By Pankaj Naik

India Ratings and Research (Ind-Ra) has rated Shriram Transport Finance Company Limited’s (STFC) additional commercial paper (CP) and subordinated debt as follows:

Instrument Type

Date of Issuance

Coupon Rate

Maturity Date

Size of Issue (million)

Rating/Outlook

Rating Action

CP*

-

-

-

INR25,000

IND A1+

Assigned

Subordinated debt*^

 

 

 

INR20,000

IND AA+/Stable

Assigned

*Unutilised
^Details are given in annexure

KEY RATING DRIVERS

Market Dominance in Used CV Financing Space: STFC is by far the largest financier of used vehicles in India. Ind-Ra estimates STFC to have three-fourth of the market share among the organised used vehicle financing space. STFC possesses strong skills in financing commercial vehicles (CVs) through its vast experience and managing credit costs within limits, despite operating mainly in an arguably weak credit profile customer category in the used vehicle segment. STFC’s expertise lies in valuation of the used assets and effective collection mechanism helping in managing credit costs. However, STFC faces tough competition in the used CV financing space, as many non-banking finance companies are trying to expand into this space.

Transition to Reduce Credit Cost Volatility:
The company is shifting its portfolio towards lower vintage and higher tonnage vehicles, and consequently possibly stronger credit profile customer category. This transition can subject STFC to pricing pressure; however; this could lead to less volatile credit costs. The build-up of regulatory pressures, 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. STFC is also growing in the passenger vehicle segment (FY17: 25% of assets under management (AUM), FY16: 23%, FY15: 22%), where yields are relatively higher. However, Ind-Ra believes a good control on the credit cost will drive profitability for this segment.

Asset Quality:
 The headline gross non-performing loans (NPLs) have been increasing as the company will transition to stricter recognition norms (90 days past due (dpd)) by FY18. The gross NPL ratio was 8.0% in 3QFY18 on a 120dpd basis (FY17: 8.2%). Credit cost was elevated at 330bp for 9MFY18 (FY17: 380bp). With the transition, STFC plans to manage its credit cost by lowering its provision coverage by 5%-10% (December 2017: 71%). The possible disruptions on broader economy, and consequently on load availability on account of implementation of the Goods and Services Tax regime could upset the trend. An additional element of uncertainty remains on the spill over effect of farm loan waivers; although the impact of the same in the past has not been significant.  

Reasonable Capitalisation:
STFC is reasonably capitalised with Tier I ratio of 14.9% in 3QFY18 (15.2% in 4QFY17). With a modest growth target of 15% for FY19, Ind-Ra believes internal accruals would be largely sufficient to support growth. The company plans to operate with moderate leverage along with a policy to maintain tier I ratio above 14% on a steady state basis. 

Comfortable Liquidity:
STFC has a matched tenure of assets and liabilities with no gaps in any of the bucket of structural liquidity statement until one-year as of December 2017. The company also maintains sizeable unutilised bank lines (INR40 billion-45 billion), which largely cover the CP borrowings. However, STFC has diluted its policy of maintaining large on-balance sheet liquidity by way of cash and investment in liquid mutual funds, which could have provided strong buffers in the event of sudden liquidity crisis. STFC endeavours to maintain a matched asset liability maturity profile by restricting its reliance on short-term borrowings which would not exceed 7%-8% of the total borrowings.  

Moderate Profitability:
The company’s profitability remained under pressure over the past few years (pre-provisioning operating profit/credit costs in 9MFY18: 2.3x, FY17: 1.8x; FY11-FY16: average 3.2x) due to a decline in securitisation income and a rise in the credit costs. Ind-Ra believes competitive pressures and transition to newer used vehicles could lead to compression in yields in FY19. Post the transition to 90dpd recognition norm, a better control on the credit costs could lead to a revival in profitability. 


