By Pankaj Naik

India Ratings and Research (Ind-Ra) has rated Shriram Transport Finance Company Limited's (STFC) additional proposed non-convertible debentures (NCDs) as follows:

Instrument Type

Date of Issuance

Coupon Rate

Maturity Date

Size of Issue (billion)

Rating/Outlook

Rating Action

NCDs

-

-

-

INR10

IND AA+/Stable

Assigned

The rating factors in STFC’s dominance in the Indian used commercial vehicle (CV) financing market with limited, meaningful organised competition in its niche segment. STFC is focused on the buckets of median to above-average yields while vacating steep yield segments; this is likely to reduce volatility in credit costs. The rating also takes into account company’s healthy capitalisation, reasonable operating metrics and comfortable liquidity. The ratings however also factor in the company’s largely institutional funding, though its non-institutional funding has increased and it now has a sizeable proportion of retail deposits.

KEY RATING DRIVERS

Strong Player in Used CV Financing Space: STFC has gained strong skill set in financing CVs through its long experience and has managed its credit costs within a moderate range despite majorly operating in an arguably weak credit profile customer category in the used CV segment. The company indicates it is shifting its portfolio towards lower-vintage used vehicles and simultaneously vacating high-yield segments; this could lead to less volatile credit costs. The build-up of regulatory pressure, changing dynamics in the CV industry, higher contribution of rural markets in incremental growth and greater availability of lower vintage used vehicles, along with an 8% spread cap (from the base rate of the bank that is acquiring portfolio) on the asset eligibility for securitisation, are leading to this transition.

However, STFC faces high competition in the used CV financing space, as many non-banking financial companies are trying to expand into this space. Competitive pressure and transition to newer used vehicles could lead to STFC facing compression in yields. Softening borrowing costs should cushion the impact on net interest margin.


Asset Quality: STFC has capitalised on the Reserve Bank of India’s (RBI) dispensation for reporting non-performing assets and reported gross non-performing assets on a 150 days past due (dpd) basis of 6.6% (7.3% without the RBI dispensation) for 3QFY17. Although the transition to 90dpd recognition seems to increase the asset quality stress, the impact on provisioning cost is planned to be cushioned through a moderation in the provision coverage ratio (PCR). On transition to 120dpd NPA recognition by March 2017 and eventually to 90dpd by FYE18, non-performing loans can increase by about 300bp. STFC would bring its PCR to 55%-60% from the PCR of 75% in December 2016.

Liquidity Profile: STFC’s liquidity profile is comfortable, as it has a matched tenure of assets and liabilities and unutilised bank lines.

Profitability: Profitability has come under pressure, as profitability buffers (pre-provisioning operating profit/credit costs - 9MFY17: 2.1x; FY11-FY16 average 3.1x) have been affected due to lower securitisation income and higher credit costs. Return on assets was 2.0% in 9MFY17 compared with an average 3.1% for FY11-FY16.

To read a detailed rating rationale, please click here.


RATING SENSITIVITIES

Positive: The company’s ability to sharply diversify its funding profile with significantly large retail funding and significantly increase credit costs buffers, while maintaining the dominant franchise in the used CV financing segment could be positive for the ratings.

Negative:
Through the cycle rise in credit cost leading to depletion in operating and/or capital buffers, reduced resource raising ability impacting the liquidity, and/or a significant loss of franchise could result in a negative rating action.


COMPANY PROFILE

STFC is the largest non-bank finance company in the asset finance segment in India. It is the flagship company of Chennai-based Shriram group of companies, which operates in consumer finance, insurance and infrastructure and energy segments.


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Outstanding Limits (billion)

Rating/Outlook

28 June 2016

20 June 2014

3 June 2013

 

Issuer rating

Long-/short-term

-

IND AA+/Stable/IND A1+

IND AA+/Stable/IND A1+

IND AA+/Stable/IND A1+

IND AA/Stable/IND A1+

NCDs

 

Long-term

INR175

IND AA+/Stable

IND AA+/Stable

IND AA+

IND AA

Bank loans

Long-/short-term

INR130

IND AA+/Stable/IND A1+

IND AA+/Stable/IND A1+

IND AA+/IND A1+

IND AA/IND A1+

Subordinated debt

Long-term

INR26.2

IND AA+/Stable

IND AA+/Stable

IND AA+

IND AA

Short-term debt/commercial paper programme

Short-term

INR15

IND A1+

IND A1+

IND A1+

IND A1+

Term deposit

Long-term

-

IND tAA+/Stable

IND tAA+/Stable

IND tAA+

IND tAA


COMPLEXITY LEVEL OF INSTRUMENTS

NCDs are instruments with low complexity levels, where the relationship between inherent risk factors and intrinsic return characteristics is straightforward.

For more information, visit https://www.indiaratings.co.in/complexity-indicators.

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.

ABOUT INDIA RATINGS AND RESEARCH

India Ratings and Research (Ind-Ra) is India's most respected credit rating agency committed to providing India's credit markets accurate, timely and prospective credit opinions. Built on a foundation of independent thinking, rigorous analytics, and an open and balanced approach towards credit research, Ind-Ra has grown rapidly during the past decade, gaining significant market presence in India's fixed income market. 

Ind-Ra currently maintains coverage of corporate issuers, financial institutions (including banks and insurance companies), finance and leasing companies, managed funds, urban local bodies and project finance companies. 

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For more information, visit www.indiaratings.co.in.

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Analyst Names

  • Primary Analyst

    Pankaj Naik

    Associate 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 40001723

    Secondary Analyst

    Prakash Agarwal

    Director and Head Financial Institutions
    +91 22 40001753

    Media Relation

    Mihir Mukherjee

    Manager Corporate Communications and Investor Relations
    +91 22 40356121