| WheelsEMI Private Limited | ||||||||
| 'CRISIL BBB/Negative' assigned to Non Convertible Debentures | ||||||||
| Rating Action | ||||||||
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| 1 crore = 10 million | ||||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL has assigned its 'CRISIL BBB/Negative' rating on Rs.20 crore non-convertible debentures of WheelsEMI Private Limited (WEPL) while reaffirming the rating of other debt instruments and bank facilities at 'CRISIL BBB/Negative/CRISIL A2'.
The ratings of WEPL continue to factors in the significant experience of the promoters and top management in the two-wheeler and two-wheeler finance industry and the company’s healthy capitalization metrics, supported by regular capital raising. 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.
The negative outlook reflects CRISIL Rating’s belief that WEPL’s asset quality metrics may come under pressure due to the extended nation-wide lockdown and challenging economic environment. Given the focus on the 2 wheeler segment, the company largely caters to borrowers with modest credit profile and relatively under-banked customers.
CRISIL understands that the initial business plan envisaged by WEPL to target used and two-wheelers in predominantly urban areas has now changed and with focus of used two-wheelers continuing to be in urban areas while new two-wheelers would be in semi urban and rural areas through a special Direct Cash Collection model. However, given the nascent stage of operations, the impact of the changes in the business model need to be observed as the portfolio matures. The company has taken several steps to manage costs during this period, however, the impact of these would need to be seen over the next few quarters.
The company has raised the initial tranche of Rs 75 crores in June 2020 and has raised an additional equity of Rs 30 crore in November 2020, thereby making an overall infusion of Rs 105 crore in current fiscal. CRISIL understands that in the event of the business ramping up faster than expected, the capital raise could also be altered suitably.
On the asset quality front, the 90+ dpd for the company deteriorated to 4.99% as on December 31, 2020 against 2.46% as on March 31, 2020 (3.17% at March 31, 2019). Consequently, there has been an increase in early delinquency buckets. Nevertheless, the company has not provided restructuring to any borrower till December 2020. Hence, CRISIL Ratings believes that inability of the company to maintain collections at current level may put pressure on the asset quality metrics and CRISIL Ratings will continue to monitor the same.
Since April 2020, WEPL has raised Rs 222 crore through term loans, commercial papers and NCDs from banks and NBFCs. Consequently, as on February 28, 2021 had liquidity of Rs 64 crore (Rs 62 crore of cash and equivalents and Rs 2 crore of unutilized working capital bank lines). Against the same, they have total debt payments of Rs 62 crore over the next 3 months till May 2021. |
Analytical Approach CRISIL has analysed the standalone business and financial risk profile of WEPL. |
Key Rating Drivers & Detailed Description Strengths:
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. This is especially important as the organized pre-owned two-wheeler financing segment is relatively nascent in the Indian market. The credit approval for new two-wheelers is centralized; the company is also in the process of centralizing the credit approval for pre-owned two-wheelers. 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 believes that the experience of the promoters and management will stand WEPL in good stead as it scales up its portfolio.
The company has healthy capitalisation, supported by regular capital raising. It also has a comfortable leverage philosophy, with gearing not expected to cross 4 times at all points in time. The company has raised the initial tranche of Rs 75 crores in June 2020 and additional equity of Rs 30 crore in November 2020, thereby making an overall infusion of Rs 105 crore in current fiscal. CRISIL understands that in the event of the business ramping up faster than expected, the capital raise could also be altered suitably. In 2017 and 2018, the company raised Rs 123 crores through infusion from PE investors. The networth of WEPL was adequate at Rs 143 crores as on December 31, 2020. As on the same date, gearing stood at 2.0 times.
Weaknesses:
WEPL commenced operations in April 2017 and as on December 31, 2020, it had a AUM of Rs 345 crore. Of this, 18% is Used two-wheeler financing, 51% is New two-wheeler financing in Rural areas, 23% is for New two-wheeler financing in Urban areas and, 7% is Re-finance for Vehicle. Even with projected AUM growth in the next two fiscals, WEPL would have a share of sub-3% in overall non-bank two-wheeler financing market. However, its share in the used two-wheeler financing market is expected to be higher.
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.
On the asset quality front, the 90+ dpd for the company deteriorated to 4.99% as on December 31, 2020 against 2.46% as on March 31, 2020 (3.17% at March 31, 2019). While collection efficiency for the company has improved to 95% in January 2021 from 42% in April 2020, it has been gradual with collection efficiencies standing at 89% as on October 2020 and 88% as of November 2020. Consequently, there has been an increase in early delinquency buckets. Nevertheless, the company has not provided restructuring to any borrower till December 2020. Hence, CRISIL Ratings believes that inability of the company to maintain collections at current level may put pressure on the asset quality metrics and CRISIL Ratings will continue to monitor the same.
WEPL is attempting to mitigate potential asset quality challenges by focusing on customer segments where the vehicle is used for income generating activities. This acts as a disincentive to default. Further, the company is also shifting 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. However, at an industry level, delinquencies in the 2-wheeler finance segments are high. Therefore, the ability of the company to contain delinquencies within manageable levels will need to be demonstrated over the medium term.
Given the nascent stage of operations for the company, the earnings profile is currently constrained amidst high operating costs given the branch expansion and technological investments being undertaken. The company reported a loss of Rs 27 crore in the first nine months of fiscal 2021 against a loss of Rs 37 crore for the year ended March 31, 2020. These losses have been higher primarily as the company provided about Rs 7.5 crore in anticipation of covid-19 related stress and also maintaining higher level of liquidity to cover 3 months of cash outflows in the current fiscal which resulted in a negative carry.
High employee costs formed the bulk of the operating expenses with the employee strength of WEPL. CRISIL understands that the initial business plan envisaged by WEPL to target urban and semi-urban customers has now changed and has increased focus on tier-3, tier-4 cities, and rural areas. WEPL’s branch network stood at 12 as on December 31, 2020. The company has taken several steps to manage costs in the past few months, however, the impact of these would need to be seen over the next few quarters. Nevertheless, the central underwriting model will support operating leverage going ahead.
The high-yield portfolio with IRR ranging between 20-30% across all segments supports the earnings profile. As the portfolio scales up and gearing increases, the ability to raise resources at competitive costs will be important. Additionally, given the impact of the extended lockdown, the ability of the company to manage asset quality, and therefore, credit costs, will be a key determinant of profitability going ahead. |
Liquidity: Adequate WEPL had positive cumulative mismatches across all the buckets as per ALM statement as on September 30, 2020. In terms of liquidity, as on February 28, 2021 had liquidity of Rs 64 crore (Rs 62 crore of cash and equivalents and Rs 2 crore of unutilized working capital bank lines). Against the same, they have total debt payments of Rs 62 crore over the next 3 months till May 2021. |
Outlook: Negative The negative outlook reflects CRISIL’s belief that WEPL’s asset quality metrics may come under pressure in the event of collection efficiencies dropping from the current levels given the increase in early bucket delinquencies. 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:
Downward factors:
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About the Company WEPL is a non-deposit taking non-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 acquired an erstwhile NBFC (Varadnarayan Savings and Investment Co. Pvt. Ltd.). WEPL is currently operating with 12 branches & 100+ locations and has presence in 12 states. |
Key Financial Indicators
*on book portfolio **excluding preference share capital |
Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
Annexure - Details of Instrument(s)
^Yet to be issued |
| Annexure - Rating History for last 3 Years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of various bank facilities | ||||||||||||||||||||||||||||||||||||
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