February 20, 2020

Sakthi Finance Limited: Ratings reaffirmed; rating assigned for fresh NCD programme

Summary of rating action

Previous Current Rated
Instrument* Rated Amount Amount Rating Action
(Rs. crore) (Rs. crore)
Non-convertible Debentures (NCDs) 0.00 200.00 [ICRA]BBB(Stable); assigned
228.11 [ICRA]BBB(Stable); reaffirmed
Non-convertible Debentures (NCDs) 342.03
113.92 [ICRA]BBB(Stable); withdrawn
Fund Based – Term Loan 48.81 33.26 [ICRA]BBB(Stable); reaffirmed
Fund-based Long-term Facilities from
148.95 131.50 [ICRA]BBB(Stable); reaffirmed
Banks
Fund Based – Interchangeable# 28.95 57.90 [ICRA]BBB(Stable)/[ICRA]A2; reaffirmed
Fund-based Short-term Facilities from
67.00 100.00 [ICRA]A2; reaffirmed
Banks
Fixed Deposits - - MA-(Stable); reaffirmed
Total* 606.79 692.87
* Instrument details are provided in Annexure-1
#Sub-limit of fund-based long-term facilities from banks

Rationale
The ratings consider Sakthi Finance Limited’s (SFL) experience in the retail financing business and its established
franchise in Tamil Nadu and Kerala. The ratings also factor in the company’s prudent origination, monitoring and
collection systems, which have evolved over the last six decades of its operations and its reasonable asset quality, with
the 90+ dpd moderating to 4.9% as of September 2019 from 5.8% as of September 2018. The ratings take cognisance of
SFL’s proposed capital raise of about Rs. 50 crore, which would improve the capitalisation from the current levels
(gearing stood at 7.1 times as of September 2019).

The ratings are, however, constrained by SFL’s geographically concentrated operations and the highly competitive
business environment, which exerts pressure on the company’s business growth and profitability (net profitability stood
at 0.9% in H1 FY2020 [Ind-AS; provisional] vis-à-vis 0.8% [Ind-AS] in FY2019 and 1.0% [IGAAP] in FY2018). ICRA takes note
of the company’s ability to raise funds through the public issuance of debentures and retail deposits to support its
overall liquidity profile as incremental funding from banks remains modest in relation to its requirements. Currently, the
company envisages to raise about Rs. 150-200 crore through the public issuance of debentures in the near term. SFL’s
ability to raise funds via debentures via the public issuance route and from HNIs and others via private placements on a
regular basis and secure the envisaged capital infusion in the near term would be critical for business growth.

ICRA has withdrawn the rating of [ICRA]BBB(Stable) for SFL’s non-convertible debenture (NCD) programme, aggregating
Rs. 113.92 crore, as these debentures were either fully redeemed or not placed, and no amount is outstanding against
the withdrawn instruments.

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Key rating drivers and their description

Credit strengths
Established franchise and presence in regional market – SFL has a track record of more than six decades in the vehicle
finance segment, with operations across Tamil Nadu, Kerala, Andhra Pradesh and Karnataka. It has a good understanding
of the target segments, mainly the used commercial vehicle (CV) segment, and has established customer relationships,
with repeat customers accounting for about 55-60% of the incremental business.

Effective origination, monitoring and collection systems – SFL’s extensive presence in vehicle finance along with the
Sakthi Group’s presence in related businesses like automotive dealerships has aided in effective origination, prudent
appraisal, good market responsiveness, monitoring and collections. The company has a branch-centric operating model
with an in-house origination team, which is responsible for collections, while the credit sanctions are centralised. SFL
conducts credit bureau checks to screen its customers, followed by field investigation and income assessment and
viability analysis as a part of its loan origination process. Prior to loan disbursement, the company's internal risk control
unit verifies the authenticity of the documents submitted. SFL has implemented a workflow management system at 75%
of its branches, which will enable the management to monitor the sourcing and collection activities on a real-time basis,
thereby reducing the lead time for loan processing.

Reasonable asset quality; critical to contain credit cost – The 90+dpd improved to 4.9% in September 2019 from 5.8% in
September 2018 (5.0% in March 2019). The 180+dpd also improved to 3.5% in September 2019 from 5.1% in September
2018 (3.9% in March 2019). However, there are slippages in the softer buckets, with the 30+dpd at 20.7% and the
60+dpd at 13.8% in September 2019 compared to 17.5% and 9.0%, respectively, in March 2019 (21.5% and 10.1%,
respectively, in September 2018). The company’s credit cost has remained at about 0.3-0.5% in the last four years with
an average of 0.4%. The provision coverage on NPAs also improved to 47% in September 2019 from 37% in September
2018 (42% in March 2019). Going forward, it would be critical for SFL to undertake overall effective recoveries to keep
the asset quality and credit costs under control.

