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Credit Analysis & Research Limited1

Kosamattam Finance LimitedRatings

Facilities Amount (Rs. crore) Ratings1 RemarksNon-Convertible Debenture Issue (Proposed) 200 (Rs. Two hundred crore only) CARE BB+ [Double B Plus] Assigned

Rating Rationale The rating assigned to the proposed long-term Non-Convertible Debenture issue of Kosamattam Finance Limited (KFL) factors in moderation in the financial performance and capitalization level during FY15 (refers to the period April 1 to March 31). The rating is constrained by the exposure to market risk related to gold, geographical concentration of its portfolio, intense competition in the gold loan business, concentration in the resource profile and scope for improvement in regulatory compliance.The ratings however factor in promoters’ experience, long track record of operations of KFL in the gold loan business and relatively low NPA levels.

Going forward, the ability of the company to maintain its asset quality and improve profitability levels while increasing the scale of operations & diversifying into new business segments, improve regulatory compliance and any change in the regulatory scenario are the key rating sensitivities.

BackgroundKosamattam Finance Ltd (KFL), a non-deposit taking NBFC registered with RBI is part of Kosamattam group. The group was founded by Mr. ChackoVarkey in 1927, with the main activity being chit fund business. In 1980, the group ventured into gold loan business under Mr. Mathew Cherian (grandson of Mr. Chacko). In 2004, the group acquired an already established gold loan NBFC in Kerala called ‘Standard Shares and Loans Pvt. Ltd.’ and changed its name to Kosamattam Finance Private Ltd. KFPL was converted to a public limited company in November 2013 and consequently the name has been changed to Kosamattam Finance Ltd. The company’s core business is offering loans against gold jewellery and constitutes around 95% of loan portfolio as on March 31, 2015. In March 2015, KFL ventured into LAP as a step towards diversification. As on March 31, 2015, the company had a loan portfolio of Rs.1,196 crore and operated through 895 branches. As on September 30, 2015, KFL had a loan portfolio of Rs.1,360 crore. KFL is also an RBI authorized Money Changer and offers forex services like buying and selling foreign currency and remittance abroad through Swift & foreign currency Demand Drafts.

Credit Risk AssessmentStrong experience of the promoters Kosamattam group entered into gold loan business in 1980 under Mr. Mathew Cherian. With the experience gained from this venture, the group took over an already established NBFC in Kerala and changed its name to KFPL. Under Mr. Mathew Cherian and his son in law Mr. George Thomas, the company has expanded its network across South India and operates out of 895 branches as on March 31, 2015. Though the promoters have strong experience in gold loan business, there is lack of depth in organizational structure. Over the years, the company built its brand and has registered significant growth in the last five years. During FY14 (refer to April 01 to March 31), the company has inducted two independent directors Mr.VenkitachalaIyer Ranganathan and Mr.Narayanaswamy ChidamaraIyer into the company’s board of directors.

Risk management systems; however scope for improvement in MIS system KFPL has put in place the adequate credit-appraisal systems. The branch employees have been trained to appraise quality of the gold jewellery provided as security against loan by prospective borrowers, which is subsequently verified by the gold appraiser. The company has implemented systems for ensuring the gold security and reducing the custodial risks, including highly secured vaults with dual control and insurance. The internal audit is conducted on monthly basis across the branches covering the disbursements, adherence to process, collection, gold stock etc., Surprise audit and cash verification is also done in all the branches. Though the internal control systems were in place for KFL, considering the size of the company the internal control systems, there is scope for improvement. The company has MIS systems at the branches. During FY15, the company has migrated to new software as the present MIS has restriction in accessing the earlier database. Further, the MIS system has limitation in extracting various reports and there is scope for improvement in MIS systems.

1Complete definitions of the ratings assigned are available at www.careratings.com and other CARE publications


Moderation in the profitability indicators in FY15 During FY15, though the loan portfolio witnessed growth of 16%, total income declined marginally from Rs.262 crore in FY14 to Rs.258 crore in FY15. The moderation in the total income was due to the interest loss of around Rs.21 crore and principal loss of Rs.0.7 crore in FY15 as against the interest loss of Rs.10.40 crore during FY14. Due to the above, NIM moderated from 7.99% in FY14 to 6.54% in FY15. ROTA also moderated from 1.89% in FY14 to 0.31% in FY15 due to the increase in the operating expenses (employee cost mainly due to addition of branches), depreciation expenses of Rs.7 crore and NCD issue expenses of Rs.2.4 crore and increase in provision of Rs.4.5 crore during FY15.

On account of growth in disbursements by 29% from Rs.1,089 crore in H1FY15 to Rs.1400 crore in H1FY16, loan portfolio increased from Rs.1,118 crore as on September 30, 2014 to Rs.1,360 crore as on September 30, 2015 registering growth of 22%. With the increase in loan portfolio, total income increased from Rs.117 crore during H1FY15 to Rs.170 crore during H1FY16 registering growth of around 46%. The company registered PAT of Rs.6 crore in H1FY16 as against Rs.3 crore in H1FY15.