RATING SENSITIVITIES

Positive: Significantly strengthened stable funding profile which could emerge through enhanced granular retail funding or/and significantly increased credit costs absorbing 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-banking finance company in the asset finance segment in India. It is the flagship company of Chennai-based Shriram Group, which operates in consumer finance, insurance and infrastructure and energy segments.

 

FINANCIAL SUMMARY

 

Particulars

FY17

FY16

Total tangible assets (INR million)

740,480

676,556

Total tangible equity (INR million)

109,399

98,464

Net income (INR million)

12,573

11,782

Return on average assets (%)

1.77

1.85

Tier 1 capital (%)

15.2

14.7

Source: Company



RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (million)

Rating

29 September 2017

31 March 2017

20 June 2014

Issuer rating

Long-term/Short-term

-

IND AA+/Stable/IND A1+

IND AA+/Stable/IND A1+

IND AA+/Stable/IND A1+

IND AA+/Stable/IND A1+

Non-convertible debentures (NCDs)*

Long-term

INR175,000

IND AA+/Stable

IND AA+/Stable

IND AA+/Stable

IND AA+

Bank loans

Long-term/Short-term

INR130,000

IND AA+/Stable/IND A1+

IND AA+/Stable/IND A1+

IND AA+/Stable/IND A1+

IND AA+/ IND A1+

Subordinated debt

Long-term

INR46,200

IND AA+/Stable

IND AA+/Stable

IND AA+/Stable

IND AA+

Short-term debt/CP programme

Short-term

INR75,000

IND A1+

IND A1+

IND A1+

IND A1+

Term deposit

Long-term

-

IND tAA+/Stable

IND tAA+/Stable

IND tAA+/Stable

IND tAA+

*Details in annexure

ANNEXURE

SUBORDINATED DEBT

 

ISIN

Date of Issuance

Coupon Rate

Maturity Date

Size of Issue (million)

Rating/Outlook

INE721A08CV0

1 December 2016

8.50%

30 May 2024

INR400

IND AA+/Stable

INE721A08CW8

1 December 2016

8.50%

1 December 2026

INR600

IND AA+/Stable

INE721A08CX6

29 December 2016

8.50%

29 December 2026

INR750

IND AA+/Stable

INE721A08CY4

17 October 2017

8.20%

15 October 2027

INR 2,890

IND AA+/Stable

 

 

 

Total utilised

INR4,640

 

 

 

 

Total unutilised

INR41,560

 

 

 

 

Total

INR46,200

 

 

 

NCDs

ISIN

Date of Allotment

Coupon

Maturity Date

Size of Issue (million)

Rating/Outlook

INE721A07HP3

21 July 2014

10.00%

19 July 2019

INR5,000

IND AA+/Stable

INE721A07HQ1

5 August 2014

10.00%

5 August 2019

INR5,000

IND AA+/Stable

INE721A07HR9

28 August 2014

10.00%

28 August 2019

INR2,500

IND AA+/Stable

INE721A07HV1

12 September 2014

10.00%

12 September 2019

INR1,250

IND AA+/Stable

INE721A07HY5

18 September 2014

10.25%

18 September 2024

INR3,000

IND AA+/Stable

INE721A07HZ2

19 September 2014

9.75%

19 September 2019

INR500

IND AA+/Stable

INE721A07IA3

19 September 2014

9.85%

19 September 2021

INR500

IND AA+/Stable

INE721A07IG0

10 October 2014

10.25%

10 October 2024

INR4,750

IND AA+/Stable

INE721A07II6

31 October 2014

10.10%

31 October 2024

INR250

IND AA+/Stable

INE721A07IM8

11 November 2014

9.55%

11 April 2018

INR500

IND AA+/Stable

INE721A07IN6

11 November 2014

9.55%

11 June 2018

INR500

IND AA+/Stable

INE721A07IO4

13 November 2014

10.00%

13 November 2024

INR3,580

IND AA+/Stable

INE721A07IR7

28 November 2014

9.90%

28 November 2024

INR1,000

IND AA+/Stable

INE721A07IS5

28 November 2014

9.95%

28 November 2019

INR750

IND AA+/Stable

INE721A07JB9

5 January 2015

Benchmark + Spread (payable monthly), i.e. 10% - 0.10% resulting into yield of 9.90% payable monthly

