Rating Rationale

Key Rating Drivers & Detailed Description

Strengths:

Expectation of support from TICL

The rating is underpinned by expectation of support from TICL (rated CRISIL AAA/Stable). TICL, on a standalone basis, had a networth of Rs 22,124 crore and a book and market value of total investment portfolio of Rs 3,344 crore and Rs 23,741 crore respectively as on June 30, 2023. TICL has a strong capital base (CRAR level of 100.31% (as of March 31, 2023) vs 15% regulatory requirement), robust and well diversified investment portfolio, healthy earnings profile and comfortable liquidity position. Majority ownership, high strategic importance, board and managerial control from TICL, imply a strong investment framework and liquidity support to Simto.

Simto, a wholly owned subsidiary of TICL, is effectively the arm of TICL wherein the intention is to generate operational income through active churn of portfolio, whereas TICL is a longer-term investor with focus on long term value accretion through buy and hold strategy. Simto earns operating income primarily through dividend, profit on sale of investments and option premium (writing of call and put options) on highly liquid stocks, largely within the Nifty 50/ Nifty 100 basket.

The interlinkages between the companies are very high. There is strong representation of TICL’s management team on Simto’s Board while the control and reporting functions are co-opted from TICL. Given its parentage, TICL has a dominant presence, including on the board of Simto with the board playing a very active role in defining the strategies and the investment philosophy for Simto.

TICL has so far infused Rs 310 crore by subscribing to the Compulsorily Convertible Preference shares issued by Simto. Further, Rs. 90 crore of capital expected to be infused through incremental subscription of CCPS of Simto. This further supports the capitalisation metrics, provide buffer against asset side risk, if any, and provide liquidity support. CRISIL Ratings expects continued involvement of TICL in the overall functioning of Simto.

Experienced management with strong focus on risk management and investment policies

The investment strategy of the company is robust. Similar to TICL, the company invests in highly liquid stocks largely within Nifty 50 / Nifty 100 basket, having strong parentage, consistent profitability, robust corporate governance, offering good dividend yield and having high liquidity in the NSE F&O segment. As on June 30, 2023, the equity investments and ETFs accounted for around 82.68% of the total investment portfolio in terms of fair value, and the rest is in debt mutual funds. The board of the company has clearly outlined the policies around the investment strategies which Simto will follow. As per RBI NBFC Regulations (as amended from time to time), Simto is required to adhere to concentration norms, as applicable. The company will adopt a mix of writing call and put options.

Healthy capitalisation metrics

As on March 31, 2023, Simto had a healthy CRAR at 48.68% which is higher than regulatory required level of 15%. Capitalisation metrics for Simto are comfortable with networth at Rs 228.6 crores as on March 31, 2023, further gearing also remained comfortable at 1.1 time as on March 31, 2023. The parent TICL had infused capital of Rs 150 crores in fiscal 2023. The company is expected to become external debt- free in near term, as company plans to capitalize through issuance of CCPS. Capitalization metrics are expected to be supported by internal accruals as well as infusion from TICL as and when required.

Weakness:

Modest scale of operations; earnings susceptible to market volatility

The scale of the company remains modest with the investment book of Rs. 520.3 crores as on June 30, 2023. With about 83% of Simto’s total investments being parked in equities and ETFs, susceptibility to volatility inherent in the capital markets is relatively high. Adverse movements in the equity market, like what was observed during the first wave of Covid pandemic period can, therefore, substantially reduce the value of the company’s investment portfolio, and hence remains a key rating sensitivity factor.

However, CRISIL Ratings notes the policies that have been put in place which limits the investments to a basket of stocks largely from Nifty 50 - Nifty 100 which would limit volatility to that extent. Further the management team has been managing a substantially higher investment book in TICL over the years. The shared resources and a similar philosophy in terms of stock selection and strategies provide comfort. Further the planned capitalisation and gearing philosophy of the company is likely to provide sufficient resiliency even in case of substantial market volatility as mentioned above.

The strategy will be a mix of writing call and put options. Mark to Market (MTM) changes will be routed through P&L. This will keep earnings profile susceptible to volatility in the markets. However, such MTM, being accounting in nature, there will be no commensurate realised loss cash impact. For instance, in fiscal 2020, the company reported net loss after tax of 18.2 crore due to Rs 18.9 crores of MTM impact on account of equity market volatility during March 2020 at the onset of first wave of Covid pandemic. However, in fiscal 2021, the company reported profit after tax of 26.4 crore as markets recovered sharply. In fiscal 2022, the company reported net profit after tax of Rs. 9.3 crores and in fiscal 2023, the company has reported net loss after tax of 5.6 crore. The income stream of the company comprises mainly of Option premium income complemented by profit on sale of securities and dividend income. The company invests in high dividend yielding companies. Nevertheless, any substantial impact on reported profitability due to market volatility will be monitored closely.