| WheelsEMI Private Limited | ||||||
| 'CRISIL BBB/Negative' assigned to NCD | ||||||
| Rating Action | ||||||
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| 1 crore = 10 million | ||||||
| Refer to annexure for Details of Instruments & Bank Facilities |
| Detailed Rationale |
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CRISIL has assigned its 'CRISIL BBB/Negative' rating on 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'. |
| Analytical Approach |
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CRISIL has analysed the standalone business and financial risk profile of WEPL. |
| Key Rating Drivers & Detailed Description |
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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 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 gearing not expected to cross 4 times at all points in time. The company had initially planned to raise around Rs 250 crores of equity in fiscal 2020 which due to the market environment and slower growth was toned down to Rs 100 to 150 crores. 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 122 crores as on September 30, 2020. As on the same date, gearing stood at 2.0 times. Weaknesses: * Small scale of operations WEPL commenced operations in April 2017 and as on September 30, 2020, it had a portfolio of Rs 265 crore. Of this, 22% is Used two-wheeler financing, 70% is New two-wheeler financing, 8% is Re-finance for Vehicle. As per the revised strategy because of impact of lockdown and transition to BS6 vehicles, the company is expected to grow its portfolio to around Rs 435 crore by end of fiscal 2021 as against initial planned Rs 850 crore. With this AUM, it 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. Gross non-performing assets (NPA) ratio for WEPL stood at 2.35% as on September 30, 2020 against 2.46% as on March 31, 2020 (3.17% at March 31, 2019). The 0 days past due delinquencies of the company was 9.4% as on March 31, 2020. However, the loan book of the company is new and the asset quality metrics are expected to inch up as the loan book seasons. 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. * 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 17 crore in the first six months of fiscal 2021 against a loss of Rs 37 crore for the year ended March 31, 2020. 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 planning to expand the branch network to 9 full-fledged branches along with 5 mini branches and 120+ micro branches by end fiscal 2021. With a typical full-fledged / mini branch taking around 6-8 months to break-even (excluding allocation of Head Office costs), operating efficiencies would flow in only over the medium term. 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 |
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WEPL had positive cumulative mismatches across all the buckets as per ALM statement as on September 30, 2020. In terms of liquidity, as on November 30, 2020, WEPL had liquidity of Rs 70 crore (Rs 68 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 65 crore over the next 3 months till February 2021. |
| Outlook: Negative |
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The negative outlook reflects CRISIL'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. The non-regular income pattern and lack of financial flexibility of these borrowers may lead to higher delinquencies especially amidst the current environment. |
| Rating Sensitivity factors |
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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 timely equity capital going forward * Continued shortfall in collections, impacting asset quality and credit costs |
| About the Company |
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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 9 branches & 100+ locations and has presence in 13 states. |
| Key Financial Indicators | ||||||||||||||||||||||||||||||||||||||||
**excluding preference share capital |
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Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL complexity levels are assigned to various types of financial instruments and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels. |
| Annexure - Details of Instrument(s) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| 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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| Links to related criteria |
| CRISILs Bank Loan Ratings - process, scale and default recognition |
| Rating Criteria for Finance Companies |
| CRISILs Criteria for rating short term debt |
| For further information contact: | ||||||
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