Credit challenges
Subdued portfolio growth; regionally concentrated operations – SFL’s portfolio grew by a modest 3.7% in FY2019 to Rs.
936 crore as on March 31, 2019 and a further 4.2% in H1 FY2020 to Rs. 975 crore as on September 30, 2019. The
subdued portfolio growth was largely because of the high competitive pressure and the company’s moderate financial
flexibility. SFL has a regionally concentrated portfolio with Tamil Nadu and Kerala accounting for 95% of the total
portfolio as of September 2019. ICRA expects the portfolio share to remain concentrated, given the company’s limited
branch expansion plans in the medium term.

Decline in profitability – SFL’s net interest margin declined to 5.3% (Ind-AS) in H1 FY2020 from 5.7% in FY2019 (Ind-AS)
and 5.8% (IGAAP) in FY2018 as it faced higher competition amid slowing demand. Its operating cost ratio declined to
3.9% in H1 FY2020 from 4.2% in FY2019 (4.1% in FY2018) while the credit cost was stable at about 0.4%. The company’s
net profitability declined to 0.8% in FY2019 and 0.9% in H1 FY2020 vis-à-vis 1.0% in FY2018. The profit before tax, as a
proportion of total assets, stood at 1.6%, 1.3% and 1.2% in FY2018, FY2019 and H1 FY2020, respectively. SFL’s ability to
improve its operating efficiencies further and keep the credit costs under control would be critical for incremental
profitability.

Increase in leverage; improvement expected post the planned capital raise – SFL has a moderate capitalisation profile
with a gearing of 7.1 times as of September 2019 (6.3 times as of March 2019). The company did not go ahead with the
planned rights issue in H1 FY2020, as was previously envisaged, though it is currently planning to raise Rs. 25 crore
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through a preferential placement in March 2020. The preferential issue would enable SFL to strengthen its capitalisation
profile with the gearing, post issue, likely to moderate to around 6.0-6.5 times. The company plans to raise another
round of capital of Rs. 25 crore in FY2021. It is expected to maintain its leverage at about 6.0-6.5 times going forward.

Diversification of funding profile critical to meet long-term growth plans – SFL has limited financial flexibility as
continued weakness in Group entity performances limits its ability to secure incremental funding from some banks. ICRA,
however, notes that in the recent past, SFL has increased its dependence on retail deposits and debentures largely via
public issuances. Currently, the company envisages raising about Rs. 200 crore through the public issuance of debentures
and about Rs. 70-80 crore (annually) via private placements to HNIs. Moreover, the proposed capital raise would bolster
its ability to secure further retail deposits, which, as of December 2019, stood at 1.43 times its net owned funds. SFL
would need to diversify its lender base to achieve its long-term growth plans and to maintain adequate liquidity.

Liquidity position: Adequate

SFL’s asset-liability maturity (ALM) profile was well matched, as of December 2019, with no cumulative negative
mismatches in the less-than-one-year buckets. ICRA takes note of the sizeable repayments (about Rs. 110 crore) in May
2020. While the ALM is well matched, the company is expected to steadily increase its on-balance sheet liquidity over
the next few months on the back of its monthly collections (loans/advances) of about Rs. 30-35 crore. SFL had a cash and
bank balance of about Rs. 35 crore and sanctioned undrawn bank lines of about Rs. 18 crore as of December 2019. ICRA
notes that the planned NCD issuance in the near term would further uplift the liquidity profile and support business
growth. The company’s ability to raise resources in a timely manner and at competitive rates would be crucial going
forward.

Rating sensitivities
Positive triggers – ICRA could change the outlook or upgrade the ratings if SFL augments its capital profile (gearing of
around 6.0 times on a sustained basis) while steadily improving its funding, asset quality and earnings profiles.

Negative triggers – ICRA could change the outlook or downgrade the ratings of SFL in case of a significant weakening in
the asset quality, which could adversely impact its earnings, or an increase in the gearing beyond 7.0 times on a
sustained basis or a deterioration in the liquidity profile.