Average Capitalization levelsDuring the period FY12-FY14, KFL has shown significant growth in the loan portfolio from Rs.686 crore as on March 31, 2012 to Rs.1,032 crore as on March 31, 2014 registering a CAGR of around 23%. Promoters infused equity of Rs.20 crore, during FY15, which has helped to maintain CAR above 19% as on March 31, 2015. However, Tier I CAR was only slightly above regulatory level (12%).Total CAR and Tier I CAR as on March 31, 2015 was 19.13% and 12.98% as against Total CAR and Tier I CAR of 19.20% and 13.72% as on March 31, 2014. Also during H1FY16, promoters have further infused equity of Rs.15 crore. Notwithstanding the same, on account of higher growth in gold loan and LAP segment, total CAR has moderated to 17.55% with Tier I CAR at 12.78% as on September 30, 2015. KFL has planned to raise Rs.15 crore during H2FY16. Although, the promoters have been infusing equity on regular intervals, Tier I CAR is slightly above the minimum levels (12%) as stipulated by RBI. Timely equity infusion by the promoters to maintain CAR levels is the key rating sensitivity.

As on March 31, 2015, GNPA and NNPA were at 0.53% and 0.21% as against GNPA and NNPA of 0.17% and 0.14% as on March 31, 2014. In order to contain the NPA levels and reduce extent and likelihood of under recovery, the company has reduced the tenure of the loans to 9 months as against 12 month earlier. GNPA and NNPA improved marginally to 0.46% and 0.18% as on September 30, 2015. With the phasing of the stressed portfolio and with the adequate collateral coverage for the portfolio disbursed in the past 12 months, the profitability is expected to improve in the subsequent years.

Entry into LAP segment and high growth The company has ventured into LAP segment in March 2015 as a step towards diversification. Under LAP, loans are extended to SME segment with the ticket size of Rs.50,000 – Rs.1 crore at a LTV of 50%. In case of corporates, the maximum ticket size is Rs.25 crore. These loans have maximum tenure of 48 months with an average interest rate of 20% to 24% per annum. As on September 30, 2015, the loan portfolio of LAP is Rs.163 crore (12% of loan portfolio) as against Rs.33 crore (2.76% of loan portfolio) as on March 31, 2015. At present, LAP is extended only in Kerala and is likely to be started in Tamil Nadu and Karnataka. Though the company has appointed experienced management personnel to take care of various operational aspects, the company has limited experience in LAP. Considering the growth in LAP portfolio in the past 6 months, with relatively large ticket size and low seasoning of the loan portfolio, maintaining comfortable asset quality in the segment remains to be seen.

During FY15, KFL has made investment in fixed assets amounting Rs.26 crore (13% of networth as on March 31, 2015) in purchase of agriculture land from promoters with a view to develop additional source of income from agriculture/tourism related activities.

Resource profileThe resource profile is concentrated towards NCDs which constitutes around 84% as on March 31, 2015 and rest is towards bank borrowings. The amount of privately placed NCDs as on March 31, 2015, has come down to 49% from 83% as on March 31, 2014. In order to meet the funding requirement for redemption of NCDs, the company raised Rs.700 crore via public issue of NCDs and has planned for fresh issues aggregating around Rs.500 crore during FY16.

Geographical concentrationThe loan portfolio is concentrated towards South India primarily in Tamil Nadu (46%), Kerala (37%) and Karnataka (12%) with


rest from Maharashtra as on March 31, 2015. With addition of 104 branches inFY15, total number of branches stood at 895 branches as on March 31, 2015. Though the share of other states contributes less to the loan portfolio, the company has been making consistent efforts to increase the loan portfolio by way of expanding the branch network and addition of new branches in other geographies.

Intense competition in the gold loan businessThe NBFC sector plays an important role in broadening the access to the financial services and represents a heterogeneous group of companies separated by their type of activity, organizational structure, size and portfolio-mix. The gold loan financing NBFCs have increased their scale of operations substantially during the last three years with a high double-digit growth witnessed by the leading players. The high growth achieved by the gold loan companies in a short term has led to a slew of regulations from the RBI which may impact the business volumes in the near term. Geographically, the gold loan financing industry is predominantly placed in the southern India with an active interest of both the South India-based banks and the large NBFCs operating out of this region. While the companies are gradually increasing their operations in the other parts of India, southern India is expected to remain as the primary market for gold loans.

Regulatory ScenarioGold loan NBFCs have seen significant change in regulatory environment in the past two years. RBI has imposed stringent regulatory norms for gold loan NBFCs by removing the priority sector status for the gold loan NBFCs, capping the bank’s exposure to the gold loan NBFCs from 10% to 7.5% of the bank’s net owned funds and bringing in LTV cap of 75% against the pledged gold jewelry. Also during FY15, RBI came out with new set of regulations for raising Retail NCDs liberalizing the rules laid out earlier. There is scope for improvement in level of regulatory compliance with respect to adherence to RBI guidelines.

