Detailed Rationale

CRISIL Ratings has assigned its ‘CRISIL A1+’ rating to the commercial paper facility of the company while reaffirming its ‘Provisional CRISIL AA(CE)/Stable/CRISIL A1+’ ratings on the bank facilities of SG Finserve Limited (SG Finserv; erstwhile known as Moongipa Securities Limited), which are proposed to be backed by a corporate guarantee of APL Infrastructure Private Limited (AIPL; rated 'CRISIL AA/Stable/CRISIL A1+'), a group company which holds 31.17% stake in APL Apollo Tubes Limited (rated 'CRISIL AA/Stable/CRISIL A1+'). AIPL is likely to provide a guarantee to the long term bank facilities of SG Finserv, hence the rating of ‘Provisional CRISIL AA(CE)/Stable’. The provisional rating is based on the confirmation by the client to share the required documents in line with the structure submitted to CRISIL Ratings, post which the provisional rating will be converted into a final rating. The guarantee-backed rating factors in the proposed unconditional and irrevocable corporate guarantee by AIPL. AIPL will also monitor the cash flow of SG Finserv to ensure all debt obligations are met on the due date.   

 

SG Finserv is a group company of the APL Apollo group, whose flagship company is APL Apollo Tubes Limited. Currently, the promoters directly hold around ~50.88% stake in the company. The promoters of APL Apollo group acquired SG Finserv in 2022.

 

The unsupported long-term rating and short-term rating reflect the standalone business and financial risk profiles of SG Finserv along with expectation of strong support from APL Apollo group. Post the acquisition, the promoters have infused Rs 545 crore of equity in the company as on December 31, 2022 and have additional plans to infusing equity to the tune of ~ Rs 150 crore in the next round of equity infusion which is expected to complete in the current fiscal itself. SG Finserv, an NBFC, is started to cater to the funding requirements of the dealers of APL Apollo Tubes in its first phase of growth plans. Further, SG Finserv also plans to cater to the suppliers of the group. This is expected to support the overall working capital cycle of the flagship entity, APL Apollo Tubes. In the next phase of growth, SG Finserv intends to cater to the distributor network of the dealers. The company started it operations in September 2022 and has disbursed ~ Rs 2,125 crore till December 23, 2022, while the company has also managed to collect ~Rs 1591 crore during the same time period. The AUM as of December 30, 2022 is expected to be close to Rs 700 crores. The delinquencies remain nil as on December 23, 2022. The strategic importance of SG Finserv to the overall group therefore remains very high. Further, the group will extend support to SG Finserv in terms of details around the dealer network which would form a critical component of the underwriting process as well as enforce stop supply in the event of any delay from the network of APL Apollo. CRISIL Ratings expects managerial, operation and financial support to SG Finserv to continue over the medium term.

Analytical Approach

CRISIL Ratings has analysed the standalone business and financial risk profiles of SG Finserv along with expectation of strong support from APL Apollo group. The APL Apollo group comprises of the flagship operating company APL Apollo Tubes Limited (AATL) (rated: ‘CRISIL AA/Stable/CRISIL A1+’) and its holding company AIPL.

 

The ratings are based on CRISIL Ratings' criteria for rating instruments backed by guarantees. The 'CE' (credit enhanced) suffix reflects the payment structure, which is designed to ensure full and timely payment to lenders on account of the corporate guarantee by AIPL.

Key Rating Drivers & Detailed Description

Strengths:

Continuing, unconditional and irrevocable corporate guarantee by AIPL

The credit-enhanced ratings of SG Finserv are based on an unconditional, continuing, and irrevocable guarantee from AIPL. The payment structure is designed to ensure full and timely payment to the lender. The proposed guarantee also contains clear mechanism for ensuring repayments to the lenders on the due date by way of well-defined structure. The proposed structure entails that SG Finserv, fund the repayment account atleast at t-2 (t being the due date) days prior to the due date, failing which the guarantee will be invoked by lenders and AIPL will have to fund the account by t-1, thus ensuring the repayments happen on due date. Effectively, the guarantor, AIPL, will pay, on the due due date, any amount due and payable by SG Finserv in relation to these instruments, in case of any shortfall in account balance one day prior to debt repayment date by SG Finserv. The guarantee and undertaking together cover the principal, interest and other amounts payable under the loan. The provisional rating is based on the confirmation by the client to share the required documents in line with the structure submitted to CRISIL Ratings, post which the provisional rating will be converted into a final rating.

