Press Release Incred Financial Services Limited

Press Release

InCred Financial Services Limited (Formerly known as Visu Leasing Finance Private Limited) September 27, 2019 Ratings Amount Instruments/Facilities Rating1 Rating Action (Rs. crore) 100 CARE PP-MLD A; Stable Secured Redeemable Principal Protected – (Rs. One Hundred (PP-MLD Single A; Assigned Market Linked Non-Convertible Debenture (NCD) Crore only) Outlook: Stable) Details of instruments/facilities in Annexure-1

Detailed Rationale & Key Rating Drivers The rating assigned to Secured Redeemable Principal Protected – Market Linked Non-Convertible Debenture (NCD) of InCred Financial Services Limited (IFSL) factor in the extensive experience of promoter and the management team, continued healthy capitalization levels and low gearing post infusion of capital in the form of compulsorily convertible preference shares (CCPS) from institutional investors in April, 2019, strong analytics driven system for lending operations, diversified loan portfolio and comfortable liquidity profile post capital infusion and the company’s commitment to maintain three months of debt repayment in the form of cash & liquid investment at all times. The ratings are constrained on account of limited track record of operations; lower than projected scale up of business on account of tightened liquidity conditions in the market resulting in subdued profitability, moderate seasoning of the loan book and moderation in asset quality parameters. Scaling up of business, improvement in profitability continued healthy capitalization levels, liquidity, and maintaining a healthy asset quality with further seasoning of the loan portfolio are the key rating sensitivities.

Detailed description of the key rating drivers Key Rating Strengths Experienced promoter and management team The InCred group is promoted by Mr. Bhupinder Singh (Founder and Chief Executive Officer (CEO)) and leads the operations of the company. He has over two decades of experience in financial services industry. Prior to this venture, he was associated with Deutsche Bank as Head of Corporate Finance division and Co-Headed Fixed Income, Equities and Investment Banking divisions for Asia Pacific region. The company’s Board of Directors includes Mr. Bhupinder Singh, Mr. Hoshang Sinor, Mr. Rupa Vora, Mr. Girish Nadkarni, Mr. Vivek Anand and Mr. Vivek Bansal (Group Chief Financial Officer (CFO)). The company has business heads for various verticals. The SME Finance Business vertical is headed by Mr. Saurabh Jhalaria who has over 18 years of experience of lending to corporate and SMEs at Deutsche Bank. The Education Loans and Two Wheeler Finance verticals are headed by Mr. Prashant Bhosale who has over 25 years of experience and co-founded HDFC Credila and Mr. Prithvi Chandrashekhar (Chief Risk Officer) who leads credit risk management & advanced analytics capabilities has served as the Global Head of Analytics at Experian and Risk Head at Capital One. In addition to this, the group has Mr. Anshu Jain (currently President at Cantor Fitzgerald and former Co-CEO of Deutsche Bank from 2012 to 2015) who has vast experience in the financial services industry on the advisory board.

Healthy capitalization levels post infusion by institutional investors and low gearing levels The promoters as an initial equity commitment to build up the business have infused equity capital to the tune of Rs.558 crore during FY17 (refers to period from April 01 to March 31) resulting in tangible net worth base of Rs.584 crore as on March 31, 2019. The company leveraged its equity base to build up its loan portfolio as a result, its overall gearing stood at 2.15 times as on March 31, 2019 as compared to overall gearing of 2.16 times as on March 31, 2018. Due to strong net worth base, the company reported overall capital adequacy ratio (CAR) of 29.6% (Tier I CAR: 29.1%) as on March 31, 2019. Further, during April, 2019, the company raised Compulsorily Convertible Preference Shares (CCPS) of Rs.427 crore from institutional investors like FMO (the Netherlands Development Finance Company), Elavar Equity, Moore Strategic Ventures and Alpha Capital along with its associates which would further support strong capitalization levels of the company. Considering the CCPS, the tangible net worth of the company was over Rs.1,000 crore. Going forward, the company plans to maintain debt to equity ratio of ~ 4 times.

Diversified loan portfolio The group has diversified loan portfolio of Rs.1,745.08 crore as on March 31, 2019. The AUM mix consists of Secured School Financing (24.29%), Student Loans (14.54%), Lending to FIs/Escrow backed lending (14.02%), Supply Chain Financing (10.29%) and Unsecured Business Loans (13.84%) under SME lending, Personal Loans (14.49%) and 2-Wheeler Loans (8.53%) under retail lending portfolio. Out of the total loan portfolio, 53.16% was unsecured while the remaining 46.84% is secured.

