SREI Equipment Finance Private Limited

SREI Equipment Finance Private Limited RATING HISTORY Rs. 15 billion, short-term debt programme Amount Outstanding Maturity Rating Outstanding Previous Ratings Mar-10 (in Rs. million) May-2010 September- 2008 Nil A1+ A1+ ICRA has reaffirmed the A1+ (pronounced A one plus) rating assigned earlier to the Rs. 15 billion, short-term debt programme of SREI Equipment Finance Private Limited (SEFPL). The highest credit quality factors in SEFPL s strong parentage; its wellestablished franchise; a large customer base and superior market knowledge of infrastructure equipment financing segment. SEFPL is a 50:50 joint venture between SREI and BNP Paribas Lease Group (a 100% subsidiary of BNP Paribas rated Aa2 by Moody s Investors Service for its senior debt). The rating also factors in good capitalisation (tier 1 capital 13.59% as on December 31, 2009) and comfortable liquidity profile of the company. In ICRA s view, SREI s strong franchise and market knowledge would help SEFPL grow business volumes profitably in a competitive market. At the same time, the presence of BNP would ensure adequate capital for growth in the short-to-medium term. Over a longer term, the JV may benefit from BNP s experience in international markets through the introduction of new product offerings and improving risk adjusted returns. ICRA has taken note of SEFPL s exposure to a single segment - construction equipment financing segment; however, expected investments in the infrastructure segment would help it support adequate business For complete rating scale and definitions, please refer to ICRA's Website www.icra.in or other ICRA Rating Publications volumes. Although there has been some increase in delinquencies of the company (The gross NPA% has gone up to 2.11% as on March 31, 2010 from 1.49% as on March 31, 2009), the quarter-wise trends show some decline in delinquencies in the last three months ended March 31, 2010. Further, NPAs for the company continue to remain low in relation to the segments in which the company operates. In light of improvement in the operating environment and SREI s good knowledge on the CE segment, ICRA expects the company to maintain good asset quality. SEFPL is likely to maintain comfortable liquidity profile owing to favourable asset liability maturity profile as well as access to a diverse set of investors (though only non-retail investors such as banks and mutual funds). In ICRA s opinion, access to large unutilized bank lines and securitisation market are likely to support the liquidity profile of the company. SEFPL reported a total portfolio of Rs. 59.59 billion as on March 31, 2010 as compared to Rs. 56.47 billion as on March 31, 2009. The bulk of SEFPL s portfolio consists of Heavy Earthmoving & Construction Equipment (76% of the total portfolio as on September 30, 2009), followed by Infrastructure Projects/ Equipments (21%) and balance being commercial vehicles 1. The company has segregated its portfolio into three segments based 1 Commercial vehicles primarily consist of tippers on the exposure value: strategic, SME and retail. Currently, strategic constitutes around 60% of the total portfolio while SME and retail together constitute the balance 40%. SEFPL plans to do a further segregation of customers in order to increase its penetration in the smaller ticket size retail segment. The company operates from the same branch locations as SREI, which is spread across 9 regional offices and 46 branches/field offices. Being a part of the SREI group, the company is able to offer a higher value proposition to its clients across the life cycle of construction equipment in terms of financing, operating leases, valuation of such equipment, options for temporary deployment/ disposal of such equipment and insurance. Further, by virtue of its long lending track record across various geographical regions, the company has acquired a sound understanding of risks associated with infrastructure financing. Such understanding of the business risks, well spread sales network and strong customer base (which is not only a channel for substantial repeat business but is also an important source for reference checks for its credit appraisals) are strong credit positives for the company. These along with the expected investments in the infrastructure sector are likely to ensure adequate business volumes for the company. The company has made total disbursements to the tune of Rs. 60.04 billion in 2009-10 as against Rs. 55.19 billion in 2008-09, registering a growth of 9%. Although