 

Strategic importance to the APL Apollo group

AIPL is a holding company with 31.17% stake in AATL (with market value of Rs ~8000 crore as on September 30, 2022). The APL group has a vintage of over 30 years. Since AIPL is purely a holding, the group draws strength from its strongest operating company i.e., APL Apollo Tubes Limited (AATL; CRISIL AA/ Stable/ CRISIL A1+).  AATL with its 11 manufacturing units and geographical diversity, is the largest and the fastest growing ERW steel tubes/ structural products manufacturers in India, with current production capacity of 2.6 million MTPA. AATL earned a revenue of Rs 13,071 crores in fiscal 2022 against revenue of Rs 8505 crores in previous fiscal, primarily driven by average realisation rising by almost 43% year-on-year, supported by volumetric growth of almost 7% despite impact of pandemic in first quarter. Post completion of the ongoing capital expenditure (capex), the capacity of the company is going to increase to 4.1 million MTPA further strengthening the business risk profile of AATL and hence APL group. However, timely completion of the capex is still a monitorable. In spite of the planned capex, AATL still remains a financially strong company with strong capital structure reflected by gearing of 0.25 time and healthy debt coverage ratio of 22.3 times as of March 31, 2022.

 

SG Finserv will primarily be engaged in the activities of channel financing for the dealers of AATL and further expand to offering the same to the retailers. Further, the NBFC will also provide bill discounting facilities to the creditors of AATL. The facilities offered will be for a tenor of upto maximum 90 days with an ROI of 12% to 15%. In addition to the proposed corporate guarantee to be given by AIPL, to SG Finserv, the NBFC will also be benefitted by way of Letter of Comfort from AATL. SG Finserv has started its operations since September, 2023 and has disbursed over Rs 2125 crore to over 40 dealers. CRISIL Ratings believes that the NBFC will benefit from the comfort provided by the group entities and promoters in the form of cost of borrowing.

 

SG Finserv will have strong operational synergies with AATL and its subsidiaries and will only lend to the dealers and vendors of AATL in the near term. Also, the entity will share the same treasury team with AATL and since the borrower base for SG Finserv is linked to AATL there will be negligible marketing expense thus reducing the overall operating expenses. AATL’s sales and marketing team will also look after the collections of SG Finserv in the current stage of operations. SG Finserv will also integrate its systems with AATL to get timely data on the sales done to the dealers and the overall outstanding, also a stop-supply arrangement will be maintained, wherein the supply to the dealer will stop in case there is an overdue. Even in case of loans to retailers, there will be system integration and stop supply arrangements with the dealers wherein the dealers will also provide an FLDG of upto 20% for the loans given by SG Finserv. Further, the promoters over the long term will continue to hold atleast ~60% stake in the NBFC.

 

Healthy capitalisation metrics for the current scale of operations

Post the acquisition, the promoters have infused Rs 545 crore of equity in the company as on September 30, 2022 and have additional plans to infusing equity to the tune of ~ Rs 150 crore in the next round of equity infusion which is expected to complete in the current fiscal itself. The equity round is expected to be led by the promoters. Over the longer term, the promoters are expected to continue to hold majority and controlling stake in the company. On a steady state basis, the gearing metrics for the company are expected to remain under 3 times. CRISIL Ratings expects timely capital infusion from promoters to continue to support growth and in the event of distress.

