FEB 2021 Wonder Home Finance Limited
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FEB 2021 Wonder Home Finance Limited Ratings Amount Facilities Ratings1 Rating Action (Rs. crore) CARE BBB+; Stable Long Term Instruments- Non- 57.00 [Triple B Plus; Outlook: Assigned Convertible Debentures (NCD) Stable] 57.00 Total Facilities (Rupees Fifty-Seven Crore only) Details of facilities in Annexure-1 Detailed Rationale & Key Rating Drivers The rating assigned to the proposed non-convertible debenture issue of Wonder Home Finance Limited (WHFL) takes into account its improved operating performance and healthy collection efficiency despite Covid-19 outbreak, geographical expansion of operations to three states and expansion of resource base with sanctions from various banks and financial institutions. The rating continues to derive strength from resourceful promoters with common shareholding, logo and brand name with the flag-ship company of the group; Wonder Cement Ltd (rated CARE AA-; Stable/CARE A1+) and vast experience of WHFL’s key management personnel in retail finance business. Ratings continue to derive strength from establishment of wide branch network and retail-focused loan portfolio. The rating is, however, constrained on account of WHFL’s nascent stage of operations with limited seasoning of its loan portfolio, lack of experience of the Wonder Cement Group in housing finance business, moderate credit profile of target borrowers, regionally concentrated operations and stiff competition from established players. Key Rating Sensitivities: Positive Factors: • Assets under Management (AUM) of above Rs.250 crore along with profitable operations while maintaining the asset quality at current levels. Negative Factors: • Any negative change in the stance of promoters for providing financial support to WHFL Detailed description of the key drivers of standalone ratings of WHFL Part of resourceful promoter group WHFL is a part of Wonder Cement group of Rajasthan run by the Patni family which comprises of two major companies viz. Wonder Cement Ltd. (WCL: Cement manufacturing company, rated CARE AA-; Stable/ CARE A1+) and R.K. Marble Pvt. Ltd. (RKMPL: marble mining & processing company, rated CARE A-/ CARE A2+; credit watch with developing implications). The credit profile of WHFL derives significant financial flexibility from being a part of the group as manifested by the upfront as well as follow-up capital infusion amounting to Rs.150 crore from the promoters along with the intended subscription of the entire proposed debenture issue allowing the company to function through the initial years with lower external borrowings. Long standing experience of the key management personnel in housing finance business coupled with induction of industry veterans to the Board enhancing its strength Mr. Ashok Patni, Chairman and founder of the Wonder Cement group has over three decades of experience in marble industry as well as over seven years’ experience in cement industry. However, housing finance being a new area of business, WHFL has appointed professionals having vast experience in the financial sector as its key management personnel. Mr. Sanjay Singh Rajawat has been appointed as Chief Executive Officer (CEO) of WHFL. He is a Chartered Accountant by qualification and has over two decades of experience in the banking sector whereby he has held key positions in various banks. Mr. Raunak Singh Mohnot, Chief Financial Officer (CFO) & Strategy Head of WHFL is a Chartered Accountant & Company Secretary. Likewise, most of the key positions in WHFL have been filled up with personnel having prior experience in their respective areas of work. Further, recently, WHFL inducted two new members as independent directors who are the veterans of the Industry leading to strengthening of the Board. Upfront infusion of substantial equity capital by the promoters along with regular need-based infusion The promoters have already infused Rs.150 crore as equity capital including upfront seed capital of Rs.50 crore till H1FY19; another Rs.50 crore during H2FY19 and further infused Rs.50 crore during H1FY20 as committed earlier under the equity infusion schedule. Furthermore, WHFL is expected to receive need-based support from the group as and when the same is 1Complete definition of the ratings assigned are available at www.careratings.com and other CARE publications 1 CARE Ratings Ltd. FEB 2021 required as manifested from the intended subscription of the entire proposed debenture issue amounting to Rs.57.00 crore by a promoter group entity. Leverage is expected to remain stable with proposed replacement of bank loans with NCD issuance. Thus, given the promoters commitment, capital adequacy is likely to be maintained at comfortable level going forward. Establishment of wide branch network in a short span of time WHFL received its registration certificate from National Housing Bank (NHB) in May 2018 and within a very short span of time (by end H1FY19) it had set up 26 branches in the state of