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| Product | Quantum (Rs. Cr) | Long Term Rating | Short Term Rating |
| Bank Loan Ratings | 100.00 | ACUITE A- | Stable | Downgraded | - |
| Total Outstanding Quantum (Rs. Cr) | 100.00 | - | - |
| Rating Rationale |
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Acuité has downgraded its long-term rating to ‘ACUITE A-’ (read as ACUITE A minus) from ‘ACUITE A’ (read as ACUITE A) on the Rs. 100.00 crore bank facilities of Alchemist Asset Reconstruction Company Limited (AARCL). The outlook remains 'Stable'.
Rationale for downgrade: The rating has been downgraded due to continued moderation in the earnings profile as a result of elevated credit costs. The company reported total income of Rs. 35.35 crore in FY2023 (prov.) as against Rs. 39.72 crore in FY2022. The impairment/credit cost for FY22 and FY23 was Rs. 21.78 crore and Rs. 9.21 crore (prov.), respectively. Accordingly, the PAT declined at a CAGR of -36.62 percent from FY21 to FY23. Further, owing to the degrowth in the AUM as well as minimal acquisitions during FY22 and FY23, the core income remained subdued. The rating continues to factor in the industry concentration in the real estate and hospitality sectors, uncertainties, and delays associated with the resolution of stressed assets in the said sectors. Further, Acuité also takes note of the high share of SRs outstanding for the accounts acquired during FY16 and FY17 (35 percent of the AUM as of March 31, 2023), with an end date of FY24 and FY25, respectively. Hence, the ability of the company to resolve the said assets within the stipulated timelines would be a key monitorable. |
| About the company |
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Incorporated in 2002, Alchemist Asset Reconstruction Company Limited (AARCL) is a Delhi-based Company engaged in acquiring distressed assets from banks and financial institutions and resolving them through appropriate resolution strategies. The company is licensed with RBI as Securitization and Asset Reconstruction Company since 2007 and was started by Mr. Alok Dhir and family who hold ~46 per cent as on March 31, 2023. The remaining stake is held by DMI Finance Private Limited (holding 11.9 per cent), Al Zawawi Group (holding 6.9 per cent) along with other high Networth Individuals and Corporates (some owned by Mr. Dhir).
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| Analytical Approach |
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Acuité has adopted a standalone approach on AARCL’s business and financial risk profile for arriving at the rating.
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Key Rating Drivers
| Strength |
| Benefits emanating from marquee investor base coupled with domain expertise of key promoters
AARCL is promoted by Mr. Alok Dhir and is in the business of acquisition and resolution of stressed assets since 2007. Mr. Alok Dhir is the Managing Director of the company and also a Managing Partner at Dhir & Dhir Associates, a leading Law Firm in India. The management team comprises of seasoned professionals in various domains such as acquisition, resolution, legal and compliance, monitoring, among others. Acuité believes that AARCL will continue to benefit from the domain expertise of the promoters and the ability of the promoters to attract diverse investors both as equity shareholder as well as QBs for their acquisitions. Comfortable capitalization The company's capital position is comfortable as reflected by CRAR of 59.99 percent as on March 31, 2023 (P.Y: 49.98 percent). The increase in CRAR is attributable to decrease in risk weighted assets for the year. Further, the gearing remained low at 0.48 times as on March 31, 2023 as against 0.51 times as on March 31, 2022. |
| Weakness |
| Earnings profile affected due to elevated credit costs
AARCL’s revenue profile comprises income from management fees, income from investments in financial assets and investments in security receipts. The company reported total income of Rs. 35.35 Cr. in FY2023 (prov.) as against Rs. 39.72 Cr. in FY2022. Owing to the degrowth in the AUM as well as minimal acquisitions during FY22 and FY23, the core income remained subdued. The company reported Profit after Tax (PAT) of Rs.5.45 Cr. in FY2023 (prov.) as against Rs.1.88 Cr. in FY2022 [Rs. 13.57 Cr. in FY21]. In FY22, the company incurred a total impairment cost (including impairement due to rating transition) of Rs. 21.78 Cr. as a result of write-offs undertaken due to expiry of 8 years. The same was Rs. 9.21 Cr. in FY23 (prov.). AARCL recovered assets amounting to Rs. 274.69 Crore vis a vis Rs.120.66 Crore during FY22 [P.Y.: Rs. 165.47 Crore]. Acuité believes that the company’s ability to maintain a steady growth in revenues will be linked to its ability to maintain a consistent acquisition strategy; and controlling credit costs will be attained by timely and successfull resolution of the acquired assets. Industry concentration risks; business profile susceptible to timely resolution of assets The