 

Weakness:

Nascent stage of operations

SG Finserv has recently started its operations from September 1, 2022. In the short period the entity has made disbursements of over Rs 2125 crore till date. While the company has a vintage of these borrowers from AATL but on the standalone basis, SG Finserv is at a very nascent stage of operations and the systems are processes are still being developed and established.

 

SG Finserv will primarily be engaged in the activities of channel financing for the dealers of AATL and further expand to offering the same to the retailers. Further, the NBFC will also provide bill discounting facilities to the creditors of AATL. The facilities offered will be for a tenor of upto maximum 90 days with an ROI of 12% to 15%. Further, AATL has a vintage of these dealers of over 3 decades and for the last decade the bad debts within AATL have remained within 0.2%. CRISIL Ratings believes that the NBFC will continue to benefit from the established track record of the group. Consequently, delinquencies are expected to remain under control. However, given the lending segment of the company and nascent stage of business the company will be exposed to concentration risk. Any higher than anticipated uptick in the asset quality metrics will remain a key monitorable.

Liquidity: Strong

SG Finserv has a free cash balance of Rs 79.82 crore as on September 29, 2022 with no debt repayment obligation. SG Finserv will be raising short-tenured debt in future and will also be lending for a short tenor of 30 to 90 days. CRISIL Ratings believes that the client will keep liquidity equivalent to two months of debt repayment requirements on an on-going basis.

Outlook: Stable

CRISIL Ratings believes SG Finserv will continue to receive strong support from the APL Apollo Group. The rating will remain sensitive to any change in CRISIL Ratings’ rating on AIPL or APL Apollo Tubes

Rating Sensitivity Factors

Upward Factors:

• Upward change in the credit risk profile of APL Apollo Tubes or AIPL by one notch or higher could have a similar impact on the ratings of SG Finserv

 

Downward factors:

• Downward change in the credit risk profile of APL Apollo Tubes or AIPL by one notch or higher could have a similar impact on the ratings of SG Finserv
• Non-adherence to the terms of transaction structure/payment mechanism

Adequacy of credit enhancement structure

The guarantee that is proposed to be provided by AIPL is unconditional and irrevocable and will cover the entire rated amount for bank loans. The payment structure is designed to ensure full and timely payment to the lender. The proposed guarantee also contains clear mechanism for ensuring repayments to the lenders on the due date by way of well-defined structure. The proposed structure entails that SG Finserv, fund the repayment account atleast at t-2 (t being the due date) days prior to the due date, failing which the guarantee can be invoked by lenders and AIPL will have to fund the account by t-1, thus ensuring the repayments happen on due date.

Unsupported ratings: CRISIL A+

CRISIL Ratings has introduced the suffix CE for instruments having explicit credit enhancement feature in compliance with the Securities and Exchange Board of India circular dated June 13, 2019.

Key drivers for unsupported ratings

For arriving at the unsupported ratings, CRISIL Ratings has considered the standalone business and financial risk profiles of SG Finserv. CRISIL Ratings has also applied its group notch-up framework to factor in the extent of support available from APL Apollo Tubes group.

 

The ratings factor in SG Finserv strategic importance to the APL Apollo group’s flagship company, APL Apollo Tubes and the strong financial flexibility of the promoters. The ratings also reflect the high operational linkages with APL Apollo Tubes since SG Finserv will be catering to the dealers and suppliers of the company. However, the rating is constrained by nascent stage of operations.

Additional disclosures for the provisional rating

CRISIL Ratings is yet to receive the following documents and understands from the issuer that the same are in the process of being executed shortly:

 

• Executed guarantee deed
• Loan agreement

 

The provisional rating shall be converted into a final rating after receipt of transaction documents duly executed within 90 days from the date of issuance of the instrument.

 

The final rating assigned after conversion shall be consistent with the available documents. In case of non-receipt of the duly executed transaction documents within the above-mentioned timelines, CRISIL Ratings may grant an extension of up to 90 days, in line with its policy on provisional ratings.

