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Established presence in debt market
Incorporated in 1993, A.K. Capital Services Limited (AKCSL), the parent entity of A. K. Stockmart Private Limited (AK Stockmart) 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 121 debt assignments of Rs. 1,43,172 Cr. translating to a market share of 30.80 percent in FY2022 as against 177 debt assignments of Rs. 2,55,228 Cr. translating to a market share of 41.60 percent in FY2021. 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. 760 Cr. (adjusted for minority interest) as on March 31, 2022 (Rs. 684 Cr. as on March 31, 2021). 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, 2022. 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.1843 Cr. as on March 31, 2022, NCDs constituted ~38 percent followed by working capital facilities at ~43 percent, TREPS (formerly known as CBLO) and Repo borrowings at ~8 percent and long term bank facilities from Banks & NBFC (term loans) at ~11 percent. The gearing ratio is comfortable at 2.43 times (adjusted for minority interest) as on March 31, 2022 (2.03 times (adjusted for minority interest) as on March 31, 2021). The gearing reduced to 1.95 times (adjusted for minority interest) as on September 30, 2022 on the back of improvement in networth to Rs. 798 Cr. coupled with decline in outstanding borrowings to Rs. 1555 Cr. On standalone basis, AKCSL reported networth and gearing at Rs. 454 Cr. and 0.99 times respectively as on September 30, 2022. 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. During 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. 2,008 Cr. as on March 31, 2022 from Rs. 1,805 Cr. as on March 31, 2021. The exposure to private sector entities stood at Rs. 1212 Cr. (~60 percent of AUM) as on March 31, 2022 as compared to Rs. 1036 Cr. (~57% of AUM) as on March 31, 2021. 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. Consequently, AKCFL reported NIL non-performing assets over the past three financial years and continued to maintain track record for six months ended September 30, 2022. 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.
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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 74 percent of total revenue and financial advisory services about 25 percent of total revenue for FY2022. 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. 323 Cr. during FY2022 as compared to Rs. 289 Cr. during FY2021 and Rs. 314 Cr. during FY2020. The improved revenue profile during FY2022 resulted in improved profitability with AKCSL reporting consolidated Profit after Tax (PAT) of about Rs. 83 Cr. during FY2022 from Rs. 75 Cr. during FY2021. PAT margin stood at 26 percent during FY2022. For H1 FY2023, consolidated PAT stood at about Rs. 42 Cr. on consolidated total income of about Rs. 186 Cr. (consolidated PAT of about Rs. 41 Cr. on consolidated total income of about Rs. 155 Cr. during H1 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. 26 Cr. during FY2022 as compared to Rs. 25 Cr. during FY2021 and Rs.19 Cr. during FY2020 mainly driven by uptick in dealing income derived from downselling of debt investments, contributing 21 percent of total income compared to 28 percent of total income in the like period. For H1FY2023, AKCSL reported PAT of about Rs. 15 Cr. on total income of about Rs. 57 Cr. (PAT of about Rs.11 Cr. on total income of about Rs. 44 Cr. during H1FY2022).
Client concentration in merchant banking & wholesale lending businesses
In terms of Private placement Issues, during the FY2022 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, contributing nearly 72 percent of the total private placement deals during FY2022. On the lending business front, AKCFL has primarily focused on the wholesale 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 wholesale 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 46 percent of its total exposures as on September 30, 2022 (41 percent of its total exposures as on September 31, 2021). 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 wholesale nature of the business.
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