Analytical approach
Analytical Approach Comments

Applicable Rating Methodologies ICRA’s Credit Rating Methodology for Non-Banking Finance Companies

Parent/Group Support NA
Consolidation To arrive at the ratings, ICRA has considered the standalone financials of SFL

About the company

Sakthi Finance Limited (SFL), incorporated in 1955, is a part of the Sakthi Group, which has a presence across sectors
such as sugar, beverages, automobile and transport dealerships, auto components and textiles. SFL primarily finances
CVs, which constituted 89% of its total portfolio as of September 2019. The remaining portfolio consisted of loans
towards the purchase of cars, construction equipment and other machinery. SFL primarily operates in Tamil Nadu and
Kerala, which together accounted for about 95% of the total portfolio.

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In FY2019, SFL reported a net profit of Rs. 9.0 crore (Ind-AS) on a managed asset base of Rs. 1,077.7 crore compared to a
net profit of Rs. 11.9 crore (IGAAP) on a managed asset base of Rs. 1,075.7 crore in FY2018. As per the provisional
financials for H1 FY2019, the company reported a net profit of Rs. 5.2 crore on a managed asset base of Rs. 1,123.4
crore.

Key financial indicators (audited)

Standalone
FY2018 FY2019 H1 FY2020
IGAAP Ind-AS Ind-AS
Total Income 167.6 165.5 80.5
Profit after Tax 11.9 9.0 5.2
Net Worth 140.1 145.4 134.9
Total Managed Portfolio 902.6 936.0 974.7
Total Managed Assets 1,075.7 1,077.7 1,123.4

Return on Average Managed Assets (%) 1.0% 0.8% 0.9%

Return on Average Net Worth (%) 7.8% 6.3% 7.4%

Gross NPA % (90 days past due) 5.2% 5.0% 4.9%

Net NPA % 3.3% 2.9% 2.6%
Net NPA / Net Worth 21.4% 18.8% 18.3%

Gearing (reported; times) 6.4 6.3 7.1

Note: Amount in Rs. crore
Source: SFL, ICRA research

Status of non-cooperation with previous CRA: Not applicable

Any other information: None

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Rating history for last three years
Current Rating (FY2020) Rating History for the Past 3 Years

Instrument Amount Rating FY2019 FY2018 FY2016

Amount
Type Outstandin
Rated 20-Feb- 21-Feb- 14-Feb- 17-Apr- 28-Mar-
g 6-Apr-18
20 19 19 17 16
Long [ICRA]BB
1 NCDs 200 200 - - - - -
Term B (Stable)
[ICRA]BB [ICRA]BB [ICRA]BB [ICRA]BB [ICRA]BB
[ICRA]BB
228.11 228.11 B B B B B
B (Stable)
(Stable) (Stable) (Stable) (Stable) (Stable)
Long [ICRA]BB
2 NCDs
Term B [ICRA]BB [ICRA]BB [ICRA]BB [ICRA]BB [ICRA]BB
113.92 113.92 (Stable); B B B B B
withdraw (Stable) (Stable) (Stable) (Stable) (Stable)
n
[ICRA]BB [ICRA]BB [ICRA]BB [ICRA]BB [ICRA]BB
Long [ICRA]BB
3 Term Loans 33.26 33.26 B B B B B
Term B (Stable)
(Stable) (Stable) (Stable) (Stable) (Stable)
[ICRA]BB [ICRA]BB [ICRA]BB [ICRA]BB [ICRA]BB
Long-term Long 131.5 [ICRA]BB
4 131.50 B B B B B
Bank Facilities Term 0 B (Stable)
(Stable) (Stable) (Stable) (Stable) (Stable)
[ICRA]BB [ICRA]BB [ICRA]BB [ICRA]BB [ICRA]BB [ICRA]BB
Fund-based Long
B B B B B B
5 Interchangeabl term/Shor (57.90) (57.90)
(Stable)/ (Stable)/ (Stable)/ (Stable)/ (Stable)/ (Stable)/
e t Term
[ICRA]A2 [ICRA]A2 [ICRA]A2 [ICRA]A2 [ICRA]A2 [ICRA]A2

Short-term Short
6 [ICRA]A2 [ICRA]A2 [ICRA]A2 [ICRA]A2 [ICRA]A2 [ICRA]A2
Bank Facilities Term 100.00 100.00

Medium MA- MA- MA- MA- MA- MA-

7 Fixed Deposits - -
Term (Stable) (Stable) (Stable) (Stable) (Stable) (Stable)

Complexity level of the rated instrument

ICRA has classified various instruments based on their complexity as "Simple", "Complex" and "Highly Complex". The
classification of instruments according to their complexity levels is available on the website www.icra.in

