­Acuité has taken consolidated view on the business and financial risk profile of A.K. Capital Services Limited (AKCSL) and its subsidiaries, A.K. Capital Finance Ltd (AKCFL), A.K. Stockmart Pvt. Ltd, Family Home Finance Pvt Ltd, A.K. Capital Corporation Pvt ltd, A.K. Capital (Sinagpore) Pte. Ltd Pte. Ltd, A.K. Wealth Management Pvt. Ltd and A.K. Alternative Asset Managers Pvt. Ltd for analysing AKCFL’s credit profile. This consolidation is in the view of the common promoters, shared brand name and strong financial and operation synergies. Acuité has assigned differential ratings based on the structure and stipulations in respect of each facility. The standalone ratings of some of the facilities have been notched up based on the credit enhancement in the form of Debt Service Reserve Account (DSRA) and structured payment mechanism (SPM) wherein funds will be deposited in the escrow account between 1 to 4 days before the due date. The extent of notch up over standalone rating is based on the extent of DSRA and T minus structures which vary across all the debenture issues. The DSRA’s are in the form of bank fixed deposits, “AAA” rated debt securities, sovereign debt securities, bank guarantee and specific identified Investments/Receivables (i.e. Business assets).

Established presence in debt market
Incorporated in 1993, A.K. Capital Services Limited (AKCSL) is a SEBI registered Category-I Merchant Banker engaged in management of private placements as well as public issues and is one of the leading players in the corporate debt market segment. The merchant banking activities conducted by AKCSL involves corporate debt raising through private placement of fixed income securities and initial public issue of bonds and debentures. AKCSL managed debt assignments of Rs. 2,75,531.19 Cr. translating to a market share of 42.90 percent in FY2023 as against debt assignments of Rs. 143172.20 Cr. translating to a market share of 30.80 percent in FY2022. AKCSL has established strong relationship with diverse base of institutional clients including Indian Corporates, Banks, NBFCs, FIs, Provident & Pension Funds, Insurance Companies, Mutual Funds, AIFs and various fund houses. AKCSL along with its subsidiaries which are engaged in lending, investment and financial advisory services have demonstrated progressive presence in undertaking and executing transactions in debt market segments like Structure Financing & Corporate Debt Restructuring, Debt Portfolio & Private Wealth Management Services and Investment advisory & Retirement Trust Solutions.
 
Comfortable capitalization and gearing; diversified funding mix
On consolidated basis, AKCSL has healthy capitalisation levels marked by networth of Rs. 839.38 Cr. (adjusted for minority interest) as on March 31, 2023 (Rs. 760 Cr. as on March 31, 2022). The steady growth in networth is mainly supported by healthy internal accruals with cumulative surplus comprising about 81 percent of the networth as on March 31, 2023. The Group has demonstrated ability of the group to raise funds from banks and capital markets across various maturities at competitive rate, which has enabled them to optimise the cost of funding. Of the outstanding borrowings of Rs.2162 Cr. as on March 31, 2023, NCDs constituted ~30 percent followed by working capital facilities at ~39 percent, TREPS (formerly known as CBLO) and Repo borrowings at ~11 percent and long term bank facilities from Banks & NBFC (term loans) at ~18 percent. The gearing ratio is comfortable at 2.58 times (adjusted for minority interest) as on March 31, 2023 (2.43 times (adjusted for minority interest) as on March 31, 2022). On standalone basis, AKCSL reported networth and gearing at Rs. 465.76 Cr. and 1.08 times respectively as on March 31, 2023. Acuité believes that the current capital levels along with internal accruals for the Group provide sufficient room for medium-term growth of its multiple businesses along with the requirement of buffers for any asset quality shocks at AKCFL level.

Healthy asset quality; sound risk management practices
Incorporated in 2006, AKCFL, lending arm of the Group, is a Mumbai based systemically important non-deposit taking nonbanking financial company (NBFC-ND-SI) engaged in the business of lending to or investing in bonds of corporate borrowers with high credit quality and lending against highly rated securities. Since FY2022, AKCFL increased exposure to private sector entities (mostly high investment grade entities) in the form of loans and advances and NCDs primarily driving up the AUM (AUM; including current investments, non-current investment, loans & advances and inventory of debt securities) to Rs. 2283.29 Cr. as on March 31, 2023 from Rs. 2008 Cr. as on March 31, 2022. The AUM improved to Rs. 2,396.86 crore as on June 30, 2023. The exposure to private sector entities stood at Rs. 1158 Cr. (~51 percent of AUM) as on March 31, 2023 as compared to Rs. 1212 Cr. (~60% of AUM) as on March 31, 2022. The shift in the lending and investment strategy was mostly driven in response to the buoyant debt/credit market. Nonetheless, Acuite notes the Group’s philosophy to not aggressively grow its investments instead churn it to reduce the concentration risk. AKCFL for the first time reported minimal gross non performing assets as on March 31, 2023 resulting from minor slippages in retail portfolio . The Gross NPA of the company stood at 0.02 percent as on March 31, 2023. Over the past three financial years the company recorded NIL non-performing assets.  The GNPA of the company stood at 0.05 percent as on June 30, 2023.
While AKCFL has been following prudent risk management practices with respect to lending, collateral events like deterioration in the credit quality of borrowers and decline in security prices can impact its performance with regard to its asset quality and earnings profile. AKCFL has demonstrated the ability to identify any potential weakening of credit quality and accordingly unwind its exposure in a timely manner. Its market intelligence and its established presence as an intermediary in the fund raising segment help in maintaining the balance between yields and asset quality.
Acuité believes that AKCFL’s prudent lending policies, robust risk management practices and strong market intelligence derived from its longstanding experience in the debt market will support its ability to scale up its operations and maintain healthy asset quality.
 
