MAKING MARKE TSFUN
BCNTIO
TEET R
YEARS
VKC Credit and Forex Services Ltd
CRISIL SME Fundamental Grade 3/5 (Good)
January 201 3
CRISIL SME FundamentalGrading
CRISIL SME FundamentalGrading
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The CRISIL SME fundamental grade reflects the fundamentals of the company as compared to other SMEs in India.
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This report has been sponsored by the National Stock Exchange of India Ltd. A CRISIL SME Fundamental Grading is a one-time assessment and reflects CRISIL's current opinion on the fundamentals of the graded equity issue. A CRISIL SME Fundamental Grading is neither an audit of the issuer by CRISIL nor is it a credit rating. Every CRISIL SME Fundamental Grade is based on the information provided by the issuer or obtained by CRISIL from sources it considers reliable. CRISIL does not guarantee the completeness or accuracy of the information on which the grading is based. A CRISIL SME Fundamental Grade is not a recommendation to buy / sell or hold the graded instrument; it does not comment on the issue price, future market price or suitability for a particular investor.
(One-time assessment)
MAKING MARKE TSFU
NC
TIONBET
RTE YEARS
VKC Credit and Forex Services Ltd
CRISIL SME Fundamental Grade 3/5 (Good)
January 11, 2013
1
Grading summary
CRISIL has assigned a CRISIL SME fundamental grade of ‘SME 3/5’ (pronounced ‘SME three on five') to the proposed IPO of VKC Credit and Forex Services Ltd (VKC). This SME fundamental grade indicates that the fundamentals of the company are good compared to other SMEs in India.
Key strengths
■ VKC commenced operations as a full-fledged money changer (FFMC) in 1995 and became an authorised dealer - category II (AD-II) in 2009. It largely focuses on corporate customers and sells currency, prepaid cards and travelers’ cheques. It has tie-ups with various reputed corporate such as Bosch, SYNTEL, Mphasis, Patni Computers and Fidelity. The company gets repeat business from these clients; corporate customers contributed over 80% of revenues.
■ It operates through 62 pan-India branches (including four airport counters) and 26 franchisees as of September 2012. The wide network enables the company to service customers across the country and also take advantage of the arbitrage opportunities in currency operations. As of September 2012, 48% of the branches are in South India (the region accounted for 64% of revenues).
■ Travel cards and travelers’ cheques are sold at a rate higher than the inter-bank rate for the day and the profit is realised on settlement with principals, which is at the rate on the day of settlement. In case of travelers’ cheques, the settlement has to be done with the principal within five-six days whereas for prepaid travel cards, the settlement has to be done with the principal within 21 days. The company hedges to avoid foreign exchange risk in these products.
■ VKC has an effective stock and risk management system which helps in reducing inventory holdings and exchange risk in case of foreign currency holdings. It uses an in-house web-based software - Eforex-on-net - which integrates the entire money changing operations including transaction processing, accounting and risk management. All branches log on to the central server hosted at the corporate office to access the application.
The system enables real-time monitoring of information pertaining to fund/stock positions and hedging of foreign exchange sold.
■ The promoters have nearly two decades of experience in foreign exchange operations including their earlier stints in the forex department of the State of Bank of India (SBI). Mr Venkatasubramanian Renganathan (chairman and managing director) and Mr Nageswaran Narayanaswamy (managing director) have served across various functions in the foreign exchange department.
Key challenges
■ VKC, being majorly into money changing services, faces stiff competition from peers such as Thomas Cook, Cox and Kings, Western Union, Centrum Forex, Weizmann Forex and UAE Exchange; these peers also offer other services such as export of foreign currency and inbound/outbound travel arrangements. It also faces intense competition from large commercial banks, predominantly in the corporate segment. At present, commercial banks dominate the foreign exchange market due to their financial strength, wide network of branches and a large customer base.
■ The foreign exchange business is largely volume driven and intense competition forces the players, including VKC, to operate on wafer-thin margins.
■ The company operates its branches under the name VKC Forex but the brand is still not registered. The company had applied to the Registry for Trade Marks for registration of the trade mark/logo but the approval is pending.
Please see disclaimer on inside cover
CRISIL SME FundamentalGrading
Key financials
■ VKC’s operating income declined to ₹10,785 mn in FY12 and ₹5,647 mn in H1FY13 compared to ₹14,137 mn in FY09 primarily due to decline in the sale of currency; the company has not been active in currency exports since FY09. The sale of currency constituted 89% of total operating income in FY12 and H1FY13.
■ The company earns gross profit from the spread between the buy and sell rate for foreign exchange. Its gross profit margin expanded to 2.1% in FY12 and 2.2% in H1FY13 from 1.7% in FY09 as prepaid incentives and outward remittances increased during the same period.
