ICRA downgrades IFCI’s multiple debt instruments to [ICRA]A- and [ICRA]A1; long term outlook remains negative

ICRA has downgraded the long-term rating on the long-term bank borrowing, bond programme and Non-convertible debenture progamme of IFCI Limited (IFCI) from [ICRA]A (pronounced ICRA A) to [ICRA]A- (pronounced  ICRA A minus). ICRA has also downgraded the short-term rating on commercial paper programme of IFCI to [ICRA]A1 (pronounced ICRA A one) from [ICRA]A1+ (pronounced ICRA A one plus). The outlook on the long-term ratings has been retained at ‘negative’.

Says Rohit Inamdar, Senior Vice President, ICRA, “The rating downgrades take into account the continued deterioration in IFCI’s profitability and capitalisation ratios. With a negative net interest income (NII) during Q1FY2018 and elevated credit provisions, IFCI continued to report net losses in Q1FY2018.” 

Though the company reported overall capitalisation of 15.2% as on June 30, 2017, its Tier I capital at 9.92% was lower than the regulatory minimum of 10% as neither the expected capital infusion from the Government of India (GoI) nor the divestment of non-core investments have materialised so far during the current fiscal.  The negative outlook on the ratings reflects ICRA expectations that the entity’s asset quality is likely to weaken further and its NII will remain under pressure given the capital constraints to expand the portfolio. Further, with elevated credit provisions, the overall profitability and capitalisation will remain dependent on the extent of recoveries, divestments and fresh capital infusion. Also, IFCI’s ability to borrow at competitive rates will be critical for it to extend competitive lending rates, and for the sustainability and growth of its business. Slower progress on above issues will be a rating negative that could lead to a further downgrade in ratings. Conversely, the rating outlook may change to stable if IFCI is able to demonstrate large recoveries, raise funds through divestments or improve its capital ratios sufficiently above regulatory levels to fund growth in advances and improve operating profitability. 

On the positive front, the institution’s ratings continue to be supported by its sovereign ownership, with 55.5% of equity being held by the GoI as on June 30, 2017. The ratings are also supported by the entity’s comfortable liquidity profile given the long term nature of its liabilities.

As for key financial parameters, during Q1FY2018, IFCI’s advances registered a degrowth of 13.23% on Y-o-Y basis and 2.75% on sequential basis. While sanctions and disbursements increased on a YoY basis during Q1FY2018 on account of the lower base in Q1FY2017, they remained considerably lower than the last few years. IFCI’s asset quality continued to deteriorate with fresh slippages of Rs. 838 crore, which was considerably higher than the recoveries of Rs. 308 crore during the quarter. As a result, its gross and net NPAs increased to 34.7% and 28.9% respectively as on June 30, 2017 from 31.9% and 27% respectively as on March 31, 2017. IFCI’s solvency ratio (net NPA/net worth) weakened further to 113% as on June 30, 2017 from 103.50% as on March 31, 2017.

IFCI reported a net loss of Rs. 276.9 crore in Q1FY2018 as against a net loss of Rs. 110.28 crore during Q1FY2017 and a net loss of Rs 458.49 crore during FY2017. With elevated NPA levels, the entity’s interest expenses exceeded its interest income during the year. For Q1FY2018, the entity’s return on average assets (PAT/ATA) stood at -1.81% while its return on equity stood at -10%.

IFCI continues to maintain liquid investments of ~Rs 1,224 crore and undrawn banking lines of Rs. 330 crore, indicating a comfortable overall liquidity profile for near term. However given the committed loan sanctions, IFCI will have to tie-up additional bank facilities in the medium term.

IFCI’s Key Financial Indicators:

Source: IFCI financials and ICRA research; Amount in Rs. crore

All ratios are as per ICRA calculations