company’s AUM of Rs.1788.64 Cr. as on March 31, 2023 is across 17 industries of which top four industries constitute ~70 percent. The top four industries are Real Estate (31.58 per cent), Hospitality (13.17 per cent), Energy (13.94 per cent) and Textile (11.15 percent). AARCL’s acquisition strategy is sector agnostic with a focus on aggregation and consolidating the share in the overall debt of the acquisition. Its acquisitions declined further in FY2023 to Rs.36.32 Cr. as against Rs.81.80 Cr. in FY2022, resulting a decrease in AUM of Rs.1,788.64 Cr. in FY2023 against Rs.2,003.32 Cr. in FY2022. Any signs of economic contraction in near to medium term would not be conducive for effective and speedy resolution of stressed assets for ARC’s like AARCL. Inherent challenges in the asset reconstruction business AARCL is likely to continue to face challenges given the inherent nature of the asset reconstruction business. The changes in the regulatory regime pertaining to acquisition of distressed assets from banks by ARC has tilted the balance in favor of those ARCs who are able to acquire assets for direct cash conditions as against issuance of Security receipts. The current disposition does not provide any significant benefits to the banks (sellers of these distressed assets) in case the investment of the bank in these SR’s exceed a threshold limit. Hence, the banks are incentivized to go for cash deals. While the regulation has allowed QBs investment, the ability of any ARC to tap this route will depend to a large extent on their demonstrated track record of recovery especially in a similar sector. Any challenges in achieving meaningful resolution of these assets will also have a bearing on the ability of the ARC to attract future support from the QIBs for their acquisitions. The intense competition from other ARC’s will also add to the headwinds in achieving the growth in scale of operations. |
| Rating Sensitivity |
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| Material Covenants |
| AARCL is subject to material covenants as stipulated by its lender. |
| Liquidity Position |
| Adequate |
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The company’s liquidity profile is adequate as on March 31, 2023. The acquisitions are funded through a mix of equity, QB funds and promoter funds with largely no scheduled payments. The cash flows of ARCs are generally uneven and a portion of revenues will depend on inflows from the resolution of SRs and upside revenues. Any challenges in ensuring steady revenue flow through timely resolution of the distressed assets will impact the liquidity buffers.
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| Outlook: Stable |
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Acuité believes that AARCL will maintain a ‘Stable’ business risk profile over the medium term supported by experienced management team. The outlook may be revised to 'Positive' if the company demonstrates material and sustained improvement in its earnings profile and growth in acquisition of distressed assets and its successful resolution. Conversely, the outlook may be revised to 'Negative' if there is persistent decline in acquisition of distressed assets or higher leverage or if the company faces pressure in the event of changes in the regulatory framework that might adversely affect their business.
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| Other Factors affecting Rating |
| Not applicable |
| Key Financials | ||||||||||||||||||||||||||||||||||||||||||||||||||
*Total income is net of interest expense
NA - Not applicable |
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| Status of non-cooperation with previous CRA (if applicable): |
| Not applicable |
| Any other information |
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Not applicable
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| Applicable Criteria |
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• Application Of Financial Ratios And Adjustments: https://www.acuite.in/view-rating-criteria-53.htm • Asset Reconstruction Companies: https://www.acuite.in/view-rating-criteria-85.htm • Default Recognition: https://www.acuite.in/view-rating-criteria-52.htm |
| Note on complexity levels of the rated instrument |
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In order to inform the investors about complexity of instruments, Acuité has categorized such instruments in three levels: Simple, Complex and Highly Complex. Acuite’s categorisation of the instruments across the three categories is based on factors like variability of the returns to the investors, uncertainty in cash flow patterns, number of counterparties and general understanding of the instrument by the market. It has to be understood that complexity is different from credit risk and even an instrument categorized as 'Simple' can carry high levels of risk. For more details, please refer Rating Criteria “Complexity Level Of Financial Instruments” on www.acuite.in.
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