5 January 2022

INR5,000

IND AA+/Stable

INE721A07JC7

19 January 2015

9.35%

17 January 2020

INR150

IND AA+/Stable

INE721A07JE3

4 February 2015

9.15%

4 February 2020

INR300

IND AA+/Stable

INE721A07JF0

24 February 2015

9.3%^

19 July 2018

INR450

IND AA+/Stable

INE721A07JJ2

2 March 2015

9.3%^

26 April 2018

INR310

IND AA+/Stable

INE721A07JK0

2 March 2015

9.25%^

10 April 2018

INR70

IND AA+/Stable

INE721A07JM6

30 March 2015

9.15%^

4 April 2018

INR160

IND AA+/Stable

INE721A07JP9

17 April 2015

9.15%

13 March 2019

INR3,000

IND AA+/Stable

INE721A07JQ7

20 April 2015

9.00%

20 April 2018

INR100

IND AA+/Stable

INE721A07JR5

17 August 2015

8.85%^

28 August 2018

INR170

IND AA+/Stable

INE721A07JS3

4 December 2015

8.80%

4 December 2020

INR150

IND AA+/Stable

INE721A07JT1

14 December 2015

8.75%^

11 April 2019

INR350

IND AA+/Stable

INE721A07JU9

22 December 2015

8.75%

21 December 2018

INR100

IND AA+/Stable

INE721A07JV7

15 March 2016

9.10%

15 March 2019

INR100

IND AA+/Stable

INE721A07JW5

18 March 2016

9.25%

18 March 2021

INR1,000

IND AA+/Stable

INE721A07JX3

18 March 2016

9.30%

18 March 2026

INR1,000

IND AA+/Stable

INE721A07KA9

29 March 2016

9.25%

29 March 2021

INR750

IND AA+/Stable

INE721A07KB7

29 March 2016

9.30%

27 March 2026

INR1,450

IND AA+/Stable

INE721A07KC5

13 April 2016

9.15%

13 April 2021

INR5,160

IND AA+/Stable

INE721A07KD3

13 April 2016

9.22%

13 April 2026

INR1,790

IND AA+/Stable

INE721A07KE1

22 April 2016

9.20%

22 April 2026

INR260

IND AA+/Stable

INE721A07KF8

29 April 2016

9.05%

29 April 2021

INR150

IND AA+/Stable

INE721A07KG6

25 May 2016

9.05%

25 May 2023

INR500

IND AA+/Stable

INE721A07KH4

9 June 2016

8.85%

10 June 2019

INR200

IND AA+/Stable

INE721A07KI2

9 June 2016

9.05%

9 June 2023

INR125

IND AA+/Stable

INE721A07KJ0

10 June 2016

8.92%^

10 June 2021

INR50

IND AA+/Stable

INE721A07KK8

30 June 2016

9.05%

30 June 2021

INR850

IND AA+/Stable

INE721A07KM4

5 July 2016

9.00%

5 July 2019

INR800

IND AA+/Stable

INE721A07KN2

5 July 2016

9.00%

5 August 2019

INR850

IND AA+/Stable

INE721A07KP7

19 July 2016

9.05%

19 July 2023

INR750

IND AA+/Stable

INE721A07KZ6

3 August 2016

8.85%

3 August 2021

INR4,500

IND AA+/Stable

INE721A07LD1

8 August 2016

8.87%

8 August 2026

INR1,100

IND AA+/Stable

INE721A07LH2

30 August 2016

8.45%

30 August 2021

INR200

IND AA+/Stable

INE721A07LS9

24 March 2017

8.10%

24 March 2020

INR100

IND AA+/Stable

INE721A07LT7

27 March 2017

7.91%^

29 June 2018

INR5,000

IND AA+/Stable

INE721A07LV3

29 March 2017

1st November 2017: 7.65% p.a.  29 March 2018: 7.75% p.a.        29 September 2018:  7.85% p.a.  29 March 2019: 7.90% p.a.        30 September 2019: 7.95% p.a.     27 March 2020: 8.05% p.a.

