CRISIL assigns fundamental grade SME 3/5 to VKC Credit IPO
CRISIL has assigned a CRISIL SME fundamental grade of 'SME 3/5' 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.
January 12, 2013 / 17:20 IST
CRISIL has assigned a CRISIL SME fundamental grade of 'SME 3/5' to the proposed IPO of VKC Credit and Forex Services (VKC). This SME fundamental grade indicates that the fundamentals of the company are good compared to other SMEs in India.
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 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 challengesVKC, 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.Key financialsVKC’s operating income declined to Rs 10,785 mn in FY12 and Rs 5,647 mn in H1FY13 compared to Rs 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.To read the full report click on the attachmentDisclaimer: This report (Report) has been commissioned by the Company/Investor/Exchange and prepared by CRISIL. The report is based on data publicly available or from sources considered reliable by CRISIL (Data). However, CRISIL does not guarantee the accuracy, adequacy or completeness of the Data / Report and is not responsible for any errors or omissions or for the results obtained from the use of Data / Report. Opinions expressed herein are CRISIL's opinions as on the date of this Report. The Data / Report are subject to change without any prior notice. Nothing in this Report constitutes investment, legal, accounting or tax advice or any solicitation, whatsoever. The Report is not a recommendation to buy / sell or hold any securities of the Company. CRISIL especially states that it has no financial liability, whatsoever, to the subscribers / users of this Report. This Report is for the personal information of the authorized recipient only. This Report should not be reproduced or redistributed or communicated directly or indirectly in any form to any other person or published or copied in whole or in part especially outside India, for any purpose.© CRISIL Limited . All Rights Reserved. Published under permission from CRISIL"
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