ARCIL looks to increase return on assets to over 10% in next 3 years

With a gradual improvement in the environment for recoveries, asset reconstruction firm ARCIL is working to increase its return on assets to over 10 per cent over the next two-three years, from 6.7 per cent in FY19. 

The firm has also started purchasing some assets with Avenue Capital as a co-investor. US-based Avenue is now the single-largest investor in ARCIL, with about 25 per cent stake. Banks like SBI, IDBI and PNB are key stakeholders in the firm.

In FY19, Avenue India Resurgence (part of Avenue Capital Group, a global investment firm focused on distressed and undervalued debt and equity opportunities) acquired a stake in ARCIL through a secondary sale. 

Rating agency India Ratings, in a commentary on ARCIL, said a strong investor tie-up will ensure funding support for acquisitions. 

Following the Reserve Bank of India’s revision in rules, selling banks have to sell non-performing assets (NPAs) to ARCs for higher cash consideration (at least 90 per cent from April 2018) than required previously. This is to avoid increased NPA provisioning in their books. 

There was a structural shift across the entire industry in FY19, along with a substantial increase in the share of cash in the acquisition cost. In case of ARCIL too, cash investment increased to 83 per cent in FY19, from 36 per cent in FY18. 

ARCIL has started purchasing some assets with Avenue Capital as co-investor in FY20, where its own investment in security receipts (SRs) remains at 15 per cent. 

However, this tie-up remains a non-exclusive one. ARCIL may also look at other third-party investors to co-invest in the future. 

The agency said it expects ARCIL to benefit on improving macroeconomic situation and materialisation of recoveries from SRs that had previously been written-off. ARCIL has certain AUMs that have been written-off and may lead to recoveries; however, the timing remains uncertain. Further, around 46% of the outstanding SRs were acquired in FY15 and FY14, and recoveries from these AUMs have started materialising and the management expects healthy recoveries over the next two to three years. The focus on recoveries will clean up ARCIL’s portfolio and preserve capital.