■ Although the gross profit margin was on an increasing trend over FY09-FY12, adjusted PAT margin declined to 0.04% in FY12 from 0.07% in FY09 on account of increase in employee cost as a percentage of sales. According to the management, the company has historically hiked salaries by ~10%. Hence, although the operating income has been on a declining trend over FY09-FY12, employee cost increased at a CAGR of 6% over the same period despite reduction in headcount. Adjusted PAT margin was 0.07% in H1FY13.
Company background
Incorporated in 1995, Chennai-based VKC Credit and Forex Services Ltd (VKC) is in the business of money changing. It is a Reserve Bank of India (RBI)-licensed AD-II. The company provides services such as sale of foreign currency, foreign prepaid travel cards, travelers’ cheques, foreign demand drafts and outward remittances. It has entered into arrangements with American Express for selling travelers’ cheques and has recently launched prepaid forex cards. It has tied up with Axis Bank, Citibank and HDFC Bank for forex prepaid travel cards; VKC holds co- branded cards with them. It has also tied up with ICICI Bank for issue of white-labeled forex prepaid travel cards. For issuance of foreign currency drafts and outward remittances, VKC has arrangements with Axis Bank, Indusland Bank and Yes Bank. About 74% of the currency sale is bulk and inter-branch sales. VKC caters largely to corporate customers (80% of the total revenues) and in a small measure to individuals (20%). The company’s network of 62 branches and over 26 franchisees (operating through 215 outlets) covers 38 cities in India. All the branches operate under the VKC Forex brand. The promoters of the company - Mr Venkatasubramanian Renganathan and Mr Nageswaran Narayanaswamy have over two decades of experience in the forex business and are ex-bankers from the SBI.
(One-time assessment)
MAKING MARKE TSFU
NC
TIONBET
RTE YEARS
VKC Credit and Forex Services Ltd
3
Grading Rationale
Business prospects
■ Forex demand is expected to increase due to significant growth in the tourism sector in India. While foreign tourist arrivals grew at a two-year CAGR of 10.3% to 6.29 mn in CY11, foreign exchange earnings grew at a CAGR of 18.8% to ₹775.9 bn during the same period. The medical tourism sector in India is expected to grow at an annual rate of 30%, making it a US$ 2 bn industry by 2015. This is expected to further increase forex demand.
■ VKC has a track record of 15 years in the forex business. With an extended operational network (present in 38 cities through 62 branches - including four airport counters, and 26 franchisees operating 215 outlets as of September 2012), the company is not only able to service customers across the country but also able to take advantage of the arbitrage opportunities in currency operations.
■ VKC has an effective stock and risk management system which helps in reducing inventory holdings and exchange risk in case of foreign currency holdings. It has an in-house centralised web-based software, Eforex- on-net, which enables real-time monitoring of vital information pertaining to fund/stock positions and hedging of foreign exchange sold.
■ VKC face intense competition from large commercial banks and several money changing operators such as Thomas Cook, Cox and Kings, Western Union, Centrum Forex, Weizmann Forex and UAE Exchange, predominantly in the corporate segment. Besides money changing services, its peers provide other services such as export of foreign currency and inbound/outbound travel arrangements. The foreign exchange business is largely volume driven and intense competition forces all the players, including VKC, to operate on wafer-thin margins.
■ The company operates its branches under VKC Forex brand, but the brand is yet to be registered. It has applied to the Registry for Trade Marks for registration of the trade mark/logo but the approval is pending.
Management and corporate governance
■ The promoters are ex-bankers from the SBI with more than two decades of experience in the forex industry. They are involved in the day-to-day business operations. VKC Forex has hired qualified personnel at the senior management positions. For instance, Mr Srikrishna, a post graduate diploma holder from the Indian Institute of Management, Calcutta, is Senior VP, Marketing. Most of the senior management personnel have been associated with the company for a fairly long time.
■ The board comprises six directors, of whom three are independent. We believe the size of the board is appropriate for the current size of the company and its business plans. Apart from the two promoters, Mr Jagadesh Sekar was appointed in September 2012 as a non-executive director on VKC’s board. He has over 12 years of experience and heads the marketing activity at VKC Finsoft. Though independent directors have relevant industry knowledge, they have been associated with VKC only since September 2012.
■ Our interactions with the company indicate that there are no major corporate governance issues. The company has been fairly transparent in providing data. It has recently hired a whole-time company secretary to take care of legal and compliance matters.
