Orient Finance rated [SL] BBB - with stable outlook

ICRA Lanka Limited, a wholly owned subsidiary of ICRA Ltd, an associate of Moody’s Investors Service, has assigned an Issuer Rating of ‘[SL] BBB-’ with stable outlook to Orient Finance PLC (OFP or the company).

The rating in Sri Lanka is assigned on an eight-point scale developed specifically for the country, and ranges from ‘[SL] AAA’ to ‘[SL] D’. This rating scale ranks the relative default risk associated with issuers in Sri Lanka.The rating is based on the strength of the Janashakthi Group and the financial, operational and management support OFP is expected to receive from the group. The Janashakthi group took over OFP in Feb - 2011.

The group flagship-Janashakthi Insurance PLC-is the third largest general insurer in Sri Lanka and has a demonstrated track record of profitable operations in a competitive market.

The rating also factors in the experienced and professional management team coupled with the improvements in risk management systems. Moderate leverage and healthy profitability add further comfort to the rating. The key rating constraints are the relatively small size of operations and limited track record for the Janashakthi group in NBFC operations.

OFP Lending operations are mainly into auto financing (84 % of total portfolio), equipment financing (2 % of total portfolio) and factoring (14 % of total portfolio). OFP auto financing portfolio as at Mar-12 comprises of two wheelers (34 %), three wheelers (10 %), cars (16 %), and other four wheelers (39 %). OFP operates a traditional branch based lending model with marketing executives assigned at branch level to source business. 100 % of OFP’s lending is on fixed rates, though its factoring portfolio carries re-pricing flexibility due to the short term nature of the business.

ICRA also notes that the factoring portfolio carries a high concentration risk with the top 10 customers accounting for more than 45 % of the total factoring portfolio (26 % of net worth). OFP has embarked on a rapid expansion phase with plans to introduce new products including pawning and group lending which would expose the company to higher financial and operational risks over the medium term.

It would be important to maintain adequate capitalization and strict control over asset quality, while growing profitably during this phase, given the highly competitive operating environment. The asset quality indicators in fresh originations are good; however, the portfolio is largely unseasoned. While conversion into a licensed finance company (LFC) in July 2012 enables OFP to raise resources from the public, it would be largely for short tenures.

It would be important to expand its institutional relationships to tap longer duration funds and maintain an adequate liquidity profile. Even as profitability in fiscal 2012 was strong, incremental interest margins could shrink in line with the volatile interest rate scenario.