Rating that would have been assigned in the absence of the pending documentation

In the absence of pending documentation considered while assigning provisional rating as mentioned above, CRISIL Ratings would have assigned a rating of ‘CRISIL A+’

Risks associated with the provisional rating:

The 'Provisional' prefix indicates that the rating is contingent on occurrence of certain steps or execution of certain documents by the issuer, as applicable. If the documents received and/or completion of steps deviate significantly from the expectations, CRISIL Ratings may take an appropriate action, including placing the rating on watch or changing the rating/outlook, depending on the status of progress on a case to case basis. In the absence of the pending steps / documentation, the rating on the instrument would not have been assigned ab initio.

About the Company

SG Finserv Limited (SG Finserv), originally established in 1994, has an NBFC license and is also registered as a SEBI broker. Earlier, SG Finserv provided a wide range of services associated with Broking, Distribution, Investment Research, Online Trading, Wealth management, Investment Banking and Insurance. However, the company had ceased to do any business in the recent past. The promoters, Mr. Rahul Gupta and Mr. Rohan Gupta acquired 56.25% stake in SG Finserv on August 20, 2021, post which an open offer was made which concluded on July 22, 2022. The promoters also have applied to RBI for approval to rename the company to SG Finserv Limited.

 

About the Guarantor

Operating since 2006, APL Infrastructure Private Limited is a holding company with limited operations in the APL Group. AIPL enjoys healthy financial flexibility from its stake in APL Apollo Tubes Limited (valued at ~Rs 8,000 crore as on September 30, 2022). The company derives majority of its business from trading of shares and steel pipes, as well as dividend from subsidiaries and rental income. The APL group has been in business for over 30 years.

About the Group

Established in 1986, APL Apollo is the largest and one of the fastest growing ERW steel tubes/structural products manufacturers in India, with a current production capacity of 2.6 million tonne per annum. The company is a part of the Sudesh group and is promoted by Mr. Sanjay Gupta.

 

Currently, APL Apollo has 10 manufacturing facilities, with 3 plants in Sikandrabad (Uttar Pradesh); 1 each in Hosur (Tamil Nadu), Murbad (Maharashtra), Raipur (Chhattisgarh), Hyderabad (Telangana), Dujana (Uttar Pradesh); and 2 plants in Bangalore (Karnataka). It has also established a wide 3-tier distribution network with around 800+ dealers.

List of covenants

• The Guarantor irrevocably and unconditionally:
• Guarantees that at least two (2) Working Day prior to any Payment Date, borrower has to deposit the Payment Account an amount equivalent to the amount to be paid to the Lender on the Payment Date, and if borrower will not fund the payment account till 6 pm on two (2) Working Day prior to any Payment Date, guarantee will be invoked and in that case guarantor has to fund the account a day prior to the actual payment date, and guarantor will fund the Payment Account an amount equivalent to the amount to be paid to the Lender on the Payment Date.
• Notwithstanding anything contained in the guarantee deed, the non-issuance of demand notice or the lender not invoking the guarantee shall not absolve the obligations of the guarantor to pay its obligation on the payment date and even if bank has not issued the demand notice / invoked the guarantee as per clause (b) above, the guarantor shall pay its obligation forthwith and in any case on or before the payment date in the event of failure on the part of the issuer/borrower in repaying the same to the bank (acting for itself and on behalf of and for the benefit of the lender) on payment date/due date. 
• The Guarantor shall at all times until the expiry of the Final Settlement Date, except as may otherwise be agreed in writing by the lender, undertake to ensure that all loans from shareholders including, without limitation, any payments in relation thereto shall at all times until the expiry of the Final Settlement Date be subordinated to the lender;
• Without the prior written approval of the lender (acting in accordance with Approved Instructions), the Guarantor shall not, at all times until the Obligations are outstanding, (whether directly or indirectly), change the name of the Issuer, without the consent of the lender (acting in accordance with the Approved Instructions); and undertake any Change of Control.

Any other information: Not applicable