Rajasthan. Each branch has been vested with required credit, legal, technical, sales, collection and admin personnel. Its existing branch network is expected to cover major part of the state. Further, recently, WHFL has expanded its operations to three states now viz. Rajasthan, Gujarat and Uttarakhand. The company has recently opened 5 branches in Gujarat and 2 branches in Uttarakhand taking the total number of branches to 35. Going forward, it has plans to expand its operations to one or more states every year would again require a lot of understanding about new geographies. Detailed credit policy, operational manual and sourcing strategy put in place WHFL has prepared a detailed credit policy and operational manual, approved by its board of directors which helps to streamline the whole home loan process. The same is also being regularly updated by WHFL. The company has its own sales team and is not reliant on any intermediary or direct selling agent (DSA) for the sourcing of loans and generation of leads. WHFL generates majority of the leads through the referral model. WHFL has also put in place a very clear delegation of authority to take decisions based on ticket size. Credit norms are also reasonably conservative with maximum ticket size of Rs.35 lakh, no builder loans and defined limit of maximum Loan to Value (LTV) ratio as well as Fixed Obligation to Income Ratio (FOIR). WHFL has further tightened its credit norms post Covid to maintain its health asset quality on sustained basis. Profitable operations along with expansion of the resource base The operations of WHFL started generating operating profits (pre-provisioning and depreciation) from Q3FY20. During 9MFY21, the total loan portfolio grew by 57.62% to Rs.210 crore resulting in about 51% increase (annualized) in total income for the same period. The company reported a Profit before tax (PBT) of Rs.1.46 crore for 9MFY21 as against a loss of Rs.3.20 crore for FY20 on a pre-tax basis. The credit cost (provisions as a % of average total assets) remained low at 0.15% aiding the profitability. WHFL has received sanction from multiple financial institutions with latest sanction has been received with a repayment terms of about 7 years which shall partly mitigate the ALM mismatches. Healthy collection efficiency despite the Covid-19 outbreak Despite the Covid-19 related stress, the collection efficiency for August 2020 was 95% while the same for September month onwards has been 100% barring 4 cases where the insurance claim is to be received post the demise of the borrower. Further, WHFL has not seen delinquency beyond 10 days in its portfolio since inception with the bounce ratio rate around 3%-4% ranges so far as articulated by management. Liquidity: Adequate As on December 31; 2020, the free cash and cash equivalents balance was about Rs.7.48 crore as against the repayments of about Rs.13.25 crore for the next one year. Further, the company had on-demand working capital lines amounting to Rs.22 crore along with the proposed fund-raising from the promoters to the tune of Rs.57 crore with a tenor of about 8.50 years thus plugging the ALM gap if any. For the longer run, the company is planning to avail the term debt with repayment terms of 7 years and above which would support their ALM. No prior experience of the group in housing finance business The Wonder Cement group has no prior experience in retail lending segment. Also, housing finance is an altogether different asset class compared to conventional financing which requires a deep understanding and experience in this domain. Accordingly, going forward, ability of the promoters to successfully establish their presence in housing finance business would be critical. Early stage of operations with lower seasoning of loan portfolio WHFL received certificate of registration from NHB on May 29, 2018 to operate as a non-deposit accepting HFC. Due to initial stage of operations, the size of business is small. Consequently, the seasoning of its loan portfolio is limited. As a result, its asset quality performance through different economic cycles and geographies is yet to be tested. However, portfolio quality has been maintained even as more than 2 years have passed and the portfolio has been resilient during Covid which provides some comfort. Sub-optimal credit profile of target borrowers 2 CARE Ratings Ltd. FEB 2021 Borrowers with good credit profile & credit history have easy access to banks w.r.to their housing finance requirement. Accordingly, the borrowers approaching small to mid-sized HFCs have relatively sub-optimal credit profile. Estimation of the income level of the borrowers in unorganized sector is challenging. At times, such borrowers have no credit history. Accordingly, ability of WHFL to assess the credit worthiness of such borrower class would be extremely critical for its success. Regional concentration of operations WHFL has commenced its operations from Rajasthan and in first place its target is to stabilize itself in Rajasthan market.