Detailed Rationale

CRISIL Ratings has reaffirmed its ratings on the debt instruments and bank facilities of WheelsEMI Private Limited (WEPL) at 'CRISIL BBB/Negative/CRISIL A2'.

 

The ratings continue to factor in significant experience of the promoters and top management in the two-wheeler and two-wheeler finance industry and the company’s comfortable capitalization metrics. These rating strengths are partially offset by the small scale of operations, asset quality risks inherent in two-wheeler financing, and high operating expenses that constrain the earnings profile. Given the focus on the 2 wheeler segment, the company largely caters to borrowers with modest credit profile and relatively under-banked customers.

 

The negative outlook reflects the constrained earnings profile of WEPL. The company reported a loss of Rs 44 crores in fiscal 2023 (almost similar to the loss in fiscal 2022 at Rs 44 crores) owing to elevated operating expenses. While the portfolio has scaled up, the operating expenses continue to remain elevated. However, on a quarter-on-quarter basis, the operating expenses with the scale up in the business have improved, albeit still remain high. In the fourth quarter of fiscal 2023, the loss for WEPL narrowed to Rs 3.5 crores as opposed to a loss of Rs 17.6 crores in the first quarter. Going forward, WEPL is expected to turn profitable in terms of monthly profitability within Q2 of fiscal 2024, the trend in which should sustain. Ability to report sustained profits and improve earnings profile is a key monitorable.

 

Consequent to redemption, CRISIL Ratings has withdrawn its rating on debentures of Rs 36.5 crore in line with its withdrawal policy (See Annexure 'Details of rating withdrawn' for details). CRISIL Ratings has received independent confirmation that these instruments are fully redeemed.

Analytical Approach

CRISIL Ratings has analysed the consolidated business and financial risk profile of WEPL and its subsidiary Blubird Auto Trade Limited (Blubird) because of 100% ownership of Blubird by WEPL.

 

Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

• Significant experience of the promoters and senior management in the two-wheeler and two-wheeler finance industry

The founders of WEPL have over 30 years’ experience in the two-wheeler and two-wheeler finance industry and were part of one of the leading companies in this segment. The top management also has extensive experience in handling various functions in similar businesses including collections, backend operations, credit and legal. 

 

Given their significant experience, the management of WEPL has been able to put in place strong systems and risk management processes at an early stage itself. The credit approval for it is centralized. The operational risk aspect has been minimized through IT systems as all the deviation approvals and disbursals are automated and done through centralized system.

 

The management is also focused on building good governance systems. It has an experienced Board with two independent directors and has appointed reputed auditors.

 

CRISIL Ratings believes that the experience of the promoters and management will stand WEPL in good stead as it scales up its portfolio.

 

• Comfortable capitalization metrics

The company has demonstrated its ability to raise capital from varied investors including PE funds, international institutions and HNI investors. WEPL has raised close to Rs 476 crores since inception and closed its Series D funding round of $30 million (around Rs 250 crore) in January 2023. Of this, Rs 225 crores (Rs 215 crore - net of issue expense) was infused in fiscal 2023 which improved the net worth (including preference share capital) to Rs 281 crore as on March 31, 2023 (Rs 107 crore as on March 31, 2022). As a result, the adjusted gearing improved to 1.6x as on March 31, 2023 (5.4x as on March 31, 2022). On a steady state basis, the gearing of the company is expected to be under 4.0 times. The consolidated net worth as on March 31, 2023 (provisional) is estimated at Rs 257 crore (Rs 91 crore as on March 31, 2022). Capital profile is expected to remain comfortable by timely fund raises.

 

Weaknesses:

• Modest scale of operations

WEPL commenced operations in April 2017 and grew at a 3 year CAGR of 55% to an Assets under Management (AUM) of Rs 929 crore as on March 31, 2023. Of the total AUM of Rs 870 crore as on December 31, 2022, 20% is used two-wheeler financing, 70% is new two-wheeler financing in rural areas, 5% is for new two-wheeler financing in urban areas and, 6% is re-finance for vehicle. Going forward, the scale up in the portfolio is expected to remain healthy as the company plans to grow majorly by Co-lending. The company has entered into co-lending agreements with multiple financial institutions and this is expected to drive growth going forward. Nevertheless, WEPL would continue to have a share of sub-3% in overall non-bank two-wheeler financing market.

 

• Asset quality susceptible to risks inherent in two-wheeler financing; used two-wheeler financing is a relatively untested segment

WEPL’s asset quality is susceptible to risks associated with financing of two-wheelers wherein the borrower credit profiles could be relatively weak.  Further, the pre-owned 2W segment is untested- while the customer profile is similar to that of new two-wheelers, the ability to recover sufficiently through repossession and sale of assets needs to be seen.

 

Post the impact of Covid-19, the asset quality metrics for the company peaked at 6.9% as on June 30, 2021. However, since then, driven by the improvement in the economic environment and collection framework, the 90+ dpd for the company has improved to 3.0% as on March 31, 2023 from 4.5% as on March 31, 2022. Adjusted for 12-month write-offs, the 90+ dpd stood at 5.1% as on March 31, 2023 (7.2% as on March 31, 2022). The collection efficiencies {collection efficiency = (current month collections + overdue collections)/Current month demand} to remain comfortable and stood in the range of 101-104% during FY23. 