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Annexure-1: Instrument details
Amount
Date of
Coupon Maturity Rated
ISIN Instrument Name Issuance / Current Rating and Outlook
Rate Date (Rs.
Sanction
crore)
Unutilised NCD NA NA NA 200.00 [ICRA]BBB(Stable)
18-May-
INE302E07144 NCD 18-May-16 11.00% 60.50 [ICRA]BBB(Stable)
20
18-May-
INE302E07151 NCD 18-May-16 11.00% 9.56 [ICRA]BBB(Stable)
20
18-May-
INE302E07169 NCD 18-May-16 11.46% 40.34 [ICRA]BBB(Stable)
20
15-May- 15-May-
INE302E07177 NCD 9.50% 6.47 [ICRA]BBB(Stable)
19 21
15-May- 15-May-
INE302E07193 NCD 9.75% 5.92 [ICRA]BBB(Stable)
19 22
15-May- 15-May-
INE302E07227 NCD 10.00% 19.09 [ICRA]BBB(Stable)
19 23
15-May- 15-May-
INE302E07185 NCD 9.50% 13.44 [ICRA]BBB(Stable)
19 21
15-May- 15-May-
INE302E07219 NCD 9.75% 8.00 [ICRA]BBB(Stable)
19 22
15-May- 15-May-
INE302E07243 NCD 9.75% 15.41 [ICRA]BBB(Stable)
19 23
15-May- 15-May-
INE302E07201 NCD 9.75% 2.69 [ICRA]BBB(Stable)
19 22
15-May- 15-May-
INE302E07235 NCD 10.00% 2.92 [ICRA]BBB(Stable)
19 23
15-May-
INE302E08027 NCD 10.25% 15-Jun-24 20.85 [ICRA]BBB(Stable)
19
15-May-
INE302E08043 NCD 10.25% 15-Jun-24 21.84 [ICRA]BBB(Stable)
19
15-May-
INE302E08035 NCD 10.25% 15-Jun-24 1.07 [ICRA]BBB(Stable)
19
NA Term Loan 1 NA - NA 8.11 [ICRA]BBB(Stable)
NA Term Loan 2 NA - NA 0.15 [ICRA]BBB(Stable)
Unutilised Term Loan NA - NA 25.00 [ICRA]BBB(Stable)
Fund-based Long-
NA term Facilities NA - NA 131.50 [ICRA]BBB(Stable)
from Banks
Fund-based
NA NA - NA (57.90) [ICRA]BBB(Stable)/[ICRA]A2
Interchangeable
Fund-based Short-
NA term Facilities NA - NA 100.00 [ICRA]A2
from Banks
NA Fixed Deposits NA - NA - MA-(Stable)
[ICRA]BBB (Stable);
INE302E07060 1-Apr-15 11.50% 1-Apr-19 19.43
NCD withdrawn

6
 [ICRA]BBB (Stable);
INE302E07078 NCD 1-Apr-15 11.50% 1-Apr-19 2.72
withdrawn
[ICRA]BBB (Stable);
INE302E07086 1-Apr-15 - 1-Apr-19 14.33
NCD withdrawn
18-May- [ICRA]BBB (Stable);
INE302E07110 NCD 18-May-16 10.50% 8.01
19 withdrawn
18-May- [ICRA]BBB (Stable);
INE302E07128 18-May-16 10.50% 3.34
NCD 19 withdrawn
18-May- [ICRA]BBB (Stable);
INE302E07136 NCD 18-May-16 10.92% 8.79
19 withdrawn
[ICRA]BBB (Stable);
INE302E08019 29-Mar-16 13.50% 15-Apr-22 25.00
NCD withdrawn
[ICRA]BBB (Stable);
Unallocated NCD - - - 32.30
withdrawn
Source: SFL

Annexure-2: List of entities considered for consolidated analysis – Not applicable

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Analyst Contacts
Mr. Karthik Srinivasan Mr. A M Karthik
+91 22 6114 3444 +91 44 4596 4308
karthiks@icraindia.com a.karthik@icraindia.com

Mr. Shaik Abdul Saleem Mr. Govindaraj Prabhu M

+91 44 4596 4325 +91 44 4596 4306
shaik.saleem@icraindia.com amlan.badu@icraindia.com

Relationship Contact
Mr. L. Shivakumar
+91 22 6114 3406 / +91 98210 86490
shivakumar@icraindia.com

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Ms. Naznin Prodhani
Tel: +91 124 4545 860
communications@icraindia.com

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+91-9354738909 (open Monday to Friday, from 9:30 am to 6 pm)

info@icraindia.com

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For more information, visit www.icra.in

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