27 March 2020

INR5,000

IND AA+/Stable

INE721A07LW1

29 March 2017

29 March 2018: 7.75% p.a.  
29 March 2019 : 7.90% p.a.
 27 March 2020: 8.10% p.a.

27 March 2020

INR2,500

IND AA+/Stable

INE721A07LX9

29 March 2017

8.10%

27 March 2020

INR2,500

IND AA+/Stable

INE721A07LY7

29 March 2017

7.89%^

29 June 2018

INR1,000

IND AA+/Stable

INE721A07LZ4

30 March 2017

8.10%

29 May 2020

INR1,250

IND AA+/Stable

INE721A07MA5

30 March 2017

1st year Coupon= 8.10% p.a.2nd and 3rd Year Coupon = 1 Year CD rate +1.50% p.a.

30 March 2020

INR2,500

IND AA+/Stable

INE721A07MB3

30 March 2017

8.15%

30 March 2022

INR50

IND AA+/Stable

INE721A07MC1

31 March 2017

8%^

28 March 2019

INR500

IND AA+/Stable

INE721A07MD9

31 March 2017

8.15%

31 March 2022

INR450

IND AA+/Stable

INE721A07MF4

9 June 2017

Zero Coupon
 If Put exercised on 9 July 2018 - 7.75%
If not exercised (on maturity) - 7.95%

7 June 2019

INR1,000

IND AA+/Stable

INE721A07MG2

9 June 2017

Zero Coupon
If Put exercised after 13 Months  - 7.75%
If Put exercised after 24 months  - 7.95%
If Put exercised after 31 months  - 7.95%
If not exercised (on maturity)      - 8.00%

9 June 2020

INR2,500

IND AA+/Stable

INE721A07MH0

12 June 2017

If Put exercised on 12 July 2018 - 7.75%
If not exercised (on maturity) - 7.95%

12 June 2019

INR2,500

IND AA+/Stable

INE721A07MI8

12 June 2017

7.85%

12 June 2018

INR3,000

IND AA+/Stable

INE721A07ML2

16 June 2017

7.92%

14 June 2019

INR1,000

IND AA+/Stable

INE721A07MN8

27 June 2017

7.84%

26 June 2020

INR850

IND AA+/Stable

INE721A07MX7

22 August 2017

7.73%

22 August 2022

INR2,750

IND AA+/Stable

INE721A07NA3

30 November 2017

8.00%

30 November 2022

INR700

IND AA+/Stable

INE721A07HI8

15 July 2014

10.00%

15 July 2019

INR3,841

IND AA+/Stable

INE721A07HJ6

15 July 2014

10.15%

15 July 2021

INR1,361

IND AA+/Stable

INE721A07HK4

15 July 2014

9.57%

15 July 2019

INR278

IND AA+/Stable

INE721A07HL2

15 July 2014

9.71%

15 July 2021

INR352

IND AA+/Stable

INE721A07HN8

15 July 2014

 

15 July 2019

INR152

IND AA+/Stable

INE721A07HO6

15 July 2014

 

15 July 2021

INR281

IND AA+/Stable

 

Total

 

 

INR102,390

 

 

NCDs raised under the rated limit but redeemed

INR31,625

 

 

Unutilised NCD limit

INR40,985

 

^Zero coupon bond


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

Ind-Ra is a 100% owned subsidiary of the Fitch Group.

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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

    Media Relation

    Namita Sharma

    Manager – Corporate Communication
    +91 22 40356121