ICRA Lanka reaffirms the Issuer Rating of Lakderana Investments Limited

Instrument Rated Amount (LKR Mn)Rating Action
Issuer RatingN/A[SL]BB- with Stable outlook; reaffirmed

Rating action

ICRA Lanka Limited has reaffirmed the Issuer Rating of [SL]BB- (Pronounced SL double B minus) with Stable outlook for Lakderana Investments Limited (“LIL” or the company).

Rationale

The rating factors the company’s modest scale of operations and competitive position within the vehicle financing industry and its limited funding profile. As LIL, is not a Licensed Finance Company, its funding profile is limited which limits its financial flexibility and growth. However, ICRA Lanka also notes the healthy portfolio growth and improvements in asset quality during the period ended Mar-22. The total portfolio grew to LKR 3.17 Bn by Mar-22 from around LKR 2.77 Bn as in Sep-21, of which three-wheelers accounted for around 94% of the total portfolio. ICRA Lanka notes that the core clientele of LIL have moderate credit and risk profiles and are susceptible to adverse economic cycles. However, the asset quality of the company improved with the gross NPA ratio (90 days past due) improving to 5.90% as in Mar-22 as compared to 20.95% in Sep-21 and 7.60% in Mar-21. This is largely attributable to the improved recovery efforts of the team, improvements noted within the macro environment, and the growth of the portfolio.

The rating also considers the healthy earnings profile of the company despite the challenging macro conditions that prevailed. The company reported a PBT/ATA of 7.73% in FY2022 in comparison to 6.58% in FY2021 and 6.31% in FY2020. This was supported by the marginal improvements in the company’s NIM (15.96% in FY2022 as compared to 14.63% in FY2021 and 15.43% in FY2020), a rise in other income, and a fall in credit costs. However, the ability of the Company to maintain asset quality and earnings, given the challenging macro-economic environment that prevails would be crucial going forward.

Outlook: Stable

The outlook may be revised to “Positive” if the company demonstrates the ability to maintain healthy asset quality as the business expands and improvements within the earnings profile. The outlook may be revised to “Negative” in case of significant deterioration in asset quality and profitability indicators.

Key rating drivers

Credit strengths

Healthy profitability indicators despite challenging macro environment: Historically, LIL maintained healthy core margins as the company is primarily focusing on high-yielding asset classes such as 3Ws and 2Ws. The company’s NIM improved to 15.96% in FY2022 as compared to 14.63% in FY2021 and 15.43% in FY2020, mainly due to the moderation in cost of funds (14.07% in FY2022 as compared to 14.80% in FY2021 and 18.17% in FY2020) and the growth of the portfolio. The profitability of the company is also supported by the rise in other income/ATA (4.52% in FY2022 in comparison to 4.33% in FY2021 and 4.83% in FY2020) and the moderation in credit costs (0.95% in FY2022 from 0.89% in FY2021 and 1.78% in FY2020) with the improvements in asset quality. The company reported a PBT/ATA of 7.73% in FY2022 in comparison to 6.58% in FY2021 and 6.31% in FY2020 and a ROA of 5.22% in FY2022 as compared to 4.50% in FY2021 (3.73% in FY2020). ICRA Lanka notes that going forward, core margins might come somewhat under pressure, due to the sharp increase in cost of funds, and management intends to maintain overall profitability via other fee income and cost savings.

Credit challenges

Asset quality notes improvements, however, remains weak: The Gross NPA (90 days due) of the company improved to 5.90% as in Mar-22 as compared to 20.95% in Sep-21 and 7.60% in Mar-21. The decline in asset quality during FY2020 and FY2021 was as a result of the business interruptions faced by the company and the challenging macro conditions that prevailed due to lockdowns being placed following the third wave of COVID-19. ICRA Lanka notes that the improvement in NPA levels post-pandemic was as a result of the increased collection/ recovery efforts of the team, improvements noted within the macro environment resulting in reductions of the NPA portfolio, and the growth of the portfolio. However, ICRA Lanka will continue to monitor the asset quality movement of the company, as the current operating environment, characterized by fuel shortages, etc., is quite challenging for the core clientele served by the company

Modest scale of operations and exposure to customers with modest credit profile: LIL is a smaller player within the vehicle financing industry with an asset base of around LKR 4.1 Bn and 31 branches. As of Mar-22, the total portfolio stood at LKR 3.2 Bn of which around 94% consisted of both registered and unregistered 3Ws. These customers have a moderate risk profile and are susceptible to adverse economic cycles. However, ICRA Lanka takes note of the revision of the credit policy and the adequate internal controls put in place, which provides comfort from a credit perspective.

Funding profile remains limited: The Company’s funding profile remains limited to mainly securitizations and bank funding due to its legal status prohibiting canvasing funds from deposits. As of Mar-22, the total borrowings of LIL stood at LKR 2.1 Bn and comprised of around 57% securitizations, 26% long-term bank funding, 14% subordinated loans, and, 2% short-term bank funding. Going forward, the company expects to diversify its funding profile and reduce its dependence on securitizations. The company reported a relatively low gearing ratio of 1.3 times in Mar-22 as compared to 1.4 times in Mar-21.

Analytical approach: For arriving at the ratings, ICRA Lanka has applied its rating methodologies as indicated below.

Links to applicable criteria:  ICRA Lanka’s Credit Rating Methodology for Non-Banking Financial Institutions

About the Company:

Lakderana Investments Ltd is a limited liability company incorporated in Sri Lanka, in March 2006.  The company is not a licensed financial institution; it carries out hire-purchase operations under the Consumer Credit Act no. 29 of 1982. High Peak Holdings (Pvt) Ltd. is the main shareholder of the company holding 54%. Mr. Virath Esela De Alwis has a holding of 25%. The company offers Hire Purchase facilities to three-wheelers, two-wheelers, and other vehicles. The company has an asset base of around LKR 4.1 Bn as at Mar-22 with 31 branches and 2 touch points.

During the year ended March 31, 2022, LIL reported a net profit (unaudited) of LKR 209 Mn on a total asset base of LKR 4,093 Mn as compared to a net profit of LKR 188 Mn on a total asset base of LKR 3,929 Mn in the previous fiscal year.

Key financial indicators
LKR MnFY2019FY2020FY2021FY2022*
Net Interest Income641 733 611 640
Profit after Tax182 177 188 209
Net worth1,127 1,272 1,430 1,621
Total Assets5,069 4,426 3,929 4,093
Return on Equity16.83%14.78%13.92%13.73%
Return on Assets3.86%3.73%4.50%5.22%
Gross NPA (90 days)4.17%7.06%7.60%5.90%
Gross NPA (180 days)1.85%2.68%3.90%2.95%
Gearing (times)3.15 2.23 1.54 1.27

*Unaudited Financials

Rating history for last three years:

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