ICRA Lanka reaffirms the Issuer Rating of Lakderana Investments Limited
|Instrument||Rated Amount (LKR Mn)||Rating Action|
|Issuer Rating||N/A||[SL]BB- with Stable outlook; reaffirmed|
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).
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.
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
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.
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
|Net Interest Income||641||733||611||640|
|Profit after Tax||182||177||188||209|
|Return on Equity||16.83%||14.78%||13.92%||13.73%|
|Return on Assets||3.86%||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%|
Rating history for last three years:
Subsidiary of ICRA Limited
CORPORATE OFFICELevel10, East Tower, World Trade Center, Colombo 01, Sri Lanka Tel:+94 11 4339907;Fax:+94112333307 Email:firstname.lastname@example.org; 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.