Presence of DSRA and Structured Payment Mechanism (SPM)

Acuité has considered the consolidated credit profile of AKCSL and the support to the investors in the rated instruments on account of the DSRA mechanism and the Structured Payment Mechanism (SPM) put in place by AKCFL to ensure timely servicing of the interest and principal obligations. The DSRA (percentage varies across the above rated issuances) is in the form of Bank Fixed Deposits, “AAA” rated debt securities, sovereign debt securities and bank guarantee, in any combination. Similarly, each issue has a T minus structure in place where the payment account is funded prior to the due date (i.e. ‘T’ date). Based on the terms of the individual issues, the payment account is funded between 1 to 4 days of the payment due date. If the company fails to fund the payment account for the amount due, the debenture trustee will initiate the liquidation of the DSRA assets in the following manner to ensure that the proceeds are available towards payment due on the NCDs by the due date in a predefined manner. In case the DSRA is utilised in full or part of the value of the DSRA is diminished below the minimum required, AKCFL will be required to replenish the same within seven days of the occurrence of such an event. The rating centrally assumes complete adherence to the SPM by the debenture trustee and AKCFL on an ongoing basis.

Susceptibility of performance to the debt segment of capital markets
AKCSL, at consolidated level, has presence in lending, investment and financial advisory services in the debt capital market with revenue from lending and investment activities comprising about 73 percent of total revenue and financial advisory services about 26 percent of total revenue for FY2023. The economic cyclicality and other macroeconomic risks inherent in the debt capital market can result in volatility in overall earnings profile of AKCSL as reflected in consolidated total income of about Rs. 406.81 Cr. during FY2023 as compared to Rs. 323 Cr. during FY2022. The improved revenue profile during FY2023 resulted in improved profitability with AKCSL reporting consolidated Profit after Tax (PAT) of about Rs. 88.42 Cr. during FY2023 from Rs. 83.01 Cr. during FY2022.  Further, adverse events such as a sharp spike in inflationary pressures or hardening of interest rates could translate into muted credit off take. The Group has traditionally focused on low risk segments such as quality corporate papers, government securities and fully collateralized loans.
On a standalone basis, AKCSL reported marginally higher profitability as reflected in profit after tax (PAT) of about Rs. 30.72 Cr. during FY2023 as compared to Rs. 26.32 Cr. during FY2022 mainly driven by uptick in dealing income derived from downselling of debt investments.

Client concentration in merchant banking & corporate lending businesses
In terms of Private placement Issues, during the FY2023 majority of issues were originated by the PSUs and the group had high concentration in merchant banking business with top 10 private placement deal in terms of Overall Volume. On the lending business front, AKCFL has primarily focused on the corporate lending segment (mainly financial services and real estate focused HFCs) and hence the loans are relatively chunkier in nature, ticket size range between Rs.5 - 50 Cr. The performance of the borrowers is subject to the vulnerabilities in the underlying sectors. The key risks inherent in such corporate lending activities is that slippages in one or two large accounts may impact the operating performance of the company for that period. While AKCFL has in the past successfully exited risky exposures and curtailed its overall exposure to private sector corporates, occurrence of the future credit events can have a bearing on the performance and profitability of the company. AKCFL’s top ten exposures accounted for 47.44 percent of its total exposures as on March  31, 2023. Given the strong presence in the debt capital market, AKCFL also regularly churns its investments to reduce the concentration risk in the portfolio. While AKCFL has been following prudent risk management practices with respect to lending, collateral events like deterioration in the credit quality of borrowers and decline in security prices can impact its performance with regard to its asset quality and earnings profile. Acuité, believes that AKCFL’s future credit profile will be influenced by its ability to optimise the balance between high yields (i.e. more risky exposures) on one hand and healthy asset quality (i.e. low risk exposures) on the other. The ability to optimise its earnings while maintaining asset quality shall be critical. The maintenance of a healthy liquid profile on an ongoing basis (in the form of unencumbered cash or unutilised bank lines) will also be a key monitorable considering the corporate lending of the business.