1Complete definitions of the ratings assigned are available at www.careratings.com and in other CARE publications. Press Release

Moderate funding profile The company had diversified funding profile as on March 31, 2019. Of the total borrowings, 54% of the borrowings were in the form of Term loans (from banks: 38% and from other FIs: 14%). Other sources of funding included NCD (37%) and loans repayable on demand (10%). Post September 2018, in line with the industry, the company faced moderation in borrowings due to which, the company reduced its disbursements resulting in lower than expected scale up of operations. The company raised capital to the tune of Rs.427.13 crore by way of CCPS from marquee investors in April, 2019.

Comfortable liquidity profile The asset liability profile of the company as on June 30, 2019 had no cumulative negative mismatches. As on July 31, 2019, the company had cumulative debt repayment of Rs.478 crore up to one year against which it had receivables from loan portfolio of Rs.750 crore and cash and cash equivalent of Rs.113 crore. In addition, IFSL had unutilized bank lines of Rs.130 crore. Further, the company as a policy has committed to keep 3 months equivalent debt repayments in the form of cash or liquid or short term debt funds at all times.

Key Rating Weakness Limited track record of operations and moderate seasoning of the loan portfolio The company under the new management started business in February 2017 and FY18 was the first full year of operation. The company saw growth in its loan disbursements during H1FY19; however, due to tightening of liquidity conditions post September, 2018, the company saw lower than expected scale up of loan portfolio. The company’s AUM stood at Rs.1,745.08 crore as on March 31, 2019 as compared to Rs.1,232.91 crore as on March 31, 2018.. Although, some of the products have seen a cycle, the overall seasoning of the loan portfolio continues to be moderate and the steady state asset quality of the portfolio is yet to be witnessed.

Subdued profitability parameters During FY18, the company had reported PAT of Rs.11.86 crore on total income of Rs.127 crore as per IGAAP. The profitability was impacted by IND AS adjustments resulting in PAT of Rs.0.89 crore from Rs.11.86 crore as per IND AS. During FY19, the company’s AUM increased 41.54% resulting in increased interest income. The company’s borrowings also increased by 22.86%. As a result, during FY19, the company reported PAT of 3.77 crore on total income of Rs.290.76 crore (PAT Margin: 1.30%). Being in the initial stage of operation, the company’s operating cost as a proportion of total income continued to be high at 42% (P.Y.: 62%) for FY19 as the company has put in resources for a larger scale of operations. Post September 2018, due to tightening of overall liquidity conditions, the company saw increase in incremental cost of funds. This coupled with slow disbursements impacted the profitability in spite of stable operating and credit costs. The company reported Net Interest Margin (NIM) of 8.60%, Return on Total Assets (ROTA) of 0.22% and Return on Tangible Net-worth of 0.71% for FY19.

Moderation in asset quality parameters As on March 31, 2019, the company reported Gross NPA of 1.82%, Net NPA of 0.70% and Net NPA to Tangible Net worth of 2.10% as compared to Nil Gross NPA as on March 31, 2018. Overall slippages during the year amounted to Rs.31.79 crore majorly due to supply chain financing portfolio which reported slippage of Rs.12.49 crore during FY19. As on June 30, 2019, the company reported Gross NPA of 2.50% and Net NPA of 1.00%. Going forward, as the company further scales up its operations, maintaining asset quality of the loan portfolio will be a key rating sensitivity.

Analytical approach: Standalone

Strong Liquidity Profile As on July 31, 2019, the company had cumulative debt repayment of Rs.478 crore up to one year against which it had receivables from loan portfolio of Rs.750 crore and cash and cash equivalent of Rs.113 crore. In addition, IFSL had unutilized bank lines of Rs.130 crore. Further, the company as a policy will keep 3 months equivalent debt repayments in the form of cash or liquid or short term debt funds at all time.

