Capital Alliance Holdings

ICRA Lanka has re-affirmed the issuer rating of [SL]A- for Capital Alliance Holdings Ltd

InstrumentRated Amount                   (LKR Mn)Outstanding Amount            (LKR Mn)Rating Action
Issuer ratingN/AN/A [SL]A- with Stable outlook; reaffirmed

Rating action

ICRA Lanka Limited has reaffirmed the issuer rating of [SL]A- (pronounced SL A minus) for Capital Alliance Holdings Limited (CALH or “the Company”). The outlook on the rating remains Stable.

Rationale

ICRA Lanka has taken a consolidated view of the Capital Alliance group (CALH and subsidiaries), which is  involved in a range of financial services such as fixed income trading, equity broking, corporate advisory and asset management. There is a strong interlink between the entities through sharing of  a common brand, senior management, systems and group treasury functions.

The rating factors in CALH’s status as the holding company of Capital Alliance PLC (CALT), a leading primary dealer (PD) in Sri Lanka (Issuer rating of [SL]A-/Stable outlook). The rating also factors in CALH’s position as the holding company of the group, with entities offering various financial services. However, group performance continues to be driven by CALT; thus it remains susceptible to the risks inherent to the PD. The rating take note of the improvement in standalone leverage to 2.80 times  (4.25 times in March 2021 and 3.00 in March 2020) and net worth of  LKR 619 Mn in December 2021. The consolidated leverage stood at 1.13 times in December 2021, from 3.31 times in March 2021 (5.90 times in March 2020), due mainly to the lower repo borrowings of the PD business on account of an adverse market environment. The rating takes note of by the capital profile of the PD, which may require capital infusions in the future in order maintain a comfortable buffer above the regulatory minimum capital threshold (current threshold is LKR 2.0 Bn and LKR 2.5 Bn from Jan-23 onwards). The standalone company had unutilized funding lines of LKR 225 Mn in December 2021, whilst CALT had bank funding of LKR 725 Mn, which provide comfort from a liquidity perspective. Further, ICRA Lanka envisages financial support from the promoters or other promoter-owned entities, if required. Going forward, performance of the subsidiaries, especially CALT, and maintaining healthy levels of capitalization, leverage and liquidity, are key from a rating perspective.

Outlook: Stable

The outlook may be revised to “Positive” based on CALH’s ability to further improve its financial profile or if the risk profile of the subsidiaries, especially CALT, improves. The outlook may be revised to “Negative” in case of a deterioration in the leverage and capital profiles, weakening in group liquidity and earnings or in case of a deterioration in the risk profile of CALT.

Key rating drivers

Credit strengths

Holding company of CALT; other group entities offer diverse financial services: CALH’s subsidiary, CALT, is a leading primary dealer in Sri Lanka (79.4% owned by CALH). CALH is expected to continue to benefit from the dividend flow from its primary dealer operation.Other group entities offering various financial and capital market services create synergies, whilst diversifying income sources. Capital Alliance Partners Limited, which provides corporate finance advisory services reported a total fee income of LKR 234 Mn in FY2021 (LKR 142 Mn in FY2020). The asset and wealth management division, Capital Alliance Investments, reported a total income of LKR 332 Mn in FY2021 (LKR 202 Mn in FY2020); total assets under management stood at LKR 77 Bn in December 2021. Capital Alliance Securities (Pvt) Limited, a licensed stock broker on the Colombo Stock Exchange, reported a total income of LKR 531 Mn in FY2021 (LKR 109 in FY2020). Income from the IT division and from standalone investments was together LKR 58 Mn in FY2021 (LKR 109 Mn in FY2020). The group expects to grow its fee-based businesses further which may contribute to growth in overall operating income and profitability.

Improvement in the gearing profile: CALH’s net worth on a consolidated basis grew to LKR 3.4 Bn in December 2021, compared with LKR 3.1 Bn in March 2021 (LKR 2.2 Bn in March 2020); whereas leverage on a consolidated basis stood at 1.13x in December 2021, largely due to a reduction in repo borrowings of the PD (consolidated leverage stood at 3.31x in March 2021 and 5.90x in March 2020).  The standalone gearing of CALH stood at 2.80x in December 2021 vis-à-vis 4.25x in March 2021 (2.97x in March 2020). Apart from CALT, the rest of the subsidiaries are fee-based businesses with relatively low debt levels. Hence, group debt and leverage is linked significantly to the PD operation. Going forward, the ability to maintain a comfortable capital structure with moderate leverage would a key monitorable.  

Adequate near-term liquidity: At the group level, the liquidity risk arises mainly from the PD operation. However, any liquidity shortfalls at the PD are mitigated by the liquid nature of the government securities in its portfolio. The standalone interest cover of CALH improved to 7.24 times in 9M FY2022 vis-à-vis 2.76 times in FY2021 (0.83 times in FY2020). Moreover, the standalone company had unutilized bank lines of LKR 225 Mn, whereas the PD had additional funding facilities of around LKR 725 Mn as of December 2021.

Credit challenges

Group performance is significantly dependent on CALT: Group performance continues to be largely driven by the primary dealer business, which represented about 79% of consolidated assets and 66% of group operating income in FY2021; thus, the group is susceptible to risks (especially market risk) inherent to the PD industry. On a consolidated basis, CALH reported a RoE and RoA of 5.1% and 1.4%, respectively, in 9M FY2022 due to the subdued performance of the PD, compared with 41.8% and 7.2% in FY2021 (RoE and RoA stood at 34.4% and 4.7%, respectively, in FY2020). The earnings of the PD are mainly dependant on cyclical variations in the interest rates;  same is not expected to impact long term profitability of the group.

