Srei Group under pressure!

SREI Infrastructure Finance Ltd. (SIFL) has announced that the company and its wholly-owned subsidiary SREI Equipment  Finance Ltd.(SEFL) have been undergoing a special audit, conducted by an auditor appointed by Reserve Bank of India.

What does this audit mean?  

• The RBI Act states that the central bank may at any time order to conduct a special audit of the accounts of a non-banking finance company, to safeguard public interest,  or the interest of the NBFC and other stakeholders. 
• This is generally undertaken if the credit quality of the lending company has significantly worsened.

CARE places SIFL credit rating under watch

• Srei Group had announced consolidation of the group’s lending business into Srei Equipment Finance Ltd (SEFL), through a slump exchange and was effective from 1  October 2019. However, the consent from all lenders of SIFL had not been obtained for the same.  According to media reports, a few lenders are expected to approach the National Company Law Appellate Tribunal (NCLAT) over SREI group’s move of consolidation, in potential breach of loan covenants. 
• The NCLT on its order dated 21st October mentioned that creditors to the company will meet on 16th December and 23rd December.
• CARE said that the ratings of SIFL continue to remain under credit watch with developing implications pending the outcome of the above-proposed meetings of creditors for considering the Scheme of Arrangement amidst stressed liquidity position.

CRISIL Downgrades pass-through certificates originated by SREI Equipment Finance

• On 19th November CRISIL has downgraded three pass-through certificates issued by Srei Equipment Finance to  A- (SO) from A+ (SO). The rating remains on Rating Watch with Negative Implications.
• The credit quality of SEFL has deteriorated sharply. The amount of loan book in SMA / Overdue category outstanding as on September 30, 2020, of all cases where moratorium benefit was extended stood at ₹12,282 crore, a worrying 42.5% of the total on-book loans of ₹28,965 crore.

INDmoney Analysis

SIFL has been under severe financial stress for the past few years. SIFL posted a 91% decline in profit for the September quarter. The management clearly indicated that the infrastructure sector has been under severe stress and it will take a long time to bring things back on track. There is a lot of uncertainty with regards to the proposed consolidation  of assets and the slump sale. Also, Srei Infrastructure Finance holds a 3.34% stake in Lakshmi Vilas Bank, which will get delisted from the exchanges and will be valued at zero. 

We recommend that you exit your investments in SREI group.