Detailed Rationale

CRISIL Ratings has assigned its ‘CRISIL BBB/Negative’ rating to non-convertible debentures (NCDs) of WheelsEMI Private Limited (WEPL) and reaffirming its ratings of other debt instruments and bank facilities at 'CRISIL BBB/Negative/CRISIL A2'.

 

The ratings continue to factor 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 and earnings profile may continue to remain weak going forward. Given the focus on the 2 wheeler segment, the company largely caters to borrowers with modest credit profile and relatively under-banked customers.

Analytical Approach

CRISIL Ratings has analysed the consolidated business and financial risk profile of 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. 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 Ratings believes that the experience of the promoters and management will stand WEPL in good stead as it scales up its portfolio.

 

Healthy capitalization metrics supported by regular capital raising

The company has healthy capitalisation, supported by regular capital raising. It also has a comfortable leverage philosophy, with steady state gearing not expected to cross 4 times.  The company has raised Rs 105 crore of equity from existing investors in fiscal 2021 with initial tranche of Rs 75 crores in June 2020 and further of Rs 30 crore in November 2020. CRISIL Ratings understands that the company is planning to raise equity of about Rs 200-250 crore in fiscal 2022 to support business growth. In 2017 and 2018, the company raised Rs 123 crores through infusion from PE investors. The networth of WEPL was adequate at Rs 100 crores as on September 30, 2021. As on the same date, adjusted gearing stood at 4.2 times.  Any delay in raising the proposed equity in fiscal 2022 or any material change in the quantum of the equity will remain a key rating sensitivity factor.

 

Weakness:

Small scale of operations

WEPL commenced operations in April 2017 and as on September 30, 2021, it had AUM of Rs 503 crore. Of this, 16% is Used two-wheeler financing, 66% is New two-wheeler financing in Rural areas, 13% is for New two-wheeler financing in Urban areas and, 5% 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. 

 

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.

 

On the asset quality front, the 90+ dpd for the company was 5.72% as on September 30, 2021 against 5.98% as on March 31, 2021 and 2.46% as on March 31, 2020. Consequently, there has been an increase in early delinquency buckets. Further, the company has done restructuring of about Rs 3.6 crore (0.8% of AUM) as on June 30, 2021, of which outstanding as on September 30, 2021 was about Rs 1.5 crore. The collection efficiencies after improving to 104% by March 2021 were impacted post the second wave and its consequent lockdowns dropping to 86% in May 2021. However, with the reopening of the lockdowns, the collection efficiencies have improved from June and stood at 110% for the month of August 2021 and September 2021. However, 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 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 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. 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.

 

Earnings profile currently constrained due to high operating costs

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 43 crore in fiscal 2021 against a loss of Rs 37 crore for the year ended March 31, 2020. Further, in H1 of fiscal 2022, the company has reported a loss of Rs 29 crore. The loss in fiscal 2021 have been higher primarily as the company provided about 6.4 crore in anticipation of covid-19 related stress and maintaining higher level of liquidity to cover in the current fiscal which resulted in a negative carry.

 

High employee costs formed the bulk of the operating expenses of WEPL. CRISIL Ratings 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 June 30, 2021. The impact of these changes on the operating expenses remains a key monitorable. Nevertheless, the central underwriting model should 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.

Liquidity: Adequate

WEPL had positive cumulative mismatches across all the buckets as per ALM statement as on September 30, 2021. In terms of liquidity, as on October 31, 2021 had liquidity of Rs 75.4 crore (Rs 72.9 crore of cash and quivalents and Rs 2.5 crore of unutilized working capital bank lines). Against the same, they have total debt payments of Rs 46.8 crore over the next 2 months till December 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:

• Sustainability in gross NPA level below 6% in the medium term.
• Increase in scale of operations while maintaining the operational cost and improving earnings.

 

Downward factors:

• Increase in steady state gearing of above 4 times or inability to bring in proposed equity capital in fiscal 2022.
• Continued pressure on asset quality and credit costs.
• Any further delay in turning profitability at pre-tax level beyond Q4 of the current fiscal.

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

Particulars as on,	Unit	September 30, 2021#	March 31, 2021	March 31, 2020
Total Assets	Rs crore	557	513	288
Advances*	Rs crore	470	373	237
Total Income (after finance cost)	Rs crore	35	48	34
Profit after tax	Rs crore	-29	-43	-37
Gross NPA	%	5.7	6.0	2.5
Gearing**	Times	4.2	2.9	3.2
Return On Assets	%	-ve	-ve	-ve

*on book portfolio

**excluding preference share capital

#Provisional

Any other information: Not applicable