By Jindal Haria

India Ratings and Research (Ind-Ra) has rated Zen Lefin Private Limited’s (Capital Float) non-convertible debentures (NCDs) as follows:

Instrument Type

Date of Issuance

Coupon Rate (%)

Maturity Date

Size of Issue (million)

Rating/Outlook

Rating Action

NCDs*

-

-

-

INR500

IND BBB/Stable

Assigned

*Yet to be issued

The rating is supported by Capital Float’s strong investor and management profile; adequate funding, capitalisation and liquidity profile; and capability to leverage technology to enhance efficiencies in its sourcing, underwriting, collection and recovery functions. The rating reflects Capital Float’s moderate asset quality metrics (unseasoned loan book) and higher operating costs (as a percentage of assets under management (AUM)).

KEY RATING DRIVERS

Adequate Funding and Liquidity Profile to Enable Medium-Term Growth: As of 3QFY18, Capital Float had about INR9,500 million in AUM, of which about INR6,300 million is on-balance sheet. In addition to securitisation Capital Float has innovated the co-lending model, where it enables institutional lenders (banks and non-banking financial institutions) to partly fund borrowers. Usually, 20% of the exposure on such loans is reserved by Capital Float. Capital Float provides 3%-5% first loss protection towards loans funded by institutional lenders. Capital Float expects the institutional co-lending model to generate significant opportunities for off-balance sheet assets with regard to liquidity and funding requirements. 

In 3QFY18, Capital Float had on-balance sheet borrowings totalling INR3,760 million, majorly from other non-banking financial companies. Its liquidity profile has asset surplus for the short term, given its average asset tenor is 12-18 months and liability tenor is 20-24 months. Considering the current asset mix strategy, Ind-Ra expects Capital Float to have an adequate surplus of assets over liabilities in the medium term. Capital Float maintains 1.5-2 months of payment obligations in the form of cash on its balance sheet. 

Comfortable Leverage After Equity Infusion:
After the equity infusion round of INR3 billion in 1HFY18, Capital Float is likely to maintain a leverage (debt/equity) of less than 4.0x and a Tier 1 capital (1HFY18 Tier 1: 46.3%) of 18%-20% at a steady state. Ind-Ra considers these levels as key monitorables, until the business mix and scale change substantially and the loan assets season or complete multiple cycles. 

Moderate Asset Quality; Gross Non-Performing Assets Likely to Increase:
Capital Float has a diversified product profile, including unsecured business loans (1HFY18: 60%-65% share in loans under management), merchant cash advance (15%-20%), PayLater (10%-12%) and consumer loans (8%-10%). The diversified product portfolio is aimed at catering to the needs of specific funding requirements of small and medium-sized enterprises. As of 1HFY18, Capital Float had gross non-performing assets of 1.8% (90 days past due as a percentage of AUM) (FY17: 1.23%). Ind-Ra expects the gross non-performing assets to increase and thus higher credit costs given the bulk of its portfolio is unseasoned. Its risk model has built in a blended credit cost of 2.5%-3.0% on its product suite.

To read a detailed rating rationale, 
click here.


RATING SENSITIVITIES

Positive: A significant increase in the scale of operations, with a focus on controlling credit costs and maintaining a steady state leverage of below 4.0x without a significant dilution of capital buffers, and a diversification of the on-balance sheet funding profile could lead to a positive rating action. 

Negative:
Rising portfolio delinquencies (and credit costs) and leverage; reducing capitalisation ratio without additional equity infusion from investors (growth as well as support capital); failure to achieve profitability by 1HFYE19 or an asset-liability gap, which, in Ind-Ra’s view, may be difficult to manage could lead to a negative rating action.


COMPANY PROFILE

Capital Float is a non-banking financial company that provides loans (majorly unsecured) to small and medium-sized enterprises across 88 locations in 16 states, using a technology-enabled underwriting platform that tries to integrate traditional lending methods with an algorithm-based credit assessment. It was founded in 2013 by Mr Shashank Rishyasringa and Mr Gaurav Hinduja. As of September 2017, it had net worth of about INR 4,300 million. 


FINANCIAL SUMMARY
 

Particulars

FY17

FY16

Total assets (INR million)

4,922.6

1,318.0

Total equity (INR million)

1,821.0

719.0

Net profit (INR million)

-634.7

-290.0

Return on average assets (%)

-20.3

-25.3

Equity/assets (%)

37.0

54.5

Capital adequacy ratio (%)

37.0

51.7

Source: Capital Float, Ind-Ra


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (million)

Rating

22 December 2017

Commercial paper

Short-term

INR500

IND A3+

IND A3+

Bank loans

Long-term

INR5,000

IND BBB/Stable

IND BBB/Stable

NCDs

Long-term

INR500

IND BBB/Stable

-


COMPLEXITY LEVEL OF INSTRUMENTS

For details on the complexity levels 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.

ABOUT INDIA RATINGS AND RESEARCH

India Ratings and Research (Ind-Ra) is India's most respected credit rating agency committed to providing India's credit markets accurate, timely and prospective credit opinions. Built on a foundation of independent thinking, rigorous analytics, and an open and balanced approach towards credit research, Ind-Ra has grown rapidly during the past decade, gaining significant market presence in India's fixed income market. 

Ind-Ra currently maintains coverage of corporate issuers, financial institutions (including banks and insurance companies), finance and leasing companies, managed funds, urban local bodies, structured finance and project finance companies. 

Headquartered in Mumbai, Ind-Ra has seven branch offices located in Ahmedabad, Bengaluru, Chennai, Delhi, Hyderabad, Kolkata and Pune. Ind-Ra is recognised by the Securities and Exchange Board of India, the Reserve Bank of India and National Housing Bank. 

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For more information, visit www.indiaratings.co.in.

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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

    Namita Sharma

    Manager – Corporate Communication
    +91 22 40356121