Press Release InCred Financial Services Limited (Formerly known as Visu Leasing Finance Private Limited) January 28, 2020 Ratings Amount Instruments/Facilities Rating1 Rating Action (Rs. crore) 250 CARE A1 Revised from CARE A1+ Commercial Paper Issue (Rs. Two Hundred Fifty Crore only) (A One) (A One Plus) Details of instruments/facilities in Annexure-1 Detailed Rationale & Key Rating Drivers The revision in the short-term rating assigned to the commercial paper issue of Incred Financial Services Limited (IFSL) is driven by moderation in its liquidity buffers, whereby the Company has not been able to maintain the stipulated liquidity in the form of cash & liquid investments covering three months of debt repayments at all times. While IFSL has maintained healthy capitalization, the company has found it difficult to raise fresh borrowing at competitive rates amidst challenging funding scenario for NBFCs/HFCs. The rating continues to factor in extensive experience of IFSL’s promoter and the management team, continued healthy capitalization levels and low gearing, strong analytics driven system for lending operations and diversified loan portfolio. The rating remains constrained on account of limited track record of operations, lower than projected scale up of business on account of adverse funding scenario for the sector, subdued profitability, moderate seasoning of the loan book and moderation in asset quality parameters. Rating Sensitivities Negative factors Any further depletion in liquidity buffers Deterioration in asset quality parameters with Net NPA to Tangible Networth exceeding 10% Further decline in profitability with losses in any of the quarters Positive factors Material improvement in the liquidity profile of the company with diversified borrowing base Sustained improvement in profitability parameters with ROTA of more than 1% 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. 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 of Rs.584 crore and capital adequacy ratio (CAR) of 29.6% (Tier I CAR: 29.1%) as on March 31, 2019 . Also, the Company’s borrowings increased from Rs.1,020 crore to Rs.1,253 crore in FY2019 to support its business expansion. As a result, its overall gearing stood at 2.15 times as on March 31, 2019 as compared to 2.16 times as on March 31, 2018. 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 led to further strengthening of capitalization levels of the Company. As a result, the Company reported 1Complete definitions of the ratings assigned are available at www.careratings.com and in other CARE publications. 1 CARE Ratings Limited Press Release tangible networth of Rs.1,007 crore during H1FY20 as compared to Rs.584 crore during H1FY19. Capital adequacy ratio was healthy with overall CAR at 49.18% (Tier I CAR: 47.71%) as on September 30, 2019 compared to CAR of 29.57% (Tier I CAR: 29.15%) as on March 31, 2019. Diversified loan portfolio The group has diversified loan portfolio of Rs.1,947.05 crore as on September 30, 2019. The AUM mix consists of Secured School Financing (22.28,%), Lending to FIs/Escrow backed lending (14.49%) and Supply Chain Financing (6.26%) and under SME lending, Personal Loans (19.62%), Student Loans (16.61%), 2-Wheeler Loans (8.5%) and Unsecured Business Loans (12.23%) under retail lending portfolio. Out of the total loan portfolio, 54.72% was unsecured while the remaining 45.28% is secured. Also, of the total AUM, 57% was retail whereas 43% was towards SME loans. Moderate funding profile The Company’s borrowing profile is largely dependent on borrowings from Banks/FI’s (65.2% of total borrowings), Commercial paper (1.4% of total borrowings) and Bonds & Debentures (33.4%). We note that the Company has increased its share of borrowings through MLD issue since September 2019. Post September 2018, in line with the industry trend, the Company has faced challenges in raising fresh borrowings. As a result, total borrowings declined from Rs1,253 crore as on March 31, 2019 to Rs.1,063 crore as on September 30, 2019. The company last raised capital to the tune of Rs.427.13 crore by way of CCPS from marquee investors in April, 2019. Moderation in short term liquidity profile The asset liability profile of the company as on December 31, 2019 had no cumulative negative mismatches. As on December 31, 2019, the company had debt repayments and interest expense amounting to Rs.614 crore (Principal debt repayment of Rs.561 crore and Rs.53 crore interest) up-to 1Y buckets against inflows from advances and interest income amounting to Rs.862 crore. The Company had committed to keep 3 months’ equivalent debt repayments in the form of cash or liquid or short term debt funds at all times. However in certain instances cash and cash equivalents has fallen below three months of debt repayment due to increased disbursements by the company over the past 3 months. The Company's overall liquidity remains adequate as there are no negative cumulative mismatches in the ALM as on December 31, 2019 even under stressed collection efficiency scenarios. 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’s loan portfolio grew by 38% from Rs.1,369 crore in FY18 to Rs.1,885 crore in Q2FY20. Although, some of the products with shorter tenor like personal loans, Supply chain financing may have seen a credit 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 FY19, the company had reported PAT of Rs.4 crore on total income of Rs.291 crore as per IND AS as compared to Rs.1 crore on a Total Income of Rs.108 crore during FY18. The Company also reported PAT of Rs.1 crore on a Total Income of Rs.158 crore during H1FY20. InCred observed lower profitability driven by selective investment in human capital and infrastructure for scale-up of business. Going forward we believe that the impact of increasing cost of funds and credit costs on profitability shall be key monitorables. 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 September 30, 2019, the company reported Gross NPA of 2.70% 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 Adequate Liquidity Profile The asset liability profile of the company as on December 31, 2019 had no cumulative negative mismatches. As on December 31, 2019, the Company had debt repayments and interest expense amounting to Rs.614 crore (Principal debt repayment of Rs.561 crore and Rs.53 crore interest) up-to 1Y buckets against inflows from advances and interest income amounting to Rs.862 crore. However, as per the Company’s Structural liquidity statement on December 31, 2019, the Company had cash & bank balances of Rs.29 crore, Nil Liquid Investments and Nil unutilized bank lines. The Company had committed to keep 3 months’ equivalent debt repayments in the form of cash or liquid or short term debt funds at all 2 CARE Ratings Limited Press Release times. However in certain instances cash and cash equivalents has fallen below three months of debt repayment due to increased disbursements by the company over the past 3 months.