RATING RATIONALE 23 November 2020 Darashaw Securities Private Limited Brickwork Ratings assigns ‘BWR A-/Stable‘ rating to the bank loan facilities of Rs. 200 Crs. of Darashaw Securities Private Limited Particulars: Amount (Rs. Facilities** Tenure Rating* Crs.) BWR A-/Stable (Assigned) Fund Based 200.00 Long Term Total 200.00 Rs. Two Hundred Crs. Only/- *Please refer to BWR website www.brickworkratings.com/ for the definition of the ratings ​ ​ ** Details of Bank Loan Facilities/NCD/Bonds/Commercial Paper are provided in Annexure-I&II RATING ACTION / OUTLOOK Brickwork Ratings (BWR) has assigned ‘BWR A-’Stable’ rating to Darashaw Securities Private Limited (DSPL or the company) factoring in the strong support from the parent company Darashaw & Company Private Limited (DCPL), the group’s long track record, experience of the promoters, its stable financial performance and moderate business risk profile. The rating is, however, constrained by the group’s impairment in investments and risk associated with market volatility. The Stable outlook indicates a low likelihood of a rating change over the medium term. BWR believes that DSPL’s business risk profile will be maintained over the medium term. ANALYTICAL APPROACH AND APPLICABLE RATING CRITERIA For arriving at its ratings, BWR has evaluated the risk profile of the Darashaw group on a consolidated basis and applied its rating methodology as detailed in the Rating Criteria below (hyperlinks provided at the end of this rationale). The consolidated financial includes financial performance of Darashaw & Company Private Limited, Darashaw Securities Private Limited and Darashaw & Company (Singapore) Pte Ltd www.brickworkratings.com Page 1 of 8 ​ ​ ​ KEY COVENANTS OF THE INSTRUMENT/FACILITY RATED: NA KEY RATING DRIVERS Credit Strengths: ● Strong support from the parent company, long track record of group: DSPL ​ being 100% owned by parent DCPL (a flagship company of the Darashaw group) gets strong support from the parent in terms of business generation as well as towards financial, operational and managerial support. The parent holds 100% shareholding and has a shared brand name with DSPL. The Darashaw group is a 94-years-old business with a prime broker status, being a key player in the retirement benefits segment. Since the inception of the business, the group has been promoted by the Mehta family. The Darashaw group consists of three entities, i.e., Darashaw & Company Private Limited, Darashaw Securities Private Limited and Darashaw and Darashaw & Company (Singapore) Pte Ltd. DCPL is a flagship company of the Darashaw groups, and the other two are the fully owned subsidiaries of DCPL. Currently, the entire business is being managed by the third generation family member Mr. Darashaw Keki Mehta. Mr. Darashaw has spent more than two decades in the industry growing the DCPL business. He is also supported by a professional management team having the experience of one business cycle. ● Stable financial performance and moderate business risk profile of the group : Darashaw Securities has shown improvement in terms of trading volume with the total income improved to Rs 1438.42 Crs as on 31 March 2020 against Rs. 781.97 Crs as on 31 March 2019. On a consolidated basis, DCPL reported a stable financial ​ performance during FY20, with a total income of Rs. 2865.99 Crs, against Rs. 2028.95 Crs during FY19. The trading income increased to Rs. 2787.83 Crs during FY20, against Rs. 1924.85 Crs in FY19. The company earned an advisory, consulting and brokerage fee of Rs. 46.15 Crs in FY20, against Rs. 69.66 Crs in FY19. The group’s profitability slightly improved to Rs 1.11 Crs during FY20, against Rs. 0.27 Crs in FY19. The thin profitability was on account of the company’s impaired exposures. In terms of business, DCPL participated in the issue of Rs. 26732 Crs during FY20 and Rs. 6314 Crs during H1FY21. Against this, DCPL did deals worth Rs. 1515 Crs (total 11 issues) during FY20 and Rs. 709 Crs (total 14 www.brickworkratings.com Page 2 of 8 ​ ​ ​ issues) during H1FY21. DCPL on consolidate basis also holds Rs. 179.69 Crs worth of free stock, which it can liquidate at any time to generate liquidity. ● Proven fund infusion capacity: As on 31 March 2020, the consolidated net worth ​ of the group stands at Rs. 180.58 Crs against Rs. 179.76 Crs as on 31 March 2019. On a standalone basis the networth of DSPL stood at Rs. 9.17 Crs as on 31 March 2020. The promoters have always supported the business across economic cycles. Promoters of the group are committed towards business growth as well as servicing the debt obligation in timely manners. As on 30 September 2020, the unsecured loans from promoters in the group stood at 218.87 Crs as interest-free unsecured loan to support the business. The