, the SP group (through Shapoorji Pallonji and Company Private Limited) held 53.1% stake in SPFPL while remaining stake of 46.9% is held by promoters of SP Group through SMCM Holdings Private Limited.

 

The company has no borrowings as on March 31, 2024, resulting in nil gearing as on same date. (0.2 times as on March 31, 2023). With the increase in scale of operations, gearing will increase gradually going forward but is not expected to exceed beyond 3 times over the medium to long term

 

• Scalable business model supported by tech based architecture

The company is now focused on supply chain financing with higher reliance on partnering with corporates (“anchors”) with an established track record of operations in the Indian market, who in turn become the lead generation/nodes for SPFPL, to source vendors/ potential borrowers. Majority of the company’s loan portfolio is skewed more towards vendor-based financing. SPFPL’s core product strategy remains focused on short-term revolving SCF with a tenure of 30-180 days, thus ensuring adequate control over end usage of funds along with higher visibility on borrower’s cash flow. As part of its product suite, the company offers both purchase invoice financing and sales invoice financing with recourse to the anchor partner. The company has developed a domain-specific AI-enabled supply chain finance platform that is aimed at sustainably scaling up the business. This proprietary technology enabled platform includes effective Early Warning Systems (EWS).

 

This is an asset light, tech enabled, co lending business model with 20-25% of the exposure remaining on SPF books and the remaining 75-80% on the books of partner banks. Overall SCF disbursements, including off-book portfolio (partner’s book) stood at Rs 717.57 crore in FY24 and Rs 256.90 crore in Q1FY25 with SCF asset under management (AUM) at Rs 344.06 crore as of June 30, 2024. The company has 16 anchors onboarded with a granular book across 146 vendors. While the pace of growth has been modest due to stringent risk assessment processes and approvals to onboard co-lending banks as well as anchors and vendors, business volumes are expected to scale up over the medium term.

 

Weakness:

• Small scale of operations

Though SPFPL was incorporated in 1994, it was a dormant entity until 2016. The company started its operations with presence in real estate lending, corporate lending, & vendor financing segments. The overall AUM stood at Rs 643 crore as on March 31, 2024 (Rs 629 crore as on March 31, 2023) wherein the corporate loan constituted 53% of the loan book while the rest 47% comprised of supply chain financing portfolio.

 

Over the last couple of years, the company had undertaken a change in business strategy wherein the focus was to exit the wholesale lending business to better manage the risk and asset - liability profile and focus exclusively on the supply chain financing business to increase granularity in the portfolio. Consequently, in the first quarter of fiscal 2025, the outstanding corporate loan book has been run down. As a result, the loan book[1] declined to Rs 344 crore as on June 30, 2024, from Rs 643 crore as on March 31, 2024. The entire loan book now only comprises of the supply chain financing portfolio. The company has processed more than 8,000 invoices and disbursed around ~ Rs.1,800 crores in the supply chain financing portfolio. Furthermore, the company has not witnessed any overdues or delays in their supply chain book till date, basis provisional numbers.

 

The company has developed a proprietary technology enabled platform to facilitate the end-to-end digital lending process of supply chain financing and has partnered with few banks to offer this product via co-lending arrangement. Some of their key co lending partner banks are Central Bank of India, IDBI, CSB Bank etc. and the company is in the process of onboarding other private and public sector banks as well.

 

With this change in business model, substantial investments were done to develop the proprietary technology enabled platform, followed by hiring of manpower to support the new business. This has resulted in a high opex ratio2 of 9.2% for fiscal 2024. Reversal of provisions on the exited corporate book has supported profitability in fiscal 2024 and is expected to do so in the current fiscal as well.  In fiscal 2024, the company reported profit after tax (PAT) of Rs 16.6 crore (RoA of 2.4%); pre-tax contribution from provision reversal was Rs 12.2 crore.and the rest from residual wholesale book and liquid assets.

 

While the company has built the necessary technology infrastructure, the size of the loan book remains small and the ability of the company to scale up operations, manage competition and asset quality while improving core business profitability will be a key rating monitorable going ahead.

1 Including off-book portfolio (partner’s book)

2 Opex ratio= operating expense/ average managed assets including off-book portfolio

 

Liquidity: Adequate

As on date, the SPFPL has nil debt obligations. The company had cash and cash equivalents and liquid investments aggregating to Rs 79.56 crore as on June 30, 2024. Against this, the company had salary and operating expense outflow of Rs 41.51 crores in the next 6 months till December 31, 2024.

Outlook: Stable

CRISIL Ratings believes SPFPL will maintain comfortable capitalization which will also support the scale up in business.

Rating Sensitivity factors

Upward factors

• Significant scale up in market position
• Maintain healthy asset quality (gross NPA <2%) and strengthen core earnings profile on a sustained basis

 

Downward factors

• Inability to scale up the asset-light business model, while improving core RoA on a steady state basis
• Deterioration in asset quality with gross NPA increasing to above 3%, over an extended period,  thereby also impacting profitability

About the Company

The SP group is a diversified conglomerate with interests in construction, design and building, and engineering, procurement and construction, among others. The group has over 60,000 employees in India and abroad.

 

SPFPL is the financial services arm of the SP group. It was incorporated in 1994 and originally received a non-banking financial company license in 1994. The company did not have any significant operations until a few years back. In recent years, the company was engaged in corporate structured lending with a focus on providing innovative and structured debt solutions to corporates including financing to the real estate sector, vendor financing, promoter funding, loans against shares, and other structured corporate loans. However, the company has now stopped these product offerings and the focus is only on the supply chain financing product. As on June 30, 2024, SP group & company held by promoters of SP Group held 100% in SPFPL.

 

In fiscal 2024, the company reported a PAT of Rs 17 crore on total income (net of interest expense) of Rs 72 crore as against PAT of Rs 21 crore on total income (net of interest expense) of Rs 72 crore in fiscal 2023.

Key Financial Indicators

As on/for the period ended March 31	Unit	2024	2023
Total Assets	Rs crore	515	599
Total income	Rs crore	79	86
PAT	Rs crore	17	21
Gross NPA	%	41.8*	3.3
Adjusted gearing	Times	Nil	0.2
Return on managed assets	%	2.4	3.0

*Due to the wholesale portfolio which was fully repaid in Q1FY25

Any other information: Not Applicable

Annexure - Details of Instrument(s)

ISIN	Name of Instrument	Date of Allotment/Facility Start date	Coupon Rate (%)	Maturity Date/Tenor	Issue Size (INR.Crs)	Complexity Level	Rating Assigned with Outlook
NA	Non-Convertible Debentures#	NA	NA	NA	125	Simple	CRISIL BBB+/Stable
NA	Non-Convertible Debentures#	NA	NA	NA	300	Simple	CRISIL BBB+/Stable
NA	Proposed Long Term Bank Loan Facility	NA	NA	NA	500	NA	CRISIL BBB+/Stable

#Yet to be raised