the growth for the company has been relatively lower in 2009-10, it is expected to pick up in the current financial year. The company plans to grow its business volumes by 25% in 2010-11. SEFPL reported a gross NPA% 2 of 2.11% as on March 31, 2010 as compared to 1.49% as on March 31, 2009. Further, the quantum of repossessed assets is sizeable at 1.83% as on March 31, 2010. The deterioration in the asset quality indicators for the company has primarily been on account of the problem of delayed payment faced by some SEFPL s customers in irrigation projects in the state of Andhra Pradesh. Nevertheless, the NPAs continue to remain low in relation to the segment in which SEFPL operates. The company s ability to dispose / redeploy such assets owing to its strong customer base and the group s presence across the value chain also mitigates the risk on such assets to some extent. Going forward, ICRA expects SEFPL to maintain a strict control over its asset quality indicators. Further, the company follows stringent provisioning norms over and above the RBI guidelines and consequently, the net NPAs for the company are relatively lower at 0.75% as on March 31, 2010. SEFPL reported a capital adequacy of 17.90% as on March 31, 2010. However, capital adequacy would be lower if the assigned portfolio added back to the risk weighted assets. The company reported a gearing of 5.95 times as on March 31, 2010 as compared to 6.34 times as on March 31, 2009. In light of adequate internal capital generation, ICRA considers capitalisation to be good. Further, the presence of a strong JV partner like BNP is also likely to ensure capital in case of need. As for liquidity, the company s assets are of relatively shorter tenure than 2 Defined as Gross NPAs as percentage of on balance sheet advances its liabilities, thus leading to a favourable asset liability profile for the company. Access to a large set of investors, large unutilised bank lines and securitisation market are likely to support the liquidity profile of the company. SEFPL has a well-diversified borrowing mix (mostly inherited from the parent SREI). Around 41% of the company s total borrowings as on March 31, 2010 were in the form of term loans from domestic banks and financial institutions, while around 19% was from foreign institutions, which are typically of longer tenure. The balance borrowings were in the form of debentures (17%), working capital from banks (16%) and other sources like mezzanine capital. As most of the borrowings are at floating rates of interest, the rising interest rates in 2008-09 resulted in a significant increase in the cost of funds for the company to 12.30%. However, with the softening of interest rates in 2009-10, the overall cost of funds of the company declined to 9.43%. Over and above the borrowings, SEFPL is also an active player in the securitisation market. The total outstanding against the assigned/securitized portfolio was Rs. 16.48 billion as on March 31, 2010 and the balance sheet advances are around 70% of its total managed assets (Rs. 85.65 billion) as on March 31, 2010. Almost the entire SEFPL s portfolio is at floating rate of interest linked to the company s prime lending rate (PLR). Thus, in line with systemic decline in interest rates and market conditions, the average yield on earning assets for the company declined to 12.44% in 2009-10 from 15.64% in 2008-09. Along with relatively lower decline in cost of funds, this resulted in the reduction of gross interest spreads of the company to 3.01% from 3.34% in the period under review. ICRA expects the spreads to be slightly under pressure owing to pressures on incremental yields. Operating expenses as a percentage of average managed assets for the company were 1.2% in 2009-10. However, considering the smaller construction equipment financing business that SEFPL is likely to focus on and the shift in portfolio mix in favour of retail and SME clients within that, there is likely to be an increase in its operating expenses. The credit provisioning/ losses as percentage of managed assets are currently at about 0.56% for SEFPL. Despite the expected increase in operating expenses, ICRA expects SEFPL s profitability to remain good in light of healthy interest spreads and support in the form of dealer subvention. About the Company SEFPL is a 50:50 joint venture between SREI Infrastructure Finance Limited (SREI) and BNP Paribas Lease Group (BPLG) and became operational in January 2008. As part of the scheme of arrangement, SREI has transferred its equipment finance business and insurance broking business as a going concern on a slump sale basis to SEFPL in 2007-08. The total managed assets of the company increased by 7% to Rs. 85.65 billion as on March 31, 2010 from Rs. 80.19 billion as on March 31, 2009 while the asset base grew by only 4% to Rs. 69.18 billion as on March 31, 2010 from Rs. 66.50 billion as on March 31, 2009. The company reported a 39% rise in PAT levels to Rs. 870.2 million for 2009-10 from Rs. 625 million in 2008-09. Out of SEFPL s six board members, three are from BPLG. Further, three executives from BPLG have also joined the risk management and business development teams. This could help the company strengthen its risk management systems, offer new products and perform riskbased pricing over the long term. About BNP BNP Paribas Lease Group (BPLG) is a 100% subsidiary of BNP