Applicable Criteria: Criteria on assigning Outlook to Credit Ratings CARE Policy on Default Recognition Financial ratios - Financial Sector Non-Banking Financial Companies Criteria for Short Term Instruments

About the Company The InCred Finance Group lends through its new age financial services technology platform “InCred- credit for InCredible India” that leverages technology and data-science to make lending quick and easy. The group acquired NBFC ‘Visu Leasing Press Release and Finance Private Limited (VLFL)’ which was incorporated on January 08, 1991 and received certificate of registration from RBI on August 20, 2000. Post-acquisition, the InCred group/new promoters raised equity capital of around Rs.500 crore and started its lending operations from February, 2017. The name of the company was changed to ‘InCred Financial Services Limited’ w.e.f. November 01, 2018. The company has around 3 years of operations and its Asset Under Management (AUM) as on March 31, 2019 stood at Rs.1,745 crore. The group typically offers loan products in retail and SME segment constituting mix of Secured School Financing (24.29%), Student Loans (14.54%), Personal Loans (14.49%), Lending to FIs/Escrow backed lending (14.02%), Unsecured Business Loans (13.84%), Supply Chain Financing (10.29%) and 2-Wheeler Loans (8.53%). As on March 31, 2019, the business is spread across India with 26 branches situated across 10 states with an employee base of 827 employees spread across various functions. The company had a wholly owned subsidiary InCred Housing Finance Private Limited (erstwhile Bee Secure Home Finance Private Limited) – a housing finance registered with NHB. The company was incorporated in December, 2015. The company in December, 2018 decided to exit the business and in February, 2019, sold its business. During Q1FY20, the company raised additional equity capital of Rs.427 crore by way of compulsorily convertible preference shares (CCPS), taking the tangible net worth of the company to around Rs.1,000 crore.

Brief Financials: (Rs. Crore) Particulars FY18 (A) FY19 (A) Total Income 108 291 PAT 1 4 Interest Coverage (times) 1.05 1.04 Total Assets^ 1,513 1,866 Net NPA (%) - 0.73 ROTA (%) NA 0.22 A: Audited; ^: Not adjusted for Intangible Assets & Deferred tax Assets (DTA); *: As per IND AS

Status of non-cooperation with previous CRA: Not Applicable

Any other information: Not Applicable

Rating History for last three years: Please refer Annexure-2

Annexure-1: Details of Instruments/Facilities:

Date of Coupon Maturity Size of the Issue Rating assigned along with Name of Instrument/Facility Issuance Rate Date (Rs. crore) Rating Outlook Secured Redeemable Principal Protected – CARE PP-MLD A; Stable Market Linked Non-Convertible Debenture - - - 100.00 (PP-MLD Single A; (NCD) Outlook: Stable)

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Annexure-2: Rating History of last three years

Current Ratings Rating History Date(s) & Date(s) & Date(s) & Date(s) & Sr. Name of Instrument/ Rated Rating(s) Rating(s) Rating(s) Rating(s) No Bank facilities Type Amount Rating assigned in assigned in assigned in assigned in (Rs. crore) 2019-2020 2018-2019 2017-2018 2016-2017 1)CARE A1+ 1)CARE A1 (05-Sep-19) 1 Commercial Paper ST 250 CARE A1+ - (04-Dec- - 2)CARE A1 17) (02-Apr-19) 1)CARE A; 1)CARE A; Stable Stable (26-Feb- 1)CARE A; Fund Based - LT – CARE A; (05-Sep-19) 18) 2 LT 1,200 Stable - Term Loan Stable 2)CARE A; 2)CARE A; (31-Jul-18) Stable Stable (02-Apr-19) (04-Dec- 17) 1)CARE A; Stable 1)CARE A; 1)CARE A; Debentures – Non CARE A; (05-Sep-19) Stable 3 LT 250 Stable - Convertible Debentures Stable 2)CARE A; (26-Feb- (27-Apr-18) Stable 18) (02-Apr-19) 1)CARE A; Stable 1)CARE A; Debentures – Non CARE A; (05-Sep-19) 4 LT 250 Stable - - Convertible Debentures Stable 2)CARE A; (27-Apr-18) Stable (02-Apr-19) 1)CARE A; Stable 1)CARE A; Debentures – Non CARE A; (05-Sep-19) 5 LT 200 Stable - - Convertible Debentures Stable 2)CARE A; (31-Jul-18) Stable (02-Apr-19) Debentures – Market CARE PP-MLD A; 6 LT 100 - - - - Linked Debentures Stable

Note on complexity levels of the rated instrument: CARE has classified instruments rated by it on the basis of complexity. This classification is available at www.careratings.com. Investors/market intermediaries/regulators or others are welcome to write to [email protected] for any clarifications.

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Analyst Contact 1 Group Head Name – Mr. Aditya Acharekar Group Head Contact no. – 022-6754 3528 Group Head Email ID – [email protected]

Analyst Contact 2 Mr. Sanjay Kumar Agarwal Contact no. – 022-6754 3500 / 582 Email ID – [email protected]

Business Development Contact Name – Mr. Ankur Sachdeva Contact no. – +91 98196 98985 Email ID – [email protected]

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