Detailed Rationale

CRISIL Ratings has assigned its ‘CRISIL BBB/Stable’ rating to the non-convertible debentures of Varthana Finance Private Limited (Varthana; formerly Thirumeni Finance Private Limited) and reaffirmed its ‘CRISIL BBB/Stable’ rating on the long-term bank facilities of the company

 

The rating factors in the company’s healthy capitalisation metrics supported by regular capital raising and experience of the promoters in the school finance industry. These rating strengths are partially offset by the modest but improving asset quality and overall earnings profile constrained by higher credit costs.

 

Varthana specializes in financing of affordable private schools and is one of the very few formal lenders in the business of school financing. The company has also started student finance loans recently which formed around 8% of the overall loan portfolio as of September 30, 2023. The company witnessed a growth of 20.3% (annualized) in the first half of fiscal 2024 with AUM increasing to Rs 1034 crore as on September 30, 2023, from Rs 938 crore as on March 2023. The company aims to continue with a similar growth rate in the near term.

 

While Varthana has been able to secure a few sanctions from banks recently, the share of bank funding stood at only 7% as a percentage of overall borrowings. Hence, the company’s ability to raise funds from banks on a continued basis and at optimal costs will remain key to their growth plans.

 

The company has healthy capitalization metrics with networth of Rs 519 crore and gearing of 1.4 times as on September 30, 2023. This has been supported by regular capital infusions with the latest being Rs 105 crore infusion in June 2021.

 

The company’s asset quality remained modest, with it having been impacted heavily during the pandemic. The 90+ days past due (dpd) stood at 5.8% as on September 30, 2023. However, this has improved from the peak of 11.2% in March 2022. The improvement in asset quality was on account of improved collections post pandemic as well as the significant amount of writeoffs undertaken by the company. Fiscal 2023 saw the company writing off its portfolio to the tune of Rs 104.6 crore and an additional Rs 18 crore was written off during the first half of fiscal 2024. However, Varthana has also managed to recover a significant amount from these written-off accounts. In any case, incremental disbursements done post covid has performed better and majority of the stress is from the portfolio originated pre covid or during covid. The company had also undertaken a restructuring of Rs 195 crore, which has partly been run down and partly been written off. As on September 30, 2023, this book stood at Rs 73.4 crore. CRISIL Ratings notes that a sizeable amount of the overall 90+ dpd (5.8%) is stemming from this restructured book which had a 90+ dpd of 2.2%.

 

The overall collection efficiency has improved significantly since the pandemic but remains below pre-pandemic levels. Hence, Varthana’s ability to control slippages, maintain healthy collections (including from restructured book) and recover from written-off account to improve overall asset quality metrics will remain a key monitorable and a rating sensitivity factor.

 

The earnings profile of the company, while has shown an improvement over the past two fiscals, continues to remain modest. The company reported a PAT of Rs 10.2 crore during H1 FY24 and RoMA of 1.6% (annualized) as compared to Rs 5.4 crore and 0.5% as on March 31, 2023 respectively. Overall earnings continue to remain constrained on account of high provisioning costs; credit costs as a percentage of total managed assets have remained high at an average of 4% over the last three fiscals for the company. Hence, the company’s ability to maintain stable asset quality and control credit costs will be a key monitorable.

Analytical Approach

CRISIL Ratings has analysed the standalone business and financial risk profile of Varthana.

Key Rating Drivers & Detailed Description

Strengths:

• Healthy capitalisation metrics supported by regular capital raising: The company has healthy capitalization metrics with networth of Rs 519 crore and gearing of 1.4 times as on September 30, 2023. This has been supported by regular capital infusions with the latest being the Rs 105 crore raised in June 2021. The gearing over the last 5 years has not exceeded 2 times. The company is also expected to follow a conservative leverage philosophy over the next two years. Over the longer term, the steady-stage gearing is not expected to cross 5 times. 

 

The tier-1 and total capital ratio of the company was 57.0% and 50.7% respectively as on March 31, 2023 and Sep 30, 2023. The networth to net NPA was also comfortable at 10.9 times as on September 30, 2023. CRISIL Ratings believes that Varthana is adequately capitalised and any additional proposed capital infusion would further enhance the company’s ability to absorb any asset side risks in the medium term.

 

• Significant experience of the promoters in the school finance industry: Varthana is involved in financing of affordable private schools which is a niche segment of operations. The founders of Varthana, Steve Hardgrave and Brajesh Mishra have significant experience in this asset class due to their previous association in similar line of business. The key personnel in top management have been associated with the financial services industry at various levels including collections, backend operations, credit and legal and have extensive experience in running the finance business.

 

Given their significant experience, the management of Varthana has been able to put in place elaborate credit policy, prudent loan monitoring process and provisioning policy given the nature of the loans. The management is also focused on building good governance systems. It has an experienced Board with three independent directors and has appointed reputed auditors.

 

The company’s assets under management (AUM) stood at Rs 1034 crore as on September 30, 2023. CRISIL Ratings believes that the experience of the promoters and management will stand Varthana in good stead as it scales up its portfolio over the medium term.

