By Jindal Haria

India Ratings and Research (Ind-Ra) has maintained Shriram City Union Finance Limited’s (SCUF) Long-Term Issuer Rating of ‘IND AA’ and Short-Term Issuer Rating of ‘IND A1+’ on Rating Watch Evolving (RWE). Instrument-wise rating actions are given below:

Instrument Type

Date of Issuance

Coupon Rate (%)

Maturity Date

Size of Issue (billion)

Rating/Rating Watch

Rating Action

Bank loan

-

-

-

INR150

IND AA/RWE

Maintained on RWE

Long-term debt programme*

-

-

-

INR0.3 (reduced from INR4.5)

IND AA/RWE

Maintained on RWE

Fixed deposit programme

-

-

-

-

IND tAA/RWE

Maintained on RWE

* Details in Annexure

KEY RATING DRIVERS

Merger Transaction: Ind-Ra has maintained the rating on RWE due to limited clarity on the IDFC Bank Limited (‘IND AAA’/RWE) and Shriram Group merger discussion and the consequent impact of the same on various businesses of both the groups in terms of group structure, operational and management control, shareholding structures, among others to determine the possible impact on the credit profile.

 

Healthy Capitalisation: SCUF reported Tier 1 capital adequacy ratio of 22.22% at FYE17 (FYE16: 23.82%). Ind-Ra believes that the company’s healthy capitalisation should support its moderate loan growth targets of about 20% CAGR over the next two-three years. The company aims at maintaining a minimum Tier 1 capital of about 15% in the long term.

 

Growing SME Segment, Yields Could Decline: The small and medium enterprises (SME) loan segment, which constitutes 54% of SCUF’s advances, is expected to remain the mainstay of the company’s portfolio. The management expects the SME loan segment to constitute about 60% of SCUF’s aggregate loans under management over the medium term. The average disbursement per SME loan account increased to INR 1 million-1.2 million in FY17 (FY16: INR 0.8 million-1 million) and could further rise to INR1.4 million over the next couple of years.

 

Transition to 90dpd Gross NPA Recognition to Result in Higher Reported Credit Costs: SCUF’s reported non-performing loans (NPLs) and credit costs are likely to increase in FY18 due to the mandatory regulatory transition from recognising NPLs on a 120 days past due (dpd) basis to 90dpd. The gross NPL ratio increased to 6.7% on a 120dpd basis in FY17 from 5.15% in FY16 on a 150dpd basis. However, on the consolidated loan portfolio (excluding gold loans), 90dpd remained in the range of 9%-10% in FY15-FY17. That being said, SCUF’s pre-provision operating profit (PPOP) and loan loss reserves provide sufficient cushion to absorb increases in delinquencies and credit costs over the near term.

 

Balancing RoAA and Provision Cover: SCUF’s return on average assets (RoAA; FYE17: 2.57%; FYE16: 2.81%; FYE15: 3.32%) declined and is expected to continue the trajectory mainly due to the increase in the credit costs and pressure on yields driven by increasing competition in the SME segment from non-banking financial companies and small finance banks. SCUF could lower the provision coverage ratio (FY17: 73%, FY16: 70%) to 50%-60% to maintain a RoAA of 2.3%-2.5% in FY18 as it transitions to 90dpd recognition of NPLs.  

 

Comfortable Funding and Borrowing Profile: 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’ category. 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. As the share of SME loans increases, the asset tenors could also increase but in Ind-Ra’s assessment SCUF would continue to remain in a liquidity surplus state in the short term. 


RATING SENSITIVITIES

The agency will resolve the RWE once there is a greater visibility about the merger discussion and impact of the same on the various businesses of both groups in terms of group structure, operational and management control, shareholding structures among others to determine the possible credit profile impact.


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. It has 990 branches at end-March 2017 and total loans under management of INR231 billion.


FINANCIAL SUMMARY

 

Particulars

FY17

FY16

Total assets (INR million)

232,815.2

200,647.6

Total equity (INR million)

49,757.7

44,600.0

Net income (INR million)

5,560.6

5,297.8

Return on average assets (%)

2.57

2.81

Tier 1 capital (%)

22.22

23.82

Source: Company

 


RATING HISTORY

Instrument Type

Current Rating/Rating Watch

Historical Rating/Outlook

Rating Type

Rated Limits (billion)

Rating

12 July 2017

22 July 2016

11 April 2014

Issuer rating

Long-term/Short-term

-

IND AA/RWE/IND A1+/RWE

IND AA/RWE/IND A1+/RWE

IND AA/Stable/IND A1+

IND AA/Stable/IND A1+

Long-term debt programme

Long-term

INR0.3

IND AA/RWE

IND AA/RWE

IND AA/Stable

IND AA

Long-term bank loans

Long-term

INR150

IND AA/RWE

IND AA/RWE

IND AA/Stable

IND AA

Fixed deposit programme

Long-term

-

IND tAA/RWE

IND tAA/ RWE

IND tAA/Stable

IND tAA

ANNEXURE

Instrument Type

 

ISIN

Date of Issuance

Coupon Rate

Maturity Date

Size of Issue (million)

Rating/Rating Watch

Rating Action

Non-Convertible Debentures

INE722A07182

4 February 2011

10.75%

4 February 2021

INR50

IND AA/RWE

Maintained on RWE

Non-Convertible Debentures

INE722A07174

23 November 2010

10.60%

13 December 2017

INR250

IND AA/RWE

Maintained on RWE


COMPLEXITY LEVEL OF INSTRUMENTS

For details on the complexity level 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. 

Headquartered in Mumbai, Ind-Ra has six branch offices located in Ahmedabad, Bengaluru, Chennai, Delhi, Hyderabad and Kolkata. Ind-Ra is recognised by the Securities and Exchange Board of India, the Reserve Bank of India and National Housing Bank. 

India Ratings is a 100% owned subsidiary of the Fitch Group.

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

DISCLAIMER

ALL CREDIT RATINGS ASSIGNED BY INDIA RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.INDIARATINGS.CO.IN/RATING-DEFINITIONS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE WWW.INDIARATINGS.CO.IN. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. INDIA RATINGS’ CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE.

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