Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA-/Stable/CRISIL A1+’ ratings on the debt instruments of Hinduja Housing Finance Ltd (HHFL). The ratings factor in the expected strong financial, operational, and management support from the parent, Hinduja Leyland Finance Ltd (HLF: ‘CRISIL AA-/Stable/CRISIL A1+’), both on an ongoing basis and in the event of any distress. This is on account of the strategic importance of HHFL to HLF, and the strong moral obligation of the parent to support the former. The ratings also factor in adequate capitalisation and earning profile of the company. These strengths are constrained by moderate scale of operations. Additionally, asset quality in this pandemic environment remains a monitorable.

HHFL is the housing finance arm of HLF, which holds 100% stake in the company. HHFL is likely to receive strong support from HLF given its strategic importance to the parent as well as the strong moral obligation of the parent to support the subsidiary. HHFL is strategically important to HLF, as it is the entity for growing the home loan business, which is a focus area for the parent. The parent plans to hold 100% stake in the near term, and is willing to infuse additional capital to support growth requirement over the medium term.

With regular equity infusions, capitalisation metrics of the company remain comfortable. Networth and adjusted gearing were adequate at Rs 291 crore and 6.0 times as on December 31, 2020. Capitalisation has been supported by regular capital infusion by the parent with HLF infusing Rs 215 crore till date. Out of this, Rs 25 crore was infused in the fourth quarter of fiscal 2021. Despite strong growth plans over the medium to long term, the capitalisation metrics are expected to remain adequate supported by regular capital infusion and internal accruals with adjusted gearing is expected to remain at 7-8 times on a steady state basis.

On the asset quality front, the proforma GNPA metrics remained comfortable at 2.4% as on December 31, 2020 as compared to 2.2% as on March 31, 2020. This is on account of the collection efficiencies improving to around 107%1 in Mar-21 from 76%1 in Sep-20. Furthermore, the company has not done any one-time restructuring under Covid-19 relief measures. Nevertheless, with the emergence of the recent lockdowns due to Covid-19, any substantial impact on collections and therefore asset quality metrics remains a key monitorable.

Analytical Approach

To arrive at the ratings, CRISIL has factored in support to HHFL from HLF because of the strategic importance of the former to the latter and the strong moral obligation of the parent towards its subsidiary. CRISIL Ratings’ credit ratings on HLF’s debt instruments factor in the expectation of strong support to HLF from ALL (Ashok Leyland Ltd) and the Hinduja group given the majority ownership and strategic importance of HLF to ALL and the group. 

Key Rating Drivers & Detailed Description

Strengths:

* Expectation of strong support from HLF

HHFL is the housing finance arm of HLF, which holds 100% stake in the company. HHFL is likely to receive strong support from HLF given its strategic importance to the parent as well as the strong moral obligation of the parent to support the subsidiary.

HHFL (the housing finance arm of HLF) is strategically important to HLF, as it is the vehicle for growing the home loan business, which is a focus area for the parent. Also, conducting the home loan business through a housing finance company allows for more efficient use of capital. Capitalisation has been supported by regular capital infusion by the parent with HLF infusing Rs 215 crore till date. The parent plans to hold 100% stake in the near term, and is willing to infuse additional capital to support growth requirement over the medium term. HHFL plans to follow a conservative gearing policy and maintain capital adequacy well above the regulatory norms. Both the companies have operational synergies, with HHFL operating through HLF’s branch network. Furthermore, HHFL also gets to leverage the banking relationships of its parent. The shared name also enhances HLF’s moral obligation to support HHFL.

* Adequate capitalisation

Networth was adequate at Rs 291 crore as on December 31, 2020, with regular capital infusions from HLF. Adjusted gearing was moderate at 6.0 times as on that date. Adjusted gearing is expected to remain at 7-8 times on a steady state basis. Capitalisation has been supported by regular capital infusion by the parent with HLF infusing Rs 215 crore till date. Out of this, Rