Rising bad loans and negative cash flows of the past three years do not inspire confidence
Religare Finvest, a subsidiary of Religare Enterprises with its focus on SME financing and retail capital market financing, is looking at raising a corpus of Rs500 crore through an issue of non-convertible debentures. The NCD issue offers debentures of five types, termed as series I to series V and the tenure and coupon rate vary across categories in the following sequence:
Is it worth investing in this issue? The issue enjoys a rating of AA- from CARE and ICRA, similar to what the NCD issue of India Infoline holds, with an interest rate of 12.75%. Higher interest rate is attractive but remember higher the interest rate, the higher is the risk.
The NCD of India Infoline was of a subordinate nature, which means in case the company gets liquidated the principal debtor will be serviced before the investors investing in this NCD issue. The Religare Finvest NCD, however, is in the form of secured debt with ‘first floating pari passu charge’, which means that the debt is fully secured and is not subordinate to other debt providers. In case of liquidation of the company and your debt is secured against immovable property of the company, if any.
The real risk is the business environment of the company. The company is focussed on financing SMEs for mortgage loans, commercial loans and working capital loans. This possibly includes funding promoters. The profits rely completely on the net interest margins and the interest income earned, which will be directly hit by interest rate volatility in the markets.
Also, the business requires substantial amounts of capital at all times for lending aggressively, and any disruption of sources of funding will have an adverse effect on liquidity which could hit the bottomline.
If customer default rises, it has to be provided for and that will take toll on profits and tie-up capital. A quick glance at the financials of the company reveal that gross NPAs (non-performing assets) have massively risen from Rs86.21 million on 31 March 2011 to Rs1,067 million on 31 March 2012 and the Net NPAs have increased from Rs17.71 million on March 31 2011, to Rs645.60 million on March 31 2012, which paints a gloomy picture.
The capital adequacy ratio of 19.65% is very near to what the minimum stipulated amount of 15% by the RBI. In case aggressive lending does not continue, the company might have to raise additional capital, a step that could weaken the company’s financial ratios.
The current asset liability mismatch is another worrisome factor. The loan portfolio of the company is skewed towards providing loans of big ticket size to few borrowers, and thus the risk of default by one increases the risk financial underperformance of the company. As on 31 March 2012, the principal amount outstanding to top 20 borrowers on an unconsolidated basis aggregated Rs26.63 billion while total loan assets amounted to Rs125.74 billion, or about 20%. Any deterioration in the asset quality of any of these exposures will affect income from operations and thereby profitability. Bear in mind the fact that the operating cash-flows have been continuously negative for the past three years.
The financials of the company are not strong enough to sustain huge amounts of debt for a long term. The issue has come up in a marginally falling interest rate situation, when the profitability of all lending companies is expected to take a hit. Considering all these factors it is best to avoid this issue.