| Gruh Finance Limited | ||||||||||
| Long-term and FD rating continues on 'Watch Negative'; CP reaffirmed | ||||||||||
| Rating Action | ||||||||||
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| 1 crore = 10 million | ||||||||||
| Refer to annexure for Details of Instruments & Bank Facilities |
| Detailed Rationale |
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CRISIL's ratings on the long-term debt instruments and fixed deposit programme of Gruh Finance Limited (Gruh) remain on 'Rating Watch with Negative Implications'. The rating on the commercial paper is reaffirmed at 'CRISIL A1+. |
| Analytical Approach |
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For arriving at the ratings, CRISIL has analyzed the business and financial risk profile of the company. Till the transaction is consummated, the ratings also continue to centrally factor in the company's strategic importance to, and the strong support it is expected to receive from, its promoter, HDFC Ltd. Post completion of the transaction, the analytical approach would not factor in the expectation of support from HDFC and the merged entity will be evaluated on standalone basis. |
| Key Rating Drivers & Detailed Description |
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Strengths * Expectation of continued strong support from the company's majority owner, HDFC Till the transaction is consummated, the ratings will continue to reflect the expectation of continued strong support from its majority owner, HDFC. HDFC is also expected to continue to provide strong strategic, management and financial support to the company till the amalgamation is completed. The company receives strong management support from HDFC in the form of representation on the board and plays an active role in the formulation of Gruh's guidelines and policies. Additionally, HDFC extends operational support to Gruh, as its operating policy, sanctioning norms, and loan schemes are formulated with inputs from HDFC. In the past, HDFC has also invested in Gruh's subordinated debt programme and has bought Gruh's securitised portfolio. Gruh's association with HDFC enables bank funding at competitive rates. Gruh operates in the same industry as its parent, but caters to a different market segment (affordable housing low-income group in rural and semi-urban areas), thereby making the relationship with the parent complementary. Moreover, Gruh cross-sells insurance products of HDFC group. CRISIL believes receiving of all regulatory approvals and more clarity on the proposed business plans of the combined entity post the transaction is concluded will be a key rating sensitivity factor. * Healthy asset quality Gruh has demonstrated its ability to maintain healthy asset quality over the business cycles as the gross non-performing assets (NPAs) have remained lower than the industry average, over the past few years. As on March 31, 2019, the gross NPAs and two-year lagged gross NPAs stood at 0.66% and 0.86% respectively (gross NPA of 0.45% and 0.63% respectively as on March 31, 2018), and were lower than the industry average. This is despite the company catering to relatively riskier low-income group customer segments and having nearly 41% of the customers in the non-salaried segment. Asset quality is supported by Gruh's strong risk management systems and recovery processes developed based on its strong business understanding emanating from a three decade long presence in this segment. It also benefits significantly from the expertise of its parent (HDFC) in risk management systems and processes. Further, the company follows prudent lending policies and has limited exposure to riskier segment such as construction finance (< 5% of the portfolio). CRISIL believes Gruh's strong risk management systems, prudent underwriting norms and collection mechanisms will enable it to maintain healthy asset quality over the medium term. * Comfortable earnings profile Gruh has comfortable earnings profile, driven by relatively high interest spreads and continued low credit costs. Gruh benefits from high interest yields, given its strong focus on the affordable housing segment. Furthermore, the company has low cost of borrowings compared to peers in the same segment which translates into a higher-than-industry average net interest margin. Consequently, the company's return on average assets (RoA), at 2.6% for fiscal 2019 (2.5% in fiscal 2018), was higher than that of some large housing finance companies (HFCs). While spreads may be under pressure amidst the rising rates scenario and intensified competition in the housing loans segment, Gruh's profitability is expected to remain higher than industry average over the medium term supported by low credit costs. * Benefits arising from strong growth potential in affordable housing Gruh is also expected to benefit from strong growth potential arising in the affordable housing segment as the Government of India is offering incentives to promote faster development of the affordable housing segment. It has more than three decades of experience in the affordable housing segment and is therefore expected to benefit from strong growth potential in the affordable housing segment. A major chunk of the demand for housing over the next few years may be in this segment, where the financing potential is sizeable. Government of India is also offering incentives such as credit-linked subsidy to customers, and schemes for builders under 'Affordable Housing in Partnership', under the Pradhan Mantri Awas Yojana. Further, state Governments such as Maharashtra, Gujarat, Madhya Pradesh and Rajasthan are more active than other states in promoting the affordable housing segment. Gruh has created a strong competitive position in affordable housing finance segment. Its assets under management have grown at a compound annual growth rate of around 20.0% over the past five years to Rs 17408 crore as on March 31, 2019. The company has requisite expertise, reach and risk management systems to cater to this segment which will translate to a strong growth potential for the company in this segment. CRISIL believes Gruh, being a leading player, will benefit from the expected growth potential in the affordable housing finance segment and maintain healthy growth over the medium term. Weaknesses * Modest asset-liability management (ALM) profile given its high dependence on short-term funds Gruh's asset liability maturity (ALM) profile is modest because of relatively high reliance on short-term borrowings, resulting in a larger asset-liability maturity mismatch in the up to one-year bucket, as against its peers. The company has a higher proportion of short-term debt than its peers. This helps Gruh to take advantage of low interest costs and benefit from the pricing differential between short- and long-term borrowings. The company has, thus far, efficiently managed ALM mismatches across interest rate cycles, and during stretched liquidity, indicating good treasury management practices and established relations with bankers. Nevertheless, the company has been taking steps to reduce their dependence on short term borrowings and increase the proportion of long term borrowings. Sustainable diversification towards longer tenor borrowings over the medium term is a monitorable. * Geographical concentration in operations Gruh operates primarily in the rural and semi-urban areas of Gujarat and Maharashtra (together comprising around 63% of the outstanding portfolio as on March 31, 2019). While it has expanded operations across other states to support growth and diversification, Gujarat and Maharashtra will continue to remain the key growth areas and thus, susceptible to high geographic concentration risks. |
| Liquidity |
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Gruh has 8.43% of positive cumulative mismatches in the upto one year bucket its ALM as on March 31, 2019. As on June 30, 2019, the company has Rs 1239 crore of total repayment (including commercial paper, other debt repayments and dividend) due for repayment till Nov 30, 2019. Against this, it has cash and cash equivalents of Rs.2700 crore, as well as unutilized working capital bank lines of Rs.650 crore and an average monthly collections of around Rs.250 crore. |
| About the Company |
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Gruh (formerly, Gujarat Rural Housing Corporation Ltd) was set up in 1986 by HDFC and the Aga Khan Fund for Economic Development, to provide an institutional structure to rural housing finance. Gruh primarily extends housing loans to individuals in rural and semi-urban areas and caters to the low-income group. It has a distinct target market segment, which complements that of HDFC's target market segment. As on December 31, 2018, Gruh had a networth and gearing of Rs 1758 crore and 10.3 times, respectively. |
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Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
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| Links to related criteria |
| Rating Criteria for Finance Companies |
| CRISILs Criteria for rating short term debt |
| Criteria for Notching up Stand Alone Ratings of Companies based on Parent Support |
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