 

WEPL attempted to mitigate potential asset quality challenges by focusing on customer segments where the vehicle is used for income generating activities in the used two wheeler segment. This acts as a disincentive to default. Further, the company has focused on collection efforts in the past fiscal and has increased the strength of its collections team, to ensure repayments from the borrowers who slipped into NPA. The company has shifted its focus to rural geographies for new two-wheelers. The impact of the change in customer segment on the asset quality would be observed as the portfolio matures. Given the low seasoning of portfolio, the ability of the company to contain delinquencies within manageable levels will need to be demonstrated over the longer term.

 

• Earnings profile currently constrained due to high operating costs

The company is yet to demonstrate profitability, as its earnings profile has been constrained by high operating costs considering high collection costs, personnel expense and fixed technological expenses. WEPL reported net loss of Rs 44 crore in fiscal 2023 (provisional) (same as the previous year) and pre-provisioning loss of Rs 22 crore in fiscal 2023 (Rs 31 crore in fiscal 2022). However, on a quarter on quarter basis, the operating expenses with the scale up in the business have improved, albeit still remain high. In the fourth quarter of fiscal 2023, the loss for WEPL narrowed to Rs 3.5 crores as opposed to a loss of Rs 17.6 crores in the first quarter. The consolidated loss for fiscal 2023 (provisional) is estimated at Rs 51 crore.

 

As on March 31, 2023, WEPL’s branch network stood at 11 and total operating centers were 300+ with employee strength of 1800+ (including field staff) as on Mach 31, 2023. The company does not have any major expansion plans for the current fiscal. CRISIL Ratings understands that WEPL in the near to medium term, would continue to grow the book through co-lending primarily and through partnerships with more number of 2 wheeler manufacturers in the existing geographies. CRISIL Ratings further understands that the current capabilities and employee base is adequate for the proposed growth plans in the medium term. Hence, WEPL expects faster absorption of operating costs as the AUM scales up, thereby leading to an improvement in the earnings profile. Going forward, WEPL is expected to turn profitable in terms of monthly profitability within Q2 of fiscal 2024, the trend in which should sustain. Ability to report sustained profits and improve earnings profile is a key monitorable. Further, while the high-yield portfolio with IRR ranging between 20-30% across all segments will support the earnings profile, the ability to raise resources at competitive costs will be important.

Liquidity: Adequate

WEPL had positive cumulative mismatches across all the buckets up to 1 year as per ALM statement as on February 28, 2023. In terms of liquidity, as on March 28, 2023, the company available liquid lines of Rs 70.6 crore (cash equivalents of Rs 54.6 crore and unutilized working capital lines of Rs 16.0 crore). Including average monthly collections, it translated into a debt cover of 1.6 times for the next three months ending June 2023.

Outlook: Negative

The negative outlook reflects CRISIL Ratings’ belief that WEPL’s earnings profile may continue to remain constrained in the near term driven by high operating expenses. Given the focus on the 2 wheeler segment, the company largely caters to borrowers with modest credit profile and relatively under-banked customers.

Rating Sensitivity factors

Upward factors:

• Increase in scale of operations while significantly improving the opex absorption, and hence, overall earnings
• Sustainability in gross NPA level below 6% in the medium term.

 

Downward factors:

• Continued underperformance vis-a-vis expected profitability in the near term
• Increase in steady state gearing of above 4 times.
• Continued pressure on asset quality and credit costs.

About the Company

WEPL is a non-deposit taking systemically important NBFC engaged in financing of used and new two-wheelers, electric two-wheelers and also offers Re-finance for Vehicles. WEPL started its operations in April 2017 in Pune after its promoters (Mr. Srinivas Kantheti, Mr. Karunakaran Vaddakkepet and Mr. Ratheesh Bharathan) acquired an erstwhile NBFC (Varadnarayan Savings and Investment Co. Pvt. Ltd.). WEPL is currently operating with 11 branches & 300+ locations and has presence in 12 states. 

 

About Blubird Auto Trade

Blubird Auto Trade, commercially known as BikeBazaar, started operations in April 2019. The company deals with Buy/Sell of pre-owned two wheelers. Blubird operates through franchisee model and has 18 frachisees as on March 31, 2023 and has presence in 4 states.

Key Financial Indicators

Particulars as on/ for the year ended,	Unit	March 31, 2023#	March 31, 2022	March 31, 2021
Total Assets	Rs crore	603	559	509
Assets under Management	Rs crore	929	664	397
Total Income (after finance cost)	Rs crore	125	80	48
Profit after tax	Rs crore	-44	-44	-43
Gross NPA/ 90+ DPD	%	3.0	4.5	6.0
Adjusted Gearing**	Times	1.6	5.4	2.9
Return On Assets	%	-ve	-ve	-ve

**debt includes off-book portfolio

#provisional

Any other information: Not applicable