CRISIL has upgraded its rating on the term loan of Ujjivan Financial Services Pvt Ltd (Ujjivan) to ‘CRISIL BBB-/ Stable’ from ‘CRISIL BB/ Stable’.
The rating upgrade reflects the resilience that Ujjivan has exhibited by better withstanding the crisis in the microfinance institutions (MFI) sector, since implementation of the ordinance by the state government of Andhra Pradesh (AP) in October 2010. Despite the constrained funding environment in the sector, Ujjivan has managed to procure regular funding through various sources, albeit at a slower pace than the pre-ordinance levels. CRISIL believes that Ujjivan will continue to raise timely and adequate funding to support its revised business plans over the medium term. Furthermore, the company has been able to smoothly transition to the revised regulatory framework prescribed by the Reserve Bank of India (RBI) and its asset quality remains unaffected, given that it does not operate in AP.
The rating also reflects the experience of Ujjivan’s board of directors and senior management in the financial services business and the company’s comfortable capitalisation. These rating strengths are partially offset by Ujjivan’s modest earnings profile, and susceptibility to heightened regulatory and legislative risks associated with the MFI sector.
Since the implementation of the AP ordinance, Ujjivan is amongst the few MFIs which have been able to mobilise funding regularly. Ujjivan raised non-convertible debentures (NCDs) aggregating Rs.400 million from Developing World Markets in December 2010 and Rs.550 million between July 2011 and August 2011. The company has also managed to procure funding through bank lines of Rs.2.4 billion and securitisation of Rs. 575 million between October 2010 and October 2011. CRISIL believes that Ujjivan will continue to raise adequate funding through bank and alternate sources over the medium term as well. Furthermore, Ujjivan has adequate capitalisation, with a net worth of Rs.1.2 billion and capital adequacy of 17 per cent as on March 31, 2011. However, the company’s gearing has increased substantially to 4.96 times as on March 31, 2011, from 2.8 times as on March 31, 2010. Ujjivan is currently raising additional equity capital to the extent of Rs.1.7 billion in the near term; the company’s ability to successfully execute its capital raising plans in a timely manner will remain a key monitorable for its rating.
CRISIL also believes that Ujjivan will benefit from the industry experience and the competence of its senior management team. The management, including the board, comprises professionals from the banking and non-banking financial company sectors with adequate experience and understanding of the microfinance business. A significant improvement in systems and processes, supported by enterprise-wide technology applications, and a gradual geographical diversification of the portfolio, has enabled the company to scale up its market position. Ujjivan’s portfolio, outstanding as on September 30, 2011, stood at Rs.5.9 billion, compared to Rs.3.7 billion as on March 31, 2010.
However, Ujjivan’s earnings profile remains modest; the company reported a net loss of Rs.25 million for the half year ended September 30, 2011, compared to a profit after tax (PAT) of Rs.67 million during the same period last year. While Ujjivan has reduced its lending rates in line with RBI requirements, its cost of operations (operating costs as a percentage of average funds deployed were 16 per cent in 2010-11 [refers to financial year, April 1 to March 31]) remain high given its strategy of diversifying across various states. Furthermore, its borrowing costs have increased (13.4 per cent in 2010-11, compared to 11.5 per cent in 2009-10) given the rising interest rate environment. Ujjivan’s ability to improve margins by lowering its operating expenses and scaling up its portfolio remains to be seen.
The MFI sector remains susceptible to heightened regulatory and legislative risks post the issuance of the AP ordinance. While some steps have been taken by RBI, over the past few months, to increase stakeholder confidence and structurally strengthen the sector, the regulatory jurisdiction on MFIs remains unclear. Furthermore, the sector’s growth and profitability prospects have moderated, given the subdued funding environment and operational challenges associated with transitioning to the revised regulatory framework. CRISIL, however, believes that MFIs such as Ujjivan are better placed to manage the challenging external environment.