Rationale
The reaffirmation of the ratings takes into consideration
Sakthi Finance Limited's (SFL) experience in the retail financing business and
its established franchise, which has evolved over the last six decades of its
operations. The ratings are, however, constrained by SFL's geographically
concentrated operations, the highly competitive business environment, and its
subdued profitability indicators. SFL's capitalisation profile is adequate with
a gearing of 6.3 times as of December 2021 (provisional; 6.2 times as of March
2021). ICRA notes that the company has deferred its previously stated plan of
raising Rs. 25 crore of equity, given the modest portfolio growth and adequate
liquidity in the near team. SFL's 90+ days past due (dpd) stood at 5.0%
(provisional) as of December 2021 similar to March 2021 levels. Its liquidity
profile is currently adequate; however, it would be crucial for the company to
diversify its funding profile to support portfolio growth while maintaining its
liquidity profile. ICRA notes that the sub-debt raised by the company up to
FY2020 via a private placement to retail/high-net-worth individual (HNI)
investors (Rs. 234 crore outstanding as of December 2021) was not in adherence
to the Reserve Bank of India's (RBI) guidelines1 . While SFL has made its
representation to the RBI on this matter and has also requested forbearance, it
hasstopped taking fresh deposits since H2 FY2021 and stopped renewals since April
2021. SFL's capital adequacy stood at 20.2% (provisional) as of December 2021
without considering the aforementioned sub-debt as Tier II capital. Further, if
the outstanding sub-debt is treated as public deposits, the company would be in
breach of the cap on deposits at 1.5 times of the net owned funds (NOF) and
would also have to augment its statutory liquid assets. Any adverse development
regarding the above, including the requirement to increase liquid assets, etc,
could impact the company's liquidity. SFL is planning to raise about Rs. 50
crore through the public issuance of debentures (with a greenshoe option of an
additional Rs. 50 crore) in May 2022, which is expected to support its
liquidity position. The promoters are also expected to provide support, if
required, by infusing liquidity or equity.
|