By Jindal Haria

India Ratings and Research (Ind-Ra) has taken the following rating actions on Satin Creditcare Network Limited’s (Satin) non-convertible debentures (NCDs):

Instrument Type


ISIN

Date of Issuance

Coupon Rate

Maturity Date

Size of Issue (million)

Rating/Outlook

Rating Action

NCDs


INE836B07170

31 July 2015

13.75%

31 July 2019

INR135

IND BBB+/Negative

Rating affirmed; Off RWE; Outlook Negative

NCDs


INE836B07170

31 July 2015

13.75%

31 July 2019

INR135

IND BBB+/Negative

Rating affirmed; Off RWE; Outlook Negative

The affirmation and resolution of Rating Watch Evolving (RWE) reflect Satin’s moderate pace of improvement in collections in Uttar Pradesh, Madhya Pradesh, Uttarakhand and Maharashtra between November 2016 and May 2017. The Negative Outlook reflects the cumulative lag in recoveries in portfolio at end-December 2016 and credit costs that could be incurred in 1HFY18. In Ind-Ra’s assessment, under the assumption that Satin maintains 16.6% Tier 1 in FY18 (same as FY17) and collections do not see a significant uptick, it may require INR1 billion-INR2 billion of additional equity. This requirement could be lesser at lower target levels of Tier 1 capital.

KEY RATING DRIVERS

Adequate Liquidity: Satin had short-term obligations of around INR18 billion, against short-term assets of about INR24 billion at end-March 2017 indicating comfortable liquidity buffers. In addition, the company had cash on balance sheet of about INR11.01 billion at FYE17.

 

Pace of Collection Efficiency Uncertain: The company’s cumulative collection efficiency (collection/demand or billing) improved to 85% in May 2017 from 58% in November 16. Although the pace of improvement was slow in the initial few months, it picked up pace in May and June 2017; collections were 123% of the demand in the first fortnight of June. Based on the trends, Ind-Ra expects collection efficiency to increase to 88%-89% in 1QFY18. However, it remains to be seen if this pace of improvement is sustained in 2QFY18.

 

No Uptick in Collections Could Warrant Equity Infusion: In Ind-Ra’s analysis, Satin could require INR1 billion-2 billion, post equity infusion of INR0.94 billion in 1QFY18 to maintain Tier 1 capitalisation levels at March 2017 levels. The requirement could be lower under lower Tier 1 capital target levels (FY17 Tier 1 capital: 16.6%; CRAR: 24.14%). The key assumptions used in the analysis included constant loans under management, 90%-92% aggregate collections on the December 2016 portfolio and pre-demonetisation level collections on disbursements post December 2016. Ind-Ra also expects Satin to witness a loss (credit costs that had the benefit of the Reserve Bank of India’s dispensation in FY17) in 1HFY18, which could be partially mitigated in 2HFY18 if collections on the December 2016 portfolio increase substantially. 

 

Ind-Ra opines that end-borrowers with two to four missed EMIs would be able to pay the EMIs from their FY18 income if the default is unintentional. However, even unintentional defaulters who have missed over three to four EMIs may be unable to repay the microfinance lenders (MFIs) in full; although some may repay at the end of the loan tenor. MFIs may need to accept haircuts on a portion of such loans.


RATING SENSITIVITIES

Positive: A considerable improvement in collection efficiency particularly in Uttar Pradesh and Madhya Pradesh, and adequate equity infusion in 9MFY18 to mitigate possible capital impairment resulting from lower collection efficiencies could result in the Outlook being revised to Stable.

 

Negative: Absence of a significant improvement in collection in 9MFY18, or credit costs impacting capital significantly and inability to raise adequate equity in 9MFY18 or liquidity stress that could impact repayment obligations could result in a negative rating action. Increase in leverage (debt/equity) beyond Ind-Ra’s expectations of sustainable leverage for such unsecured lending could also lead to a negative rating action.


COMPANY PROFILE

Satin is the largest MFI based in North India with 618 branches spread across 235 districts as of FY17. It had a loan portfolio of around INR36.2 billion in FY17 and market capitalisation of INR10.8 billion as on 28 June 2017.  Satin’s unadjusted leverage (debt to equity) was 5.82x at FYE17.

 

FINANCIAL SUMMARY

Particulars

FY17

FY16

Total assets (INR million)

47,484.0

33,034.2

Total equity (INR million)

6,622.2

3,240.1

Net income (INR million)

245

579.4

RoAA (%)

0.47

1.7

Equity/Assets (%)

13.9

9.8

Tier 1 capital (%)

16.6

11.3


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (million)

Rating

30 December 2016

28 July 2015

NCDs

Long-term

INR270

IND BBB+/Negative

IND BBB+/RWE

IND BBB+/Stable


COMPLEXITY LEVEL OF INSTRUMENTS

For details on the complexity level of the instruments, please visit https://www.indiaratings.co.in/complexity-indicators.

SOLICITATION DISCLOSURES

Additional information is available at www.indiaratings.co.in. The ratings above were solicited by, or on behalf of, the issuer, and therefore, India Ratings has been compensated for the provision of the ratings. 

Ratings are not a recommendation or suggestion, directly or indirectly, to you or any other person, to buy, sell, make or hold any investment, loan or security or to undertake any investment strategy with respect to any investment, loan or security or any issuer.

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Analyst Names

  • Primary Analyst

    Jindal Haria

    Director
    India Ratings and Research Pvt Ltd Wockhardt Towers, 4th floor, West Wing Plot C-2, G Block. Bandra Kurla Complex Bandra (East), Mumbai 400051
    +91 22 40001750

    Media Relation

    Mihir Mukherjee

    Manager Corporate Communications and Investor Relations
    +91 22 40356121