Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL BBB/Stable’ rating on the bank facilities and non-convertible debentures of Varthana Finance Private Ltd (Varthana; formerly Thirumeni Finance Pvt Ltd).

 

CRISIL Ratings has taken note of the acquisition of Rs 126 crore school funding portfolio of Indian School Finance Company (ISFC) by Varthana on February 29, 2024, comprising over 800 schools. This pool is a mix of current, overdue and written-off accounts. While the current portfolio has been bought at par, the rest of the portfolio has been acquired at a steep discount. While performance of the current book will remain a monitorable, higher-than-expected recoveries from the overdue and written-off accounts can benefit the earnings profile.

 

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 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 12% of the overall loan portfolio as on December 31, 2023. The company witnessed a growth of 50% (annualized) in the nine months of fiscal 2024 with assets under management (AUM) increasing to Rs 1137 crore as on December 31, 2023, from Rs 938 crore as on March 31, 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.

 

The company has healthy capitalization metrics with networth of Rs 522 crore and gearing of 1.7 times as on December 31, 2023. This has been supported by regular capital infusions with the latest being Rs 105 crore 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 6.3% as on December 31, 2023. However, this has improved from 11% in March 2022. The improvement in asset quality was on account of improved collections post pandemic as well as the significant amount of write-offs 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 nine months 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 before or during Covid. The company had also undertaken a restructuring of Rs 195 crore, which has partly been run down and partly written off. As on December 31, 2023, this book stood at Rs 69.5 crore. CRISIL Ratings notes that a sizeable amount of the overall 90+ dpd (6.3%) is stemming from this restructured book, which had a 90+ dpd of 38.0%.

 

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 be modest. The company reported a profit after tax (PAT) of Rs 14.4 crore during the nine months of fiscal 2024 and return on managed assets (RoMA) of 1.4% (annualized) as compared to Rs 5.4 crore and 0.5%, respectively, as on March 31, 2023. Overall earnings continue to be 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. 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 capitalisation metrics with networth of Rs 522 crore and gearing of 1.7 times as on December 31, 2023. This has been supported by regular capital infusions with the latest being Rs 105 crore in June 2021. 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-state gearing is not expected to cross 5 times. 

 

The tier-1 and total capital ratio of the company was 39.28% and 39.28%, respectively, as on December 31, 2023. The networth to net non-performing asset (NPA) was also comfortable at 18 times as on same date. CRISIL Ratings believes 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, Mr Steve Hardgrave and Mr 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 AUM stood at Rs 1137 crore as on December 31, 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 have been healthy historically with gross non-performing asset (GNPA) ratio 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 write-offs undertaken by the company, the 90+ dpd has improved to 6.3% as on December 31, 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 nine months 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 before or during Covid. The post pandemic disbursements have been performing significantly better with collection efficiency upwards of 98%.

 

The company had also undertaken a restructuring of Rs 195 crore, which has partly been run down and partly written-off. As on December 31, 2023, this book stood at Rs 69.5 crore. CRISIL Ratings notes that a sizeable amount of the overall 90+ dpd (6.5%) is stemming from this restructured book, which had a 90+ dpd of 38.0%.

 

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 non-banking finance companies (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 percentage of average total managed assets; ATMA) is strong at 11.1% for the nine months of fiscal 2024.  

 

The company follows a hub and spoke model for ground level operations and is present in 16 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 7.2% for the nine months of fiscal 2024. 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 pre-provisioning operating profit (PPOP)has remained healthy 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 on account of slippages in asset quality arising from pandemic induced stress. As a result, overall profitability has remained subdued. The company reported a PAT of Rs 14.1 crore during the nine months of fiscal 2024 and RoMA of 1.4% (annualized) as compared to Rs 5.4 crore and 0.5%, respectively, as on March 31, 2023.

 

Varthana has also managed to recover a significant amount from these written-off accounts. Of the total portfolio written off since June 2022 (Rs 155 crore), Varthana has recovered Rs 47 crore by February 2024. More recoveries are also expected in the coming quarters.

 

However, the company’s ability to control credit costs and improve operational efficiency, thereby enhancing 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 up to one year as on February 29, 2024. The overall liquidity position (cash, liquid investments and unutilised working capital lines) of the company was Rs 137 crore as on February 29, 2024, providing a liquidity cover of 1.5 times for upcoming three months of repayments.

Outlook: Stable

CRISIL Ratings believes 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

VIPL 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 January 2013 in Bengaluru after its promoters acquired an erstwhile NBFC. Varthana is currently operating with 38 branches and has presence in 16 states. The company had also started student loans product recently and it formed around 12% of the overall loan portfolio as on December 31, 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	Line of Credit	NA	NA	19-Oct-2024	9.9	NA	CRISIL BBB/Stable
NA	Non-Convertible Debentures*	NA	NA	NA	113	Simple	CRISIL BBB/Stable
INE125T07238	Non-Convertible Debentures	11-Dec-2023	13.65	25-Sep-2027	17	Complex	CRISIL BBB/Stable
INE125T07246	Non-Convertible Debentures	14-Dec-2023	12.75	14-Dec-2025	15	Simple	CRISIL BBB/Stable
INE125T07253	Non-Convertible Debentures	27-Dec-2023	12.25	27-Dec-2025	30	Simple	CRISIL BBB/Stable
INE125T07261	Non-Convertible Debentures	27-Feb-2024	12.3	27-Feb-2027	25	Complex	CRISIL BBB/Stable
NA	Proposed Long Term Bank Loan Facility	NA	NA	NA	117.47	NA	CRISIL BBB/Stable
NA	Term Loan	NA	NA	05-Dec-2025	10	NA	CRISIL BBB/Stable
NA	Term Loan	NA	NA	30-Jun-2026	21.52	NA	CRISIL BBB/Stable
NA	Term Loan	NA	NA	30-Sep-2026	10	NA	CRISIL BBB/Stable
NA	Term Loan	NA	NA	31-Aug-2025	8.75	NA	CRISIL BBB/Stable
NA	Term Loan	NA	NA	18-Jun-2026	20	NA	CRISIL BBB/Stable
NA	Term Loan	NA	NA	03-Oct-2024	2.36	NA	CRISIL BBB/Stable

*Yet to be issued