■ Since the past three-four years, VKC has outstanding non-interest bearing loans given to group companies – VKC Finsoft Solutions and Veeyen Associates. As of September 2012, VKC has an outstanding loan of ₹81.5 mn. As per our interaction with the management, this is expected to be received along with the interest in next six-nine months.
Please see disclaimer on inside cover
CRISIL SME FundamentalGrading
Financials
■ VKC’s operating income declined to ₹10,785 mn in FY12 and ₹5,647 mn in H1FY13 compared to ₹14,137 mn in FY09 primarily due to the decline in sale of currency; the company has not been active in currency exports since FY09. The sale of currency constituted 89% of total operating income in FY12 and H1FY13.
■ The company earns gross profit from the spread between the buy and sell rate for foreign exchange. Its gross profit margin expanded to 2.1% in FY12 and 2.2% in H1FY13 from 1.7% in FY09 as prepaid incentives and outward remittances increased during the same period.
■ Although the gross profit margin increased over FY09-FY12, adjusted PAT margin declined to 0.04% in FY12 from 0.07% in FY09 on account of increase in employee costs as a percentage of sales. According to the management, the company has historically hiked salaries by ~10%. Hence, although operating income was on a declining trend over FY09-FY12 and there was a reduction in head count, employee costs increased at a CAGR of 6% over the past four years. Adjusted PAT margin was 0.07% in H1FY13.
■ VKC’s working capital cycle has increased to seven days in H1FY13 from three days in FY09. While inventory remained stable at one day, debtor days increased to 14 days in H1FY13 from five days in FY09. Creditor days also increased to 10 days in H1FY13 from four days in FY09.
■ VKC’s net debt to equity marginally declined to 0.6x in H1FY13 from 0.7x in FY09 but increased from 0.4x in FY12. However, its interest coverage ratio increased to 1.6x in H1FY13 from 1.4x in FY12.
■ The company has registered an improvement in its return on capital employed (RoCE) in the past few years – from 6.3% in FY10 to 10.9% in H1FY13. This was due to increase in asset turnover and improvement in margins.
We expect VKC’s RoCE to increase from current levels due to further improvement in operating margins and higher asset turnover.
Peer comparison
Parameters VKC Weizmann Forex Wall Street Finance Transcorp International
Product / service Offers money changing services; foreign exchange services such as foreign prepaid travel cards, travelers’ cheques, foreign demand drafts, remittances
Offers money changing services; foreign exchange services, demand draft, telegraphic transfer, prepaid card and travelers’ cheques
Offers foreign exchange services, travelers’
cheques and other money transfer services
Offers financial services;
foreign exchange services, money transfer, automobile rentals and investment advisory services
Market capitalisation
(₹ mn) Unlisted 1,156 153 177
Revenue (₹ mn) 10,785 (FY12) 42,251 (FY12) 318 (FY12) 6,722 (FY12)
Revenue Growth
(FY10-12 CAGR) -9.4% NA -3.3% NM
Average EBITDA margin
(FY10-12) 0.3% 0.7% (FY12) -3.2% 5.0%
Average PAT margin
(FY10-12) 0.03% 0.5% (FY12) -3.6% 3.7%
Note: Standalone financials, peers follow different revenue recognition policy
Financials of VKC are not strictly comparable to peers as they also offer other services besides money changing Source: Industry, CRISIL Research
(One-time assessment)
MAKING MARKE TSFU
NC
TIONBET
RTE YEARS
VKC Credit and Forex Services Ltd
5
Note: Standalone financials
All figures have been reclassified as per CRISIL standards Source: CRISIL Research
Income statement Balance Sheet
(₹ mn) FY09 FY10 FY11 FY12 Sep-12 (₹ mn) FY09 FY10 FY11 FY12 Sep-12
Operating incom e 14,137 13,151 10,988 10,785 5,647 Liabilities
EBITDA 45 23 32 32 21 Equity share capital 53 53 53 53 53
EBITDA margin 0.3% 0.2% 0.3% 0.3% 0.4% Reserves 84 87 93 97 102
Depreciation 3 7 7 7 4 Minorities - - - - - EBIT 42 16 25 25 17 Net w orth 137 140 146 150 155
