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 ICRA has withdrawn the rating of [ICRA]BBB(Stable) for SFL's non-convertible debenture (NCD) programme, aggregating Rs. 113.92 crore, as these debentures were either fully redeemed or not placed, and no amount is outstanding against the withdrawn instruments