Capital Alliance Holdings

ICRA Lanka upgrades the issuer rating of Capital Alliance Holdings Ltd to [SL] A-

InstrumentRated Amount                   (LKR Mn)Outstanding Amount            (LKR Mn)Rating Action
Issuer ratingN/AN/AUpgraded to [SL]A- from [SL] BBB+; Stable outlook

Rating action

ICRA Lanka Limited has upgraded the issuer rating of Capital Alliance Holdings Limited (CALH or “the Company”) to [SL]A- (pronounced SL A minus) with Stable outlook from [SL] BBB+ (pronounced as SL triple B plus) with Stable outlook.

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 upgrade factors in CALH’s status as the holding company of Capital Alliance Limited (CAL), a leading primary dealer (PD) in Sri Lanka (Issuer rating of [SL]A-/Stable outlook). Contribution to group income from other group entities remain modest at present, although income from these entities continue to grow. Consequently, CALH’s performance remains highly dependent on CAL. The rating upgrade also factors in the improvement in the capital and gearing profiles, with CALH’s group net worth improving to LKR 3.3 Bn in January 2021 vis-à-vis LKR 2.2 Bn in March 2020 (LKR 1.8 Bn in March 2019), due primarily to the healthy performance of CAL.  CALH’s standalone gearing stood at 3.33 times in January 2021 vis-à-vis 2.97 times in March 2020, whereas leverage on a consolidated basis had improved to 3.03 time in January 2021, compared with 5.89 times in March 2020 and 6.39 times in March 2019. ICRA Lanka envisages the group capital profile to improve further with the expected earnings generation of CAL  (which is expected to grow its net worth to  LKR 5.0 Bn) and other subsidiaries in the medium term. The standalone company had unutilized funding lines of LKR 306 Mn in December 2020, whilst CAL had bank funding of LKR 500 Mn, which provides 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 CAL, and maintaining healthy levels of capitalization 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 CAL, 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 CAL.

Key rating drivers

Credit strengths

Holding company of CAL; other group entities offer diverse financial services: CALH’s subsidiary, CAL, is a leading primary dealer in Sri Lanka (90.8% 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 142 Mn in FY2020 (LKR 140 Mn in FY2019). The asset and wealth management division, Capital Alliance Investments, reported a total income of LKR 202 Mn in FY2020 (LKR 151 in FY2019); total assets under management stood at LKR 67 Bn in January 2021. Capital Alliance Securities (Pvt) Limited, a licensed stock broker on the Colombo Stock Exchange, reported a total income of LKR 109 Mn in FY2020 (LKR 95 in FY2019). Income from the IT division and from standalone investments was together LKR 109 Mn in FY2020 (LKR 48 Mn in FY2019). At present, contribution from businesses apart from the PD operation, remain relatively modest. However, the group expects to grow its fee-based businesses in the future which may contribute to growth in overall operating income and profitability.

Improvement in capital and gearing profiles: Due to the healthy performance of the PD operation, CALH’s net worth on a consolidated basis grew to LKR 3.3 Bn in January 2021, compared with LKR 2.2 Bn in March 2020 (LKR 1.8 Bn in March 2019), whereas leverage on a consolidated basis stood at 3.03 times in Jan 2021and 5.89 times in Mar 2020, respectively.  The standalone gearing of CALH  stood at 3.33 times in January 2021 vis-à-vis 2.97 times in March 2020. ICRA Lanka notes that the current core capital of the PD which stood at LKR 2.8 Bn in January 2021, is in excess of regulatory requirements (current regulatory minimum is LKR 1.0 Bn).  The ability to maintain comfortable capital and gearing profiles, going forward, would be a key monitorable.

Adequate near-term liquidity: : Liquidity risk arises mainly from the PD operation as all other subsidiaries are fee -based businesses. 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 3.80 times in the 10M ended January 2021 vis-à-vis 0.82 times in FY2020 (0.67 times in FY2019). As of December 2020, the standalone company had unutilized bank lines of LKR 306 Mn; whereas the PD had an additional funding facility of around LKR 500 Mn. In addition, ICRA Lanka envisages support from the promoters or other promoter-owned entities (Jetwing group of companies), if required.

Credit challenges

Group performance is significantly dependent on CAL: Group performance continues to be largely driven by the primary dealer business, which represented about 90% of consolidated assets and 82% of group operating income in FY2020; 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 at 57.2% and 9.9%, respectively, in the 10M ended January 2021, supported by CAL’s robust performance vis-à-vis 34.4% and 4.7% in FY2020. However, ICRA Lanka notes that  interest rates have bottomed out at the end of CY2020. Hence, group earnings in the next 12M may be comparatively lower.

Capital requirements of the PD limits group flexibility: Standalone operating income can be volatile, as CALH is dependent on the dividend flow from its key operating subsidiary, the PD business. In the 10M ended January 2021, the dividend income of the company stood at LKR 310 Mn (LKR 3 Mn in FY2020), representing approximately 71% of the recurring total income (1% in FY2020). Hence, CALH was able to report a standalone net profit of LKR 296 Mn in the 10M ended January 2021 vis-à-vis the standalone net losses of LKR 29 Mn and LKR 39 Mn in FY2020 and FY2019, respectively. The management has decided to build the core capital of the PD to LKR 5 Bn (above the expected regulatory threshold of LKR 3.0 Bn in Jan-23) going forward, which may limit dividends from being up-streamed. Future growth in the group net worth, providing a higher capital buffer above the regulatory requirement for the PD, would be considered a rating positive. Whereas, excessive profit distributions that diminish the capital buffer, would be a considered a rating negative.

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 Limited (CAL) 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, 2020, CALH on a stand-alone basis reported a net loss of LKR 29 Mn, on a total asset base of LKR 1.8 Bn, vis-à-vis a net loss of LKR 39 Mn on a total asset base of LKR 2.2 Bn during the previous fiscal. For the 10M ended January, 2021, CALH reported a stand-alone net profit of LKR 296 Mn on a total asset base of LKR 2.3 Bn.

For the financial year ended March 31, 2020, CALH reported a consolidated net profit of LKR 686 Mn, on a total asset base of LKR 16.1 Bn, vis-à-vis a net loss of LKR 45 Mn on a total asset base of LKR 13.1 Bn during the previous fiscal. In the 10M ended January 2021, CALH reported a consolidated profit of LKR 1,316 Mn on a total asset base of LKR 15.8 Bn.

Key financial indicators of CAL – Audited

Stand-alone

LKR MnFY2018FY2019FY202010M FY2021*
Total Income1,040148201435
Profit after Tax761(39)(29)296
Net worth517483455525
Total Assets2,3082,1671,8342,277
Return on Equity141.4%-7.8%-6.2%75.3%
Return on Assets36.1%-1.7%-1.5%17.1%
Reported Gearing (times)3.143.352.973.33

*Unaudited

Consolidated

LKR MnFY2018FY2019FY202010M FY2021*
Total Income2,5391,5893,0513,260
Profit after Tax970(45)6861,316
Net worth1,6621,5652,0273,000
Total Assets12,81513,13316,08715,833
Return on Equity38.9%-2.5%34.4%57.2%
Return on Assets6.4%-0.3%4.7%9.9%
Reported Gearing (times)**5.546.395.893.03

**Includes non- controlling interest

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

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

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