Interest 19 12 20 17 11 Convertible debt - - - - - Operating PBT 22.4 4.5 4.4 7.8 6.8 Other debt 162 88 127 144 193
Other income - - - - - Total debt 162 88 127 144 193
Exceptional inc/(exp) - - - - - Deferred tax liability (net) 6 5 2 3 4
PBT 22.4 4.5 4.4 7.8 6.8 Total liabilities 306 233 275 297 352
Tax provision 11.9 1.8 (0.2) 4.0 2.7 Assets Minority interest - - - - - Net fixed assets 123 46 44 41 44
PAT (Reported) 10.5 2.7 4.6 3.8 4.2 Capital WIP - - - - - Less: Exceptionals - - - - - Total fixed assets 123 46 44 41 44
Adjusted PAT 10.5 2.7 4.6 3.8 4.2 Investments - 1 1 1 1
Current assets Ratios Inventory 46 27 26 24 43
FY09 FY10 FY11 FY12 Sep-12 Sundry debtors 184 201 315 358 437
Grow th Loans and advances 21 24 25 29 25
Operating income (%) (1.3) (7.0) (16.4) (1.9) NA Cash & bank balance 71 71 60 83 103
EBITDA (%) 35.6 (48.4) 36.8 2.1 NA Marketable securities - - - - - Adj PAT (%) 1.7 (74.1) 68.8 (17.1) NA Total current assets 322 323 426 494 609
Adj EPS (%) (4.1) (74.1) 68.8 (17.1) NA Total current liabilities 139 136 196 239 301
Net current assets 183 187 230 255 308
Profitability Intangibles/Misc. expenditure - - - - - EBITDA margin (%) 0.3 0.2 0.3 0.3 0.4 Total assets 306 233 275 297 352
Adj PAT Margin (%) 0.07 0.02 0.04 0.04 0.07 RoE (%) 8.6 2.0 3.2 2.6 5.5 Cash flow RoCE (%) 15.3 6.3 9.8 8.9 10.9 (₹ mn) FY09 FY10 FY11 FY12 Sep-12 RoIC (%) 14.1 7.6 13.5 10.0 6.5 Pre-tax profit 22 4 4 8 7
B/S ratios Total tax paid (8) (3) (2) (3) (2)
Inventory days 1.2 0.8 0.9 0.8 1.4 Depreciation 3 7 7 7 4
Creditors days 4 4 7 8 10 Working capital changes 40 (4) (55) (1) (33)
Debtor days 5 6 10 12 14 Net cash from operations 57 4 (46) 10 (24)
Working capital days 3 3 6 6 7 Cash from investments Current ratio (x) 2.3 2.4 2.2 2.1 2.0 Capital expenditure (80) 70 (5) (4) (6)
Debt-equity (x) 1.2 0.6 0.9 1.0 1.2 Investments and others - (1) - - -
Net debt/equity (x) 0.7 0.1 0.5 0.4 0.6 Net cash from investments (80) 70 (5) (4) (6)
Interest coverage 2.2 1.4 1.2 1.4 1.6 Cash from financing Equity raised/(repaid) 15 - - - -
Per share Debt raised/(repaid) 22 (74) 39 17 49
FY09 FY10 FY11 FY12 Sep-12 Dividend (incl. tax) - - - - - Adj EPS (₹) 2.0 0.5 0.9 0.7 0.8 Others (incl extraordinaries) 6 1 1 1 0
CEPS 2.6 1.8 2.2 2.1 1.5 Net cash from financing 43 (74) 40 18 50
Book value 25.8 26.5 27.5 28.3 29.2 Change in cash position 20 (1) (11) 24 19
Actual o/s shares (mn) 5.3 5.3 5.3 5.3 5.3 Closing cash 71 71 60 83 103
Please see disclaimer on inside cover
CRISIL SME FundamentalGrading
IPO Details
The proposed IPO is in the form of fresh issue of shares up to ₹160 mn. The issue also includes an offer for sale of up to 1.8 mn shares by the selling shareholders. VKC will not receive any proceeds from the offer for sale. It plans to use the maximum amount for working capital requirements (₹120 mn) mainly for the day-to-day operations; the remaining to be used for general corporate purposes and to meet issue expenses (not available at the time of grading).
Pre-IPO shareholding pattern
Name No of shares Percentage
Promoter shareholding (A) 5,300,000 100.00
Institutional (B) - -
Non-institution (C) - -
Total (A+B+C) 5,300,000 100.00
Source: DRHP
Issue details
Type of issue Fresh issue and offer for sale
Issue size ₹160 mn
Face value ₹10
Price band Not available at the time of grading Lead managers Inga Capital Private Ltd
Legal advisors to the issue Khaitan & Co
Registrar to the issue Link Intime India Private Ltd Source: DRHP
Objects of issue
Particulars
Total fund requirement
(₹mn)
Amount deployed till December 2012
(₹mn)
Estimated amount to be utilised from net
proceeds (₹mn)
Working capital requirements 120 - 120
General corporate purposes# - - -
To meet the Issue expenses# - - -
Total* 160 - 160
* Total does not include expense for general corporate purpose and issue related expenses; #not yet available Source: DRHP
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R YEARS
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