By Jindal Haria

India Ratings and Research (Ind-Ra) has affirmed Shriram City Union Finance Limited's (SCUF) Long-Term Issuer Rating at ‘IND AA’ with a Stable Outlook. A full list of rating actions is at the end of this commentary.

KEY RATING DRIVERS

The affirmation reflects SCUF’s healthy capitalisation levels, fairly well-diversified funding profile, sound liquidity, and adequate pre-provision operating profit (PPOP) buffers. The affirmation factors in the company’s established franchise, low competition in segments where it operates, and its 20-year-long operating record and management’s experience. The ratings are supported by SCUF’s linkages with Shriram group as it benefits through customer acquisition and funding access. The ratings factor in SCUF’s concentrated operations in states of Tamil Nadu and Andhra Pradesh and high dependence on institutional funding. 


The company’s healthy capitalisation should support its moderate loan growth targets (about 20% CAGR) over the next two years. SCUF reported a comfortable Tier 1 capital adequacy ratio of 23.82% at FYE16 (FYE15: 24.8%). 

Of the small and medium enterprises loan segment that constitutes 54% of SCUF’s loan portfolio, the share of loans above INR1.5m ticket size (which is a competitive segment) declined marginally to 34% in June 2015 from 37% in September 2013. Reported NPLs and credit costs are likely to increase over the next two years from the FYE16 ratios, due to the mandatory regulatory transition from recognising NPLs on 
a 150 days past due (dpd) to 90dpd over the next two years (transition). The gross NPL ratio increased at FYE16 to 5.15% on a 150dpd basis (FYE15: 3.10%, on a 180dpd basis). On a comparable basis, the 180dpd gross NPA was 3.57% at FYE16 as against 3.39% at end-December 2015. That being said, SCUF’s PPOP and loan loss reserves provide sufficient cushion to absorb increases in delinquencies and credit costs over the near-term. 

SCUF’s return on average assets (RoAA; FYE16: 2.81%; FYE15: 3.32%) is likely to move in a lower trajectory over the near-medium term as it makes the transition. RoAA dropped largely due to a combination of a decline in other income (i.e. gains from 
securitisation) and an increase in credit costs as SCUF made the transition to recognising NPLs on a 150dpd basis in 4QFY16 from on a 180dpd basis. SCUF lowered the provision coverage ratio (FYE16: 69.7%; FYE15: 78.3%) during FY16, partly stemming some of the decline in RoAA; it is likely that SCUF will have to further lower the provision coverage ratio to 30%-40% to maintain a RoAA range of 2.3%-2.5% over the next two years as it transitions to 90dpd recognition of NPLs. 

Operating profitability (PPOP/average loans) may rise in the near-term as SCUF intends to maintain its high overall yields on advances while funding costs could drop further on a decline in interest costs in a softening interest rate environment. Although operating profitability has declined over the past one year it still remains adequate (PPOP/average loans: FYE16: 8.4%; FYE15: 9.2%; FY11- FY16 average: 8.6%). 

SCUF depends on banks for more than half of its total borrowings, this is in line with most of its peers rated in the ‘IND AA’ range; furthermore, the presence of several banks offsets concentration risk. SCUF’s liquidity profile is aided by well-matched asset-liability tenors stemming from a shorter tenor asset profile relative to liabilities. SCUF’s funding profile benefits from its affiliation with the Shriram group, which helps the company in maintaining easy access to banks and retail funds.


RATING SENSITIVITIES

Positive: A significant and sustained improvement in SCUF’s funding profile and franchise, while maintaining stable asset quality, profitability, and liquidity ratios could lead to a positive rating action. 

Negative:
A negative rating action may result from any signs of deterioration in the company’s funding access or rising delinquencies that in Ind-Ra’s expectations could lead to a marked weakening of the profitability and capital buffers.


COMPANY PROFILE

SCUF was established in 1986 as a commercial vehicle financier, part of the larger Shriram group. In FY06, the business was consolidated into Shriram Transport Finance Corporation (‘IND AA+’/Stable), and SCUF shifted focus to retail financing which includes small business loans, two wheeler loans, auto loans, loans against gold, and personal loans. 

SCUF’s ratings are as follows:

- Long-Term Issuer Rating: affirmed at 'IND AA'; Outlook Stable
- Short-Term Issuer Rating: affirmed at 'IND A1+'

- INR2bn non-convertible debentures: 'IND AA' rating withdrawn as the limits have not been utilised
- INR4.5bn long-term debt programme (reduced from INR7.5bn): affirmed at 'IND AA'; Outlook Stable
- INR89.46bn long-term bank loans: affirmed at 'IND AA'; Outlook Stable
- Fixed deposit programme rating: affirmed at 'IND tAA'; Outlook Stable
- INR4bn short-term debt programme: 'IND A1+' rating withdrawn as the company does not plan to utilise the limits



SOLICITATION DISCLOSURES

Additional information is available at www.indiaratings.co.in. The ratings above were solicited by, or on behalf of, the issuer, and therefore, India Ratings has been compensated for the provision of the ratings. 

Ratings are not a recommendation or suggestion, directly or indirectly, to you or any other person, to buy, sell, make or hold any investment, loan or security or to undertake any investment strategy with respect to any investment, loan or security or any issuer.

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Analyst Names

  • Primary Analyst

    Jindal Haria

    Director
    India Ratings and Research Pvt Ltd Wockhardt Towers, 4th floor, West Wing Plot C-2, G Block. Bandra Kurla Complex Bandra (East), Mumbai 400051
    +91 22 40001750

    Secondary Analyst

    Abhishek Bhattacharya

    Director and Co Head Corporates
    +91 22 40001786

    Media Relation

    Mihir Mukherjee

    Manager Corporate Communications and Investor Relations
    +91 22 40356121