Arka Fincap Limited NCD Review: Should you invest?

Arka Fincap Limited is coming up with their public NCD issuance, they have filed shelf prospectus with SEBI. Let us look at the profile of Arka Fincap Limited, its group, its business model, and key financial parameters.

About the Company

Company was incorporated as Kirloskar Capital Limited on April 20, 2018 at Mumbai, Maharashtra, India as a public company under the Companies Act, 2013. Pursuant to a resolution passed by Shareholders at the EGM held on June 4, 2019, the name of the Company was changed to Arka Fincap Limited and a fresh certificate of incorporation consequent upon change of name was issued by the ROC on June 28, 2019. The Company is registered with the Reserve Bank of India (RBI) as a non-banking financial Company vide certificate no. N-13.02282 dated July 25, 2019 (previously issued in the name of Kirloskar Capital Limited vide certificate no. N13.02282 dated October 29, 2018) in pursuance of Section 45-IA of the ‘RBI’ Act, 1934.

Arka Fincap Limited is a systemically important non-deposit taking NBFC registered with RBI. Company is a professionally managed organization and is part of the Kirloskar Group, primarily engaged in providing structured term financing solutions to corporates, real estate and urban infra financing, loans to micro, small and medium enterprise (“MSME”) and personal finance loans to borrowers in India.

About Group 

Kirloskar Oil Engines Limited (KOEL) is the ultimate holding company. Incorporated in 2009, KOEL is the flagship company of the Kirloskar group. It is listed on NSE & BSE and has a market capitalization of more than ₹ 5,000 crores. KOEL has achieved a long-term debt rating of CRISIL AA/Stable from CRISIL and short-term rating of CRISIL A1+ from CRISIL. Kirloskar group is involved in businesses across industries as diverse as construction, agriculture, automotive engineering and the commercial marine. 

KOEL is the flagship company of Kirloskar group and is into the business of manufacturing diesel gensets. KOEL develops and offers indigenous engines for agriculture, genset and industrial off highway equipment segments. KOEL has a strong presence in industrial engines where it powers earth moving construction, mining, fluid handling, material handling equipment and marine applications and it has manufacturing units in India at Pune, Nashik, Kolhapur, Bhare and Rajkot.

Industry Overview

Wholesale real-estate credit is a credit usually offered to real estate developers who focus on financing the projects at various stages in the project cycle. In simple words, it is a loan used by real estate developers for their prospective projects. Also, known as commercial real-estate lending. This type of credit is exclusively extended for income generating activities and business purposes. These loans are usually mortgage loans (secured loans) and are quite expensive in nature when compared to residential portfolio products. Commercial real estate (CRE) loans play a critical role in financing the activities related to purchase, development, and construction of commercial properties. 

Wholesale real-estate credit loans play a major role in overall economic infrastructure development as it helps in financing the properties by businesses/companies. These loans can also be used to purchase a warehouse, apartment buildings, hospitals, restaurants, hotels, housing developments, retail spaces like shopping malls, etc. The loan amount for a commercial real estate loan is higher than the loan amount of residential real estate loans. Larger down payments may be required when one takes a commercial real-estate loan as there is a huge risk to the lender than in case of residential real estate holder. Thus, we can say that wholesale real-estate loans are a little complex when compared with residential loans. But at the end, real-estate developers need this credit to fund larger projects.

The commercial real estate sector was hit during the pandemic as construction activities and movement of labor had come to a halt, offices and schools were shut, this also impacted the demand for funding. However, post the Covid-19 pandemic the commercial real estate sector has been on the road to recovery and with a surge in demand for retail and commercial properties since the onset of the pandemic, the sectors’ demand for funding from banks has also improved. Given the massive funding requirement for construction, there remains a need for a sound and robust financing ecosystem that is aided by Government initiatives.

Group Structure

Business Model of Arka Fincap Limited

Company operates into four principal lines of business, namely corporate lending, real estate and urban infra financing, MSME lending, and personal finance loans.

Below is the split of the Loan book as on December 2022, March 2022, March 2021 and March 2020.

Corporate Lending – Corporate lending business primarily consists of advancing secured loans to companies in the manufacturing, services, and infrastructure industries by way of structured financing, promoter financing and special situation funding (such as buy-outs and bridge financing)

Real estate and urban infra financing – Primarily focused on providing project specific funding for ongoing residential and commercial projects (which have received key regulatory approvals), this includes last-mile financing, project finance, corporate exposures, working capital finance, acquisition financing for residential projects.

MSME Lending – launched MSME business line in December 2020. Offer three products under it, Loan Against Property, Supply Chain Finance and Unsecured Loans through digital lending.

Personal Finance Loan – Forayed into the personal lending business in August 2020. Provide short term personal finance loans to customers. 

Wholesale business contributes about 75% of total AUM. Below is the concentration of exposure to twenty largest borrowers :- 

Company’s Financials

Borrowings of the Company

Components of all borrowings as of the dates indicated are set out below:

Comforts/Concerns

Comforts:

• Strong support from the parent entity. 
• Experienced Board and management team.

Concerns:

• Limited track record of operations:
• More than 75% of exposure is into wholesale lending which is susceptible to slippages. Also, total exposure to twenty largest borrowers as on March 22 is close to 50%.
• Company’s ability to scale up operations with a healthy loan book, while maintaining its asset quality over the medium term would be a key monitorable.

Source of data: Draft Prospectus, Annual Report, Rating Rationale, Quarterly results, etc.