 

Weaknesses:

• Modest albeit improving asset quality: While Varthana’s asset quality metrics historically have been healthy with GNPA ratios below 2.0%, the pandemic resulted in the deterioration of the same. As a result, the 90+ dpd increased to 11.2% as on March 31, 2022. However, with conditions returning to normalcy post pandemic as well as the significant amount of writeoffs undertaken by the company, the 90+ dpd has improved to 5.8% as on September 30, 2023. Fiscal 2023 saw the company writing off its portfolio to the tune of Rs 104.6 crore and an additional Rs 18 crore was written off during the first half of fiscal 2024. However, Varthana has also managed to recover a significant amount from these written-off accounts. In any case, incremental disbursements done post covid has performed better and majority of the stress is from the portfolio originated pre covid or during covid. The post pandemic disbursements have been performing significantly better with collection efficiency in this portfolio at upwards of 98%.

 

The company had also undertaken a restructuring of Rs 195 crore, which has partly been run down and partly been written off. As on September 30, 2023, this book stood at Rs 73.4 crore. CRISIL Ratings notes that a sizeable amount of the overall 90+ dpd (5.8%) is stemming from this restructured book which had a 90+ dpd of 2.2%.

 

The overall collection efficiency has also improved significantly since the pandemic but remains below pre-pandemic levels. Hence, Varthana’s ability to control slippages, maintain healthy collections (including from restructured book) and recover from written-off account to improve overall asset quality metrics will remain a key monitorable and a rating sensitivity factor

 

• Profitability constrained by high credit costs: Varthana has a healthy pre-provisioning operational profitability (PPOP) marked by high gross spreads and moderate operating costs. Since it operates in a niche segment of school financing and at lower ticket sizes (more than 80% of loan book is of less than Rs 3 crore), it does not face significant competition from Banks or other NBFCs. Consequently, average yield on the loan book is 18-19%. With leverage being low, Varthana’s total income margin (net-off interest expenses as a % of average total managed assets; ATMA) is strong at around 11.6% as on September 30, 2023.  

 

The company follows a hub and spoke model for ground level operations and is present in 19 States. The company’s operating costs has seen an increase on account of expenses incurred towards setting up the technology for the student loan business and stood at 7.4% as on September 30, 2023. The operating expenses are expected to improve in the medium term as the company achieves economies of scale. Nevertheless, due to the high gross spreads, the overall PPOP has remained healthy at over 3.5% of ATMA over last two fiscals.

 

Nevertheless, credit costs as a percentage of total managed assets have remained high at an average of 4% over the last three fiscals for the company on account of slippages in asset quality stemming from pandemic induced stress. As a result, the overall profitability has remained subdued. The company reported a PAT of Rs 10.2 crore during H1 FY24 and RoMA of 1.6% (annualized) as compared to Rs 5.4 crore and 0.5% as on March 31, 2023, respectively.

 

Varthana has also managed to recover a significant amount from these written-off accounts. Of the total portfolio written off since June 2022 (Rs 122.6 crore), Varthana has recovered Rs 35.5 crore by September 2023. Further recoveries are also expected in the coming quarters.

 

However, the company’s ability to control credit costs and improve operational efficiencies, thereby improving the overall earnings profile will remain a key rating sensitivity factor.

Liquidity: Adequate

Asset-liability maturity profile of Varthana is comfortable with cumulative positive mismatches across buckets of upto one year as on September 30, 2023. The liquidity cover of the company was 1.1 times for 3 months of repayments as on October 31, 2023. The overall liquidity position (cash, liquid investments and unutilised working capital lines) of the company was Rs 183 crore as on October 31, 2023.

Outlook: Stable

CRISIL Ratings believes that Varthana will benefit from its experienced promoters and management team and will maintain its healthy capitalisation metrics going ahead.

Rating Sensitivity factors

Upward factors:

• Improvement in profitability with RoMA above 2% on a sustained basis
• Sustainability of GNPA below 5% over the medium term
• Increase in scale of operations while maintaining operational costs and improving earnings

 

Downward factors:

• Shortfall in collections, thereby impacting asset quality and credit costs
• Increase in steady state gearing above 5 times in the medium term
• Profitability metrics remaining subdued below current levels

About the Company

Varthana (formerly Thirumeni Finance Private Limited) is a non-deposit non-systemically important NBFC engaged in financing affordable private school owners by providing loan capital so they can expand their infrastructure, invest in teacher-training, and introduce new learning methods into their classrooms. Varthana started its operations in Jan 2013 in Bangalore after its promoters acquired an erstwhile NBFC. Varthana is currently operating with 41 branches and has presence in 19 states. The company had also started student loans product recently and it formed around 8.1% of the overall loan portfolio as of June 30, 2023. 

Any other information: Not Applicable

Annexure - Details of Instrument(s)

ISIN	Name of the instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue size (Rs.Crore)	Complexity Level	Rating assigned with outlook
NA	Proposed Long Term Bank Loan Facility	NA	NA	NA	200	NA	CRISIL BBB/Stable
NA	Non-Convertible Debentures*	NA	NA	NA	200	Simple	CRISIL BBB/Stable

*Yet to be issued