group level gearing stood at 2.49 times as on 31 March 2020, against 2.30 times as on 31 March 2019. Credit Risks: ​ ● Impairment of investments may impact the profitability: As on 30 September ​ 2020, of the total investments on the balance sheet of ~ Rs.272.45 crore, the group has 63.50% of its investments in default category rated instruments given its exposure on large distressed assets. Against this, the group had made provisions of Rs 13.10 Crs till 30 September 2020 and sold off Rs. 79.50 Crs . The group has planned to reduce the value of their investments/inventories out of cash accrual which may also impact their profitability over the medium term. The group’s ability to manage profitability and also improve their investment portfolio quality will remain a key monitorable ● Risk associated with market volatility and holding securities for longer term: The group’s business activities in the debt capital market are exposed to economic cyclicality and macroeconomic indicators, such as, the movement in the interest rate, GDP, growth and inflation, wherein any adverse movement in either of the factors will result in volatility in the business performance, considering that its income depends on the activity in debt market issues. During the process of subscribing and down selling, the group at times holds certain securities for a long/short term. In case the value of investments reduces, or it faces volatility in the interest rate, it also faces the risk of losses. www.brickworkratings.com Page 3 of 8 ​ ​ ​ RATING SENSITIVITIES Positive: A significant improvement in the financial risk profile and market share of the group, ​ ​ including a substantial increase in revenue and profitability, while maintaining the gearing, will be a rating positive. Negative: A significant decline in shareholding by DCPL in DSPL, deterioration in business ​ ​ volumes or the earning profile, and an increase in the gearing group will be a rating negative. LIQUIDITY INDICATORS: ADEQUATE As on 31 October 2020, on a consolidated level, the group had liquidity of Rs.179.69 Crs, in the form of free stocks against no stipulated debt obligation during 1 December 2020 to 31 March 2021. The group also had undisbursed sanctions of over Rs. 150 Crs as on 31 October 2020. Coronavirus disease (COVID-19), declared a pandemic by the World Health Organisation ​ (WHO), has become a full-blown crisis globally, including in India. As a containment measure, the Indian Government had announced a 21-day nationwide lockdown on 24 March 2020, which was subsequently extended until 31 May 2020. As per BWR, financial institutions, mainly those lending to the retail low-income borrower segments, could be the most impacted. The 6-month moratorium announced by the Reserve Bank of India on interest and principal on bank debt has provided some cushion to the lending community to realign its collection machinery and operations during this period. However, lenders' ability to ensure credit discipline among borrowers and to collect accumulated interest and principal dues on a timely basis will be a key monitorable. BWR is actively engaging with its clients on a continuous basis and taking updates on the impact on its operations and liquidity situation. BWR will take appropriate rating actions as and when it deems necessary and will publish the same. COMPANY PROFILE Darashaw Securities Private Limited (DSPL), incorporated in 1995, is a wholly owned subsidiary of Darashaw and Company Pvt Ltd (DCPL). The company was formed to carry on the business of brokerage, market making and trading in all kinds of shares, securities, pure debt instruments or hybrid instruments, warrants, options, futures and other listed or non-listed securities. DCPL is the flagship company of the Darashaw group. The group is promoted by the Mehta family, was incorporated in 1926 and was the first broker to the RBI. DCPL is a SEBI-accredited Merchant Banker Category-I, Mutual Fund Advisor and Portfolio Manager, www.brickworkratings.com Page 4 of 8 ​ ​ ​ headquartered in Mumbai, and spans 12 cities in India with over 250 professionals. It is also a member of various stock exchanges in India. DCPL has two fully owned subsidiaries, namely, Darashaw & Company (Singapore) Pte Ltd and Darashaw Securities Pvt. Ltd. DSPL is a trading arm of the group. The businesses that DCPL deals with are Debt Intermediation, Investment Banking, Retirement Services, Infrastructure & Financial Advisory, and Equity & Wealth Management. The company has an internal policy, which, inter alia, prescribes safety, liquidity and return as the main parameters for evaluating deals. All investment decisions are taken by an investment committee of six members, which is well supported by the company’s strong research team. KEY FINANCIAL