By Jindal Haria

India Ratings and Research (Ind-Ra) has affirmed Shriram Housing Finance Limited’s (SHFL) Long-Term Issuer Rating at ‘IND AA’. The Outlook is Stable. 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 loans

-

-

-

INR15.0

IND AA/Stable

Affirmed

Non-convertible debentures* (NCDs)

-

-

-

INR6.0 (reduced from INR6.5)

IND AA/Stable

Affirmed

*Details in Annexure

Analytical Approach: The ratings factor in the support SHFL receives from its parent, Shriram City Union Finance (SCUF; ‘IND AA’/Stable, 77.25% stake) and also in the latter’s credit strength.

KEY RATING DRIVERS

Support-Driven Rating: SCUF is likely to remain SHFL’s single-largest shareholder and retain management control in the foreseeable future. Ind-Ra considers SHFL important 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; its new business strategy also focuses on leveraging the Shriram Group’s customer and distribution network especially in states where the group has a dominant presence. In 2HFY19, senior management from the Shriram Group were moved in various functions including the MD & CEO of SHFL, to strengthen the management team of SHFL. More executives at senior execution levels are also likely to make a similar transition. SHFL has access to funding lines worth INR3 billion (enhanced from INR1 billion) from SCUF in the form of short-term bridge lines, which in the agency’s assessment are adequate to meet its stress case contingent liquidity needs. 

New Business Strategy May Improve the Deteriorated Asset Quality:
SHFL’s gross non-performing loans fell to 2.8% in 3QFY19 (FY18: 5.0%; FY17: 2.5%, FY16: 2.8%), mainly due to the sale of NPAs to asset reconstruction companies to the tune of INR0.8 billion (4.1% of 1HFY19 assets under management). Ind-Ra expects that the newer originations that have been subject to the new risk and pricing frameworks could fare better. The company is also reworking its business strategy and plans to provide home loans even across non-affordable segments and would concentrate in seven key states (presence in 17 states) rather than spreading out. The company also plans to become more flexible in its pricing matrices depending on borrower behaviour to prevent foreclosures. This could help improve asset quality at relatively lower yields. Furthermore, SHFL plans to grow its loan book to about INR30 billion by FY20, based on this reworked strategy under the new leadership. 

Low Leverage:
SHFL’s leverage was low at 3.3x at end-9MFY19 (1HFY19: 3.6x; FY18: 3.2x; FY17: 3.3x), which can support its loan growth target at a CAGR 30% for FY20-FY21 without fresh capital infusions. The company expects to maintain its leverage (debt to equity) at about 5x in the medium term. Ind-Ra however believes that the parent is committed to infuse equity, when required. SHFL may need equity as it scales up its assets under management with a better operating performance than observed for legacy originations. 

Adequate Liquidity:
SHFL had unutilised bank lines of INR1.3 billion and on-balance sheet liquidity of INR0.86 billion at end-December 2018. SHFL has utilised the line from the parent when required; currently, it does not have any outstanding amount against the facility. Also, its short-term liabilities exceed the short-term assets by about 15% of total assets and this is comparable to peers.


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 dilution in SCUF’s management control, a reduction in stake of SCUF 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. Persistent under performance and consequent changes in the long-term strategy of SCUF may also result in a revaluation of the ratings.


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. The company had a network of 88 branches across 17 states and union territories at end-December 2018. 

FINANCIAL SUMMARY
 

Parameters

FY18

FY17

Total assets (INR million)

19,795.1

19,294.4

Total equity (INR million)

4,525.4

4,236.6

Net income (INR million)

288.9

289.6

Return on average assets (%)

1.5

1.8

Tier 1 capital (%)

32.0

29.3

Source: SHFL


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook/Rating Watch

Rating Type

Rated Limits (billion)

Rating

12 December 2017

1 September 2017

1 July 2016

23 March 2016

Bank loan

Long-term

INR15.0

IND AA/Stable

IND AA/Stable

IND AA/RWE

IND AA/Stable

IND AA/Stable

NCDs

Long-term

INR6.0

IND AA/Stable

IND AA/Stable

IND AA/RWE

IND AA/Stable

IND AA/Stable

ANNEXURE

Instrument

ISIN

Date of Issuance

Coupon Rate

Maturity Date

Size of Issue (billion)

Rating/Outlook

NCDs

INE432R07109

27 October 2015

9.00

27 October 2020

INR0.40

IND AA/Stable

NCDs

INE432R07117

29 April 2016

9.00

29 April 2023

INR0.25

IND AA/Stable

NCDs

INE432R07125

2 May 2016

9.00

2 May 2023

INR0.15

IND AA/Stable

NCDs

INE432R07141

1 July 2016

9.50

1 July 2021

INR0.20

IND AA/Stable

NCDs

INE432R07133

28 June 2016

9.50

28 June 2018

INR0.50

WD (paid in full)

NCDs

 

Total unutilised

 

 

INR5.00

 

 

 

Total

 

 

INR6.00

 


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

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 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. 

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

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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