Financial Performance(Rs. Cr)

For the period ended / as at March 31, 2013(12m, A)

2014(12m, A)

2015(12m, A)

Working ResultsInterest Income 235 260 256Total Income 236 262 258Interest Expenses 117 149 145Net Interest Income 117 112 112Operating Expenses 53 72 98Total Provision / Write offs 0.8 0.5 5.5PBT 64 41 9PAT 39 26 5Financial PositionTangible Net worth 146 175 199Total Borrowings 1,162 1,297 1,718Total Loan Portfolio 989 1,032 1,196Total Assets 1,321 1,477 1,921Key Ratios (%)SolvencyOverall Gearing (times) 7.95 7.42 8.62Capital Adequacy Ratio (CAR) (%) 15.06 19.20 19.13Tier I CAR (%) 12.94 13.72 12.98Interest Coverage (times) 1.55 1.28 1.07ProfitabilityNet Interest Margin (NIM) 10.78 7.99 6.54Return on Total Assets (ROTA) 3.61 1.89 0.31


Operating expenses to Total Assets 4.90 5.14 5.74Asset QualityGross NPA Ratio (%) 0.31 0.17 0.53Net NPA Ratio (%) 0.28 0.14 0.21Net NPA to Net worth (%) 1.89 0.83 1.29

A – Audited

Analyst ContactName: Mr. P. Edwin IrudayarajTel: 044-2849 0876Cell: + 91 99402 03610Email: [email protected]

(This follows our brief rationale for entity published on 23 December, 2015)

Disclaimer:CARE’s ratings are opinions on credit quality and are not recommendations to sanction, renew, disburse or recall the concerned bank facilities or to buy, sell or hold any security. CARE has based its ratings on information obtained from sources believed by it to be accurate and reliable. CARE does not, however, guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. Most entities whose bank facilities/instruments are rated by CARE have paid a credit rating fee, based on the amount and type of bank facilities/instruments.


CONTACTHead Office Mumbai

Mr. Sanjay Kumar Agarwal Mr. Amod KhanorkarMobile: + 91 8108007676 Mobile: + 91 9819084000E-mail: [email protected] E-mail: [email protected]

CREDIT ANALYSIS & RESEARCH LIMITEDCorporate Office: 4th Floor, Godrej Coliseum, Somaiya Hospital Road, Off Eastern Express Highway, Sion (East), Mumbai - 400 022.Tel: +91-22-6754 3456 | Fax: +91-22-6754 3457 | E-mail: [email protected] | Website: www.careratings.com

AHMEDABADMr. Mehul Pandya32, Titanium, Prahaladnagar Corporate Road,Satellite, Ahmedabad - 380 015Cell: +91-98242 56265Tel: +91-79-4026 5656E-mail: [email protected]

BENGALURUMr. Dinesh SharmaUnit No. 1101-1102, 11th Floor, Prestige Meridian II,No. 30, M.G. Road, Bangalore - 560 001.Cell: +91-99000 41975Tel: +91-80-4115 0445, 4165 4529E-mail: [email protected]

CHANDIGARHMr. Sajan Goyal2nd Floor, S.C.O. 196-197, Sector 34-A,Chandigarh - 160 022.Cell: +91 99888 05650Tel: +91-172-5171 100 / 09Email: [email protected]

CHENNAIMr. V Pradeep KumarUnit No. O-509/C, Spencer Plaza, 5th Floor,No. 769, Anna Salai, Chennai - 600 002.Cell: +91 98407 54521Tel: +91-44-2849 7812 / 0811Email: [email protected]

COIMBATOREMr. V Pradeep KumarT-3, 3rd Floor, Manchester SquarePuliakulam Road, Coimbatore - 641 037.Cell: +91-98407 54521Tel: +91-422-4332399 / 4502399Email: [email protected]

HYDERABAD Mr. Saikat Roy401, Ashoka Scintilla, 3-6-502, Himayat Nagar,Hyderabad - 500 029.Cell : + 91 9820998779Tel: +91-40-4010 2030E-mail: [email protected]

JAIPURMr. Rakesh Jayaraman304, Pashupati Akshat Heights, Plot No. D-91,Madho Singh Road, Near Collectorate Circle,Bani Park, Jaipur - 302 016.Cell: +91 – 76655 96136Tel: +91-141-402 0213 / 14E-mail: [email protected]

KOLKATAMs. Priti Agarwal3rd Floor, Prasad Chambers, (Shagun Mall Bldg.)10A, Shakespeare Sarani, Kolkata - 700 071.Cell: +91-98319 67110; Tel: +91-33- 4018 1600E-mail: [email protected]

NEW DELHIMs. Swati Agrawal13th Floor, E-1 Block, Videocon Tower,Jhandewalan Extension, New Delhi - 110 055.Cell: +91-98117 45677; Tel: +91-11-4533 3200E-mail: [email protected]

PUNEMr. Rahul Patni9th Floor, Pride Kumar Senate,Plot No. 970, Bhamburda, Senapati Bapat Road,Shivaji Nagar, Pune - 411 015.Cell: +91-78754 33355; Tel: +91-20- 4000 9000E-mail:[email protected]

CIN - L67190MH1993PLC071691

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kosamattam finance limited - careratings.com cr esear ed kosamattam finance limited ratings...

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