Paribas. BNP Paribas is rated Aa2 for its senior debt by Moody s Investors Service. BPLG specialised in financing investments made by companies and professionals indirectly through partners (manufacturers, importers and vendors of equipment) or directly to its customers. BNP Paribas Lease Group has been in this business for 50 years. BNP Paribas Lease Group is present in Austria, Belgium, France, Germany, Hungary, Italy, the Netherlands, Poland, Portugal, Spain and the United Kingdom. About SREI SREI Infrastructure Finance Ltd. (SREI) was initially incorporated as Sri Radha Krishna Export Industries Ltd. in March 1985. The name was changed first in April 1994 to SREI International Finance Ltd. to reflect its focus on financial services, and then again in 2005 to SREI Infrastructure Finance Ltd. to reflect its focus on the infrastructure sector. The core services of SREI (accounting for around 95% of consolidated revenues) involve the financing of both new and used infrastructure equipment, infrastructure projects and renewable energy. Services provided by subsidiary companies account for the balance of SREI s consolidated revenues and include capital market services, insurance broking and venture capital. SREI operates directly from 9 regional offices and 46 branch/field offices and does not utilise DSA 3 services. For the year ended March 31, 2010, SREI reported a net profit of Rs. 1115 million over an asset base of Rs. 44.45 billion as compared to a net profit of Rs. 503.6 million over an asset base of Rs. 20.77 billion for the previous year. May 2010 3 DSA: Direct Sales Agents

Key Financial Indicators 31-Mar-10 31-Mar-09 31-Mar-08 (Provisional) (Audited) (Audited) Equity Capital 500 500 21 Net Worth 9,660 8,823 211 Net Loans 59,586 56,468 43,142 Total Assets 69,175 66,496 52,713 Total Income 8,713 9,341 2,209 Net Interest Income 2,754 2,399 590 Profit Before Tax 1,344 1,057 354 Profit After Tax 870 625 240 Interest Income/ATA (%) 11.95% 14.75% 7.85% Interest Expenses/ ATA (%) 7.89% 10.72% 5.61% Provisions/ATA (%) 0.68% 0.68% 0.20% Operating Expenses/ATA (%) 1.47% 1.65% 0.74% Cost to Income ratio (%) 36% 40% 32% PAT/ATA (%) 1.28% 1.05% 0.91% PAT/ Average Net Worth (%) 9.42% 13.84% 207.43% Dividend/PAT (reported) (%) 0.00% 0.00% 0.00% Dividend Rate (%) 0% 0% 0% Total Debt / Net Worth (reported) (times) 5.95 6.34 227.30 Capital / Risk Weighted Assets 17.90% 14.14% -4.16% Tier I Capital (%) NA 13.23% -5.38% Note: Amounts in Rs. Million Source: SEFPL and ICRA research For further details please contact: Analyst Contacts: Ms. Vibha Batra (Tel No. +91-124-4545302) vibha@icraindia.com Relationship Contacts: Ms. Anuradha Ray (Tel No. +91-33-22876617) anuradha@icraindia.com Copyright, 2010, ICRA Limited. All Rights Reserved. Contents may be used freely with due acknowledgement to ICRA Icra ratings should not be treated as recommendation to buy, sell or hold the rated debt instruments. The icra ratings are subject to a process of surveillance which may lead to a revision in ratings. Please visit our website (www.icra.in) or contact any icra office for the latest information on icra ratings outstanding. All information contained herein has been obtained by icra from sources believed by it to be accurate and reliable. Although reasonable care has been taken to ensure that the information herein is true, such information is provided as is without any warranty of any kind, and icra in particular, makes no representation or warranty, express or implied, as to the accuracy, timeliness or completeness of any such information. All information contained herein must be construed solely as statements of opinion and icra shall not be liable for any losses incurred by users from any use of this publication or its contents SREI had transferred all the equipment finance related business to SEFPL in January 2008. Thus the numbers for 2007-08 pertain to only last three months of the financial year and are thus not comparable to subsequent year numbers.

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