By Jindal Haria

India Ratings and Research (Ind-Ra) has maintained Shriram Housing Finance Limited’s (SHFL) bank loans and non-convertible debentures (NCDs) on Rating Watch Evolving (RWE) as follows:

Instrument Type

Date of Issuance

Coupon Rate (%)

Maturity Date

Size of Issue (billion)

Rating/Rating Watch

Rating Action

Bank loans

-

-

-

INR15

IND AA/RWE

Maintained on RWE

NCDs*

-

-

-

INR7

IND AA/RWE

Maintained on RWE

* The details of the NCDs are provided in Annexure.

KEY RATING DRIVERS

RWE Maintained:  Ind-Ra has maintained the ratings on RWE due to lack of clarity on the IDFC Bank Limited ('IND AAA’/RWE) and Shriram Group transaction and the 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. The agency will resolve the RWE once there is greater visibility about the transaction. The agency would reassess the linkages between SHFL with its resultant parent entity. 

Support-Driven Rating:
SHFL’s Long-term ratings continue to reflect the credit strength of its parent, Shriram City Union Finance (SCUF; ‘IND AA’/RWE, 77.25% stake). SCUF is likely to remain the single largest shareholder and retain management control in the foreseeable future. Ind-Ra considers SHFL integral to SCUF’s strategy to focus on underpenetrated customer segments, and believes that that the parent will continue to monitor SHFL’s business and funding strategy.

SHFL benefits from its linkages with the Shriram Group for market know-how and since the company shares the Shriram brand name with the parent group, Ind-Ra believes that a default by SHFL will constitute an extremely high reputational risk for SCUF and the Shriram franchise. In addition to having significant independent committed and uncommitted banking and capital market lines, the company has access to funding lines worth INR1 billion from SCUF and INR1 billion from Shriram Capital Limited in the form of short-term bridge loans, which are adequate to meet its contingent liquidity needs.

Asset Quality:
SHFL’s gross non-performing loans (NPLs) increased to 4.8% in 1QFY18 from to 2.6% in March 2017 (FY16: 2.8%, FY15: 2.1%). Ind-Ra expects the originations of FY16-H1FY17 to result in elevated levels of NPAs while newer originations that have been subject to the new risk and pricing frameworks may fare better. Ind-Ra is of the view that ultimate credit losses will depend on the company’s ability to liquidate the collateral, which is likely to be supported by the initiation of Securitisation And Reconstruction of Financial Assets and Enforcement of Security Interest  (SARFAESI; obtained in December 2015). 

Leverage:
At end-March 2017, SHFL’s leverage was low at 3.3x (end-March 2016: 2.2x), which can support its loan growth targets (company forecast for FY18-FY20: CAGR 30%) over the next few years without fresh capital infusion. The company expects to maintain its leverage (debt to equity) at about 6x in the medium term. Ind-Ra believes that the parent is committed to equity infusion, when required.


RATING SENSITIVITIES

Positive: An upgrade of the parent’s Long-Term Issuer Rating could lead to a re-assessment of SHFL’s rating. 

Negative:
A significant dilution in SCUF’s management control, a reduction in stake to a minority shareholder, or a downgrade of SCUF’s Long-Term Issuer Rating could lead to a downgrade in SHFL’s rating. Additionally, any material reduction in liquidity support by the parent or inability to access funding could lead to a negative rating action for SHFL.


COMPANY PROFILE

SHFL was registered as a housing finance company with National Housing Bank (‘IND AAA’/Stable) in August 2011 and started lending operations in December 2011. SHFL is promoted by SCUF, a flagship company of the Shriram Group, which owns 77.25% stake in the company. The company provides housing loans to low-/middle-income borrowers in the unorganised sector in Tier 2 and Tier 3 cities. The company had a network of 85 branches across 19 states and union territories at end-March 2017. 

FINANCIAL SUMMARY

 

Parameters

FY17

FY16

Total assets (INR million)

19,065.9

13,699.8

Total equity (INR million)

4,239.6

3,943.0

Net income (INR million)

289.6

191.1

Return on average assets (%)

1.8

1.8

Tier 1 capital (%)

29.3

42.2

Source: SHFL


RATING HISTORY

Instrument Type

Current Rating/Rating Watch

Historical Rating/Outlook/Rating Watch

Rating Type

Rated Limits (billion)

Rating

12 July 2017

1 July 2016

23 March 2016

Bank loan

Long-term

INR15

IND AA/RWE

IND AA/RWE

IND AA/Stable

IND AA/Stable

NCDs

Long-term

INR7

IND AA/RWE

IND AA/RWE

IND AA/Stable

IND AA/Stable

ANNEXURE

Instrument Type

ISIN

Date of Issuance

Coupon Rate (%)

Maturity Date

Size of Issue (million)

Rating/Rating Watch

Rating Action

NCDs

INE432R07042

1 December 2014

9.20

1 December 2017

INR500

IND AA/RWE

Maintained on RWE

NCDs

INE432R07109

27 October 2015

9.00

27 October 2020

INR400

IND AA/RWE

Maintained on RWE

NCDs

INE432R07117

29 April 2016

9.00

29 April 2023

INR250

IND AA/RWE

Maintained on RWE

NCDs

INE432R07125

2 May 2016

9.00

2 May 2023

INR150

IND AA/RWE

Maintained on RWE

NCDs

INE432R07133

28 June2016

9.50

28 June 2018

INR500

IND AA/RWE

Maintained on RWE

NCDs

INE432R07141

1 July 2016

9.50

1 July 2021

INR200

IND AA/RWE

Maintained on RWE


COMPLEXITY LEVEL OF INSTRUMENTS

For details on the 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. 

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. 

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

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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