By Jindal Haria

India Ratings and Research (Ind-Ra) has affirmed Shriram City Union Finance Limited’s (SCUF) Long-Term Issuer Rating at ‘IND AA’ with a Stable Outlook and Short-term Issuer Rating at ‘IND A1+’. The instrument-wise rating actions are given below:

Instrument Type

Date of Issuance

Coupon Rate (%)

Maturity Date

Size of Issue (billion)

Rating/Outlook

Rating Action

Bank loan

-

-

-

INR150.00

IND AA/Stable

Affirmed

Long-term debt programme*

-

-

-

INR0.05 (reduced from INR0.3)

IND AA/Stable

Affirmed

Fixed deposit programme

-

-

-

-

IND tAA/Stable

Affirmed

* Details in Annexure

KEY RATING DRIVERS

Healthy Capitalisation: SCUF reported Tier 1 capital adequacy ratio of 22.5% in 9MFY19 (FYE18: 20.6%). When adjusted for the capital infused in its housing subsidiary, the Tier 1 capital comes to be about 21.9% for 9MFY19. This in the agency’s opinion is adequate to support SCUF’s moderate loan growth targets of about 18-20% CAGR over the next two-three years. The company aims at maintaining a minimum Tier 1 capital of about 15% in the long term. In the agency’s view, it will also be able to meet the capital requirements of its housing subsidiary. 

Growing SME Segment, Yields Could Decline:
SCUF would continue to focus on the small and medium enterprises (SME) loan segment, constituting 60% of its advances. The management expects the SME loan segment to constitute about 65% of SCUF’s aggregate loans under management over the medium term. SCUF’s average disbursement per SME loan account increased to INR1 million-1.5 million in FY18 and 1HFY19 (FY16: INR0.8 million-1 million) and the company expects it to remain at similar levels. The yields could decline over the next two years as the asset mix changes and the segment becomes more competitive as banks resume lending and some non-banking financial companies and small finance banks operating in this segment scale up.

Comfortable Funding and Liquidity 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. However, the presence of several banks offsets concentration risk. SCUF also raised non-convertible debentures of INR15.9 billion and issued cumulative commercial papers of INR43.9 billion during 2Q-3QFY19 when the market liquidity was tight. SCUF’s liquidity profile is aided by well-matched asset-liability tenors stemming from a shorter tenor asset profile relative to liabilities. The short-term assets exceed short-term liabilities by 13.1% of the total assets (9MFY19; including cash on balance sheet of INR18.45 billion). As the share of SME loans increases, the asset tenors could also increase, but in Ind-Ra’s assessment SCUF would remain in a liquidity surplus state in the short term. 

Marginal Decline in Credit Costs in FY19:
SCUF’s non-performing loans (NPLs) and credit costs had increased in FY18, due to the mandatory regulatory transition to recognise NPLs on a 90 days past due (dpd; gross NPA) basis. The gross NPL ratio had increased to 9.0% in FY18 (FY17: 6.7% on 120dpd). The 90 dpd has remained more or less steady at 8.7% at end-9MFY19 (around 9% in the last three years). Also, provision coverage ratio increased to 69% at end-9MFY19 (FY18: 62%). However, credit costs (as a percentage of assets under management) reduced to 2.8% on an annualised basis for 9MFY19 (FY18: 4.2%; FY17: 4.1%). The newer originations especially from SME and personal loan segments are performing better and the company thus expects its credit costs to continue to decline over the medium term. The credit costs under Ind-As could substantially increase in case the company is unable to control the bucket wise delinquencies at long term average levels. However, Ind-Ra expects SCUF’s pre-provision operating profit to sufficiently cushion any increases in delinquencies and credit costs over the near term without facing capital erosion.

Balancing RoAA and Provision Cover:
SCUF’s return on average assets (RoAA; 9MFY19 (annualised): 3.4%; FYE18: 2.6%; FYE17: 2.6%; FYE16: 2.7%) has remained stable and is likely to improve moderately, as incremental credit cost declines. Ind-Ra expects the company would witness pressure on yields, driven by increasing competition in the SME segment from non-banking financial companies and small finance banks. SCUF has lowered the provision coverage ratio (FY18: 62%, FY17: 72%, FY16: 70%) to maintain a RoAA of 2.5%-3.0% as it transitioned to 90dpd recognition of NPLs. The agency expects the company to maintain provision coverage in the range of 65%-70% (9MFY19: 69%) FY19 onwards. 


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. It had 969 branches at end-March 2018 and total loans under management of INR295 billion at end-September 2018. 

FINANCIAL SUMMARY
 

Parameters

FY18

FY17

Total assets (INR billion)

289.6

245.3

Total equity (INR billion)

55.6

50.3

Net income (INR billion)

6.6

5.5

Return on average assets (%)

2.63

2.57

Tier 1 capital (%)

20.57

22.22

Source: Company


RATING HISTORY

Instrument Type

Current Rating/Stable

Historical Rating/Outlook/Rating Watch

Rating Type

Rated Limits (billion)

Rating

12 December 2017

22 July 2016

11 April 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+

Long-term debt programme

Long-term

INR0.05

IND AA/Stable

IND AA/Stable

IND AA/Stable

IND AA

Long-term bank loans

Long-term

INR150

IND AA/Stable

IND AA/Stable

IND AA/Stable

IND AA

Fixed deposit programme

Long-term

-

IND tAA/Stable

IND tAA/Stable

IND tAA/Stable

IND tAA

ANNEXURE

Instrument Type

ISIN

Date of Issuance

Coupon Rate (%)

Maturity Date

Size of Issue (billion)

Rating/Outlook

Non-convertible debentures

INE722A07182

4 February 2011

10.75

4 February 2021

INR0.05

IND AA/Stable

Non-convertible debentures

INE722A07174

23 November 2010

10.60

13 December 2017

INR0.25

WD (paid in full)

 

Total

 

 

 

INR0.05

 


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.

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Analyst Names

  • Primary Analyst

    Jindal Haria

    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 40001750

    Media Relation

    Namita Sharma

    Manager – Corporate Communication
    +91 22 40356121