Near-term capital requirements of the PD limits group flexibility: The standalone earnings profile is linked to the dividend flow from CALH’s key operating subsidiary, the PD business; hence standalone income can be volatile. In the 9M ended December 2021, the dividend income of the company stood at LKR 560 Mn, representing approximately 94% of the recurring total income (73% in FY2021 and 1% in FY2020). Hence, CALH reported a standalone net profit of LKR 477 Mn in 9M FY2022 vis-à-vis LKR 186 Mn in FY2021 (in FY2020, no dividends were up streamed by the PD, resulting in a standalone net loss of LKR 29 Mn).  As in December 2021, the primary dealer had a moderate capital buffer of LKR 0.7 Bn over the current regulatory limit (LKR 2.0 Bn). ICRA Lanka further notes that the regulatory minimum capital limit is to increase to LKR 2.5 Bn in Jan-23. Thus, the management is expected to continue to build the core capital of CALT which may restrict future dividends from being up-streamed; same may also limit the group’s financial flexibility.

Analytical approach: For arriving at the ratings, ICRA has applied its ratings methodologies as indicated below: Links to applicable criteria:  ICRA Lanka Issuer Rating Methodology 

About the Company:

Capital Alliance Holdings Ltd (CALH), through its subsidiaries provides a wide range of financial and capital market solutions. At standalone level, the Company is engaged in managing its subsidiaries i.e. Capital Alliance PLC (CALT) which is an authorized primary dealer of government securities, Capital Alliance Partners Limited, which provides advisory services on debt placements, equity raising, mergers and acquisitions and corporate restructurings, Capital Alliance Investments Limited involved in asset management and private wealth management,  Capital Alliance Securities (Pvt) Limited involved in stock broking,  and Finnovation (Pvt) Limited which provides IT solutions for group entities and third parties.

For the financial year ended March 31, 2021, CALH on a stand-alone basis reported a net profit of LKR 186 Mn, on a total asset base of LKR 2.4 Bn, vis-à-vis a net loss of LKR 29 Mn on a total asset base of LKR 1.8 Bn during the previous fiscal. For the 9M ended December 2021, CALH reported a stand-alone net profit of LKR 477 Mn on a total asset base of LKR 2.5 Bn.

For the financial year ended March 31, 2021, CALH reported a consolidated net profit of LKR 1,113 Mn, on a total asset base of LKR 14.7 Bn, vis-à-vis a net profit of LKR 687 Mn on a total asset base of LKR 16.1 Bn during the previous fiscal. In the 9M ended December 2021, CALH reported a consolidated profit of LKR 124 Mn on a total asset base of LKR 8.6 Bn.

Key financial indicators of CALH – Audited

Stand-alone

LKR MnFY2019FY2020FY20219M FY2022*
Total Income119172401596
Profit after Tax(39)(29)186477
Net worth483455442619
Total Assets2,1671,8342,3672,459
Return on Equity-7.8%-6.2%41.4%119.9%
Return on Assets-1.7%-1.5%8.8%26.4%
Reported Gearing (times)3.353.004.252.80

*Unaudited

Consolidated

LKR MnFY2019FY2020FY20219M FY2022*
Total Income1,5893,0523,4411,531
Profit after Tax(45)6871,113124
Net worth1,7552,2313,0963,385
Total Assets13,13316,08714,6728,581
Return on Equity-2.5%34.4%41.8%5.1%
Return on Assets-0.3%4.7%7.2%1.4%
Reported Gearing (times)**6.395.903.311.13

**Includes non- controlling interest

Rating history for last three years:
Analysts
Apsara Thurairetnam
+94-766781590
apsara@icralanka.com

Sahil Udani
+91-22-6114 3429
sahil.udani@icraindia.com

Disclaimer
ICRA Logo

Subsidiary of ICRA Limited

CORPORATE OFFICE
Level10, East Tower, World Trade Center, Colombo 01, Sri Lanka
Tel:+94 11 4339907;Fax:+94112333307 Email:info@icralanka.com; Website:www.icralanka.com

© Copyright, 2022 ICRA Lanka Limited. All Rights Reserved. Contents may be used freely with due acknowledgement to ICRA Lanka.

ICRA Lanka ratings should not be treated as recommendations to buy, sell or hold the rated debt instruments. ICRA Lanka ratings are subject to a process of surveillance, which may lead to revision in ratings. An ICRA Lanka rating is a symbolic indicator of ICRA Lanka’s current opinion on the relative capability of the issuer concerned to timely service debts and obligations, with reference to the instrument rated. Please visit our website www.icralanka.com or contact ICRA Lanka’s office for the latest information on the outstanding ICRA Lanka ratings.

All information contained herein has been obtained by ICRA Lanka from sources believed by it to be accurate and reliable, including the rated issuer. ICRA Lanka however has not conducted any audit of the rated issuer or of the information provided by it. While reasonable care has been taken to ensure that the information herein is true, such information is provided ‘as is’ without any warranty of any kind, and ICRA Lanka in particular, makes no representation or warranty, express or implied, as to the accuracy, timeliness or completeness of any such information.

ICRA Lanka does not take any responsibility for accuracy of material/documents prepared or published by other parties based on this document. All ICRA Lanka official rating rationales are prepared in English and external parties may present or publish translated versions of the same. Readers are henceforth advised to refer to the ICRA Lanka’s official rating rationale in the event of any inconsistency found in such documents.

ICRA Lanka or any of its group companies may have provided services other than rating to the issuer rated. All information contained herein must be construed solely as statements of opinion, and ICRA Lanka shall not be liable for any losses incurred by users from any use of this publication or its contents.