Rating Rationale
March 13, 2018 | Mumbai
HDFC Securities Limited
Ratings Reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.300 Crore
Long Term Rating CRISIL AAA/Stable (Reaffirmed)
Short Term Rating CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its 'CRISIL AAA/Stable/CRISIL A1+' ratings on the Rs 300 crore bank loan facilities of HDFC Securities Ltd (HDFC Securities).
 
The ratings continue to reflect HDFC Securities' strategic importance to, and strong expectation of support from, its parent, HDFC Bank Ltd (HDFC Bank; rated 'CRISIL AAA/CRSIL AA+*/Stable'). The ratings also factor in HDFC Securities' comfortable capitalisation. These strengths are partially offset by susceptibility to risks associated with capital-market-related businesses.

Analytical Approach

For arriving at the ratings, CRISIL has factored in the support that HDFC Securities is expected to receive from HDFC Bank.

Key Rating Drivers & Detailed Description
Strengths
* Expectation of support from the parent, HDFC Bank  
CRISIL believes that HDFC Securities is an important subsidiary of HDFC Bank, as it complements the bank's product offerings by providing a platform for services related to capital markets and financial products distribution to its customers. Such services not only strengthen the business franchise of the bank but also support its efforts towards increasing its low-cost retail deposit base. Also, the company helps the bank strengthen its client relationships. Furthermore, there exists strong operational and managerial integration between HDFC Bank and HDFC Securities. The latter benefits significantly from the strong retail franchise and nationwide branch infrastructure of the parent. The bank shares its strong technology platform and risk management practices with the company. Moreover, some of the senior management personnel of HDFC Securities, including the managing director and chief executive officer, are on deputation from HDFC Bank. HDFC Securities also has board representation from HDFC Bank. The bank is committed to provide both funding and capital assistance to HDFC Securities on an ongoing basis to support its business growth over the medium term. The strong operational, managerial, and financial linkages, along with the significant holding and shared brand name, imply a strong moral obligation on HDFC Bank to support HDFC Securities, both on an ongoing basis and in the event of any distress.
 
* Comfortable capitalisation
HDFC Securities is well capitalised, with a networth of Rs 917 crore and nil gearing as on September 30, 2017. The gearing is negligible and is expected to remain low over the medium term since the borrowing requirements of the company are largely to meet the margin requirements at exchanges and the networth is expected to remain adequate for the company's current and planned scale of operations. Moreover, the promoters will infuse capital into the company as and when needed.
 
Weakness
* Exposure to risks associated with capital market-related businesses
The company's main broking business remain exposed to economic, political, and social factors that drive investor sentiments. Given the cyclical nature of the business, the company's brokerage volumes and earnings are highly dependent on the level of trading activity in the capital markets. This makes earnings and profitability volatile.
Outlook: Stable

CRISIL believes HDFC Securities will continue to benefit from the strong financial, managerial, and operational support from HDFC Bank. The outlook may be revised to 'Negative' if there is a significant weakening of the HDFC Bank's credit risk profile, a change in the extent of the bank's ownership of HDFC Securities, or diminution in the expected support from the parent. 

About the Company

HDFC Securities, a subsidiary of HDFC Bank, was incorporated in fiscal 2001 as a joint venture between HDFC Ltd and HDFC Bank; Indocean e-Securities Holdings Ltd (Indocean) later joined as venture capitalist. The bank has increased its stake in HDFC Securities over a period. The bank holds 98.1% stake in HDFC Securities as on November 2017; the remaining 1.9% is held by the current and past employees of HDFC Securities. The company had a network of 262 own branches as on September 30, 2017; it also has an effective internet and call centre model.
 
HDFC Securities offers broking services both in the cash equity and derivative market segments including the currency derivative segment. The retail broking segment accounted for about 97% of total broking income for fiscal 2017. The income from broking activities was Rs 421 crore, and constituted around 76% of the total income for fiscal 2017. It also distributes third-party products, such as mutual funds, insurance, bonds, fixed deposits, initial public offerings, and non-convertible debentures. The company is one of the largest non-bank distributor for HDFC Life. It caters mainly to customers of HDFC Bank and is among the equity brokerage firms with the largest retail client base; it had over 2.0 million customers as on date. HDFC Securities remains a strong player in the cash segment, however its presence in the F&O market segment remains small.
 
In the half year ended September 30, 2017, profit after tax (PAT) was Rs 146.9 crore on total income of Rs 351.4 crore, against PAT of Rs 100.3 crore on total income of Rs 262.7 crore in the corresponding period of the previous fiscal. In fiscal 2017, PAT was Rs 216 crore on total income of Rs 553 crore as against PAT of Rs 133 crore on total income of Rs 402 crore in fiscal 2016.

*Tier I bonds (Under Basel III)

Key Financial Indicators
As on / for the period ended September 30      Unit 2017 2016
Total Assets Rs crore 1385 1226
Total income Rs crore 351 263
Profit after tax Rs crore 147 100
Gross NPA % Nil Nil
Adjusted gearing (for NBFCs) Times Nil Nil
Return on assets % 21.3 17.6

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.
Annexure - Details of Instrument(s)
ISIN Name of Instrument Date of allotment Coupon rate (%) Maturity date Issue size
(Rs Cr)
Rating assigned
with outlook
NA Bank Guarantees* NA NA NA 40 CRISIL A1+
NA Long-Term Bank Facility* NA NA NA 225 CRISIL AAA/Stable
NA Proposed Long Term Bank Loan Facility NA NA NA 35 CRISIL AAA/Stable
*HDFC Bank limits are interchangeable between funded and non-funded
Annexure - Rating History for last 3 Years
  Current 2018 (History) 2017  2016  2015  Start of 2015
Instrument Type Quantum Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund-based Bank Facilities  LT/ST  260  CRISIL AAA/Stable    No Rating Change    No Rating Change    No Rating Change    No Rating Change  CRISIL AAA/Stable 
Non Fund-based Bank Facilities  LT/ST  40  CRISIL A1+    No Rating Change    No Rating Change    No Rating Change    No Rating Change  CRISIL A1+ 
Table reflects instances where rating is changed or freshly assigned. 'No Rating Change' implies that there was no rating change under the release.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Bank Guarantee* 40 CRISIL A1+ Bank Guarantee* 75 CRISIL A1+
Long Term Bank Facility* 225 CRISIL AAA/Stable Long Term Bank Facility* 75 CRISIL AAA/Stable
Proposed Long Term Bank Loan Facility 35 CRISIL AAA/Stable Proposed Bank Guarantee 100 CRISIL A1+
-- 0 -- Proposed Long Term Bank Loan Facility 50 CRISIL AAA/Stable
Total 300 -- Total 300 --
*HDFC Bank limits are interchangeable between funded and non-funded
Links to related criteria
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating Criteria for Securities 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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