By Jindal Haria

India Ratings and Research (Ind-Ra) has rated Shriram City Union Finance Limited's (SCUF) additional bank loan as follows:

Instrument Type

Date of Issuance

Coupon Rate

Maturity Date

Size of Issue (million)

Rating/Outlook

Rating Action

Bank loan

-

-

-

INR60,540

IND AA/Stable

Assigned

The rating 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 its geographically concentrated operations and high dependence on institutional funding.

KEY RATING DRIVERS

Healthy Capitalisation: The company’s healthy capitalisation should support its moderate loan growth targets (about 20% CAGR) over the next two years. SCUF reported a Tier 1 capital adequacy ratio of 22.64% at 9MFYE17 (FYE16: 23.8%). 

SME Segment Ticket Size Increasing:
Of the small and medium enterprises (SME) loan segment that constitutes 55% of SCUF’s loan portfolio, the share of loans above INR1.5 million ticket size (which is a competitive segment) increased significantly to 50% in 1HFY17 from 31% in FY15, indicating increasing ticket sizes. Two-wheeler finance is the second-largest segment constituting 18% of the portfolio. In terms of geographical concentration, Andhra Pradesh, Tamil Nadu and Maharashtra constitute 80% of SCUF’s portfolio. 

Transition to 90dpd Gross NPA Recognition would result in High Credit Costs:
The 150-day gross NPL ratio increased to 5.4% at 9MFYE17 from 5.15% at FYE16 (FYE15: 3.10%, on 180dpd basis). With Reserve Bank of India dispensation, the reported gross NPA comes at 4.5% for 9MFYE17. Although a part of this can be attributed to demonetisation, Ind-Ra believes that headline gross NPA will continue to increase as SCUF transitions to 90 dpd recognition by FY18. Ind-Ra expects the 120-day gross NPA at 7.5%-8% for FY17 and 90dpd overdue portfolio at about 10%. That being said, SCUF’s PPOP and loan loss reserves provide sufficient cushion to absorb increases in delinquencies and credit costs over the near to mid-term. Nevertheless, Ind-Ra opines that the company needs to tighten the borrower selection and recovery processes further to bring down delinquencies at least by one bucket in FY18. 

SCUF may Need to Balance RoAA and Provision Cover:
SCUF’s return on average assets (RoAA; 9MFY17: 2.74%; FYE16: 2.81%; FYE15: 3.32%) is likely to shift to a lower trajectory over the near-medium term as it makes the transition. RoAA dropped in FY16 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 the 150 dpd basis in 4QFY16 from on the180 dpd basis. SCUF lowered the provision coverage ratio (FYE16: 69.7%; FYE15: 78.3%) during FY16, partly stemming some of the decline in RoAA. SCUF is likely to either lower the provision coverage ratio to 30%-40% to maintain an RoAA range of 2.3%-2.5% or face RoAA erosion over the next two years as it transitions to the 90 dpd recognition of NPLs. 

Profitability Buffer to Remain Steady:
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. Further, as SCUF’s SME ticket sizes increase, there could be some downward pressure on yields, which could offset some of the benefit of lower cost of funds. Although operating profitability has declined over the past one year, it remains adequate (PPOP/average loans: 9MFY17: 8.5%; FYE16: 8.4%; FYE15: 9.2%; FY11- FY16 average: 8.6%).

 

Funding and Borrowing Profile Comfortable: 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. The current debt to equity is comfortable at 3.25x, and Ind-Ra expects the entity’s leverage to remain lower than peers.


RATING SENSITIVITIES

Positive: A significant and sustained improvement in SCUF’s funding profile and franchise, while improving asset quality and maintaining its 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.


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Outstanding Limits (million)

Rating

22 July 2016

11 April 2014

15 March 2013

Issuer Rating

Long-term

-

IND AA/Stable

IND AA/Stable

IND AA/Stable

IND AA-/Positive

Long-term debt programme

Long-term

INR4,500

IND AA/Stable

IND AA/Stable

IND AA

IND AA-

Long-term bank loans

Long-term

INR150,000

IND AA/Stable

IND AA/Stable

IND AA

IND AA-

Fixed deposit programme

Long-term

-

IND tAA/Stable

IND tAA/Stable

IND tAA

IND tAA-


COMPLEXITY LEVEL OF INSTRUMENTS

For details on complexity levels of the instruments, please 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, structured finance and project finance companies. 

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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

    Media Relation

    Mihir Mukherjee

    Manager Corporate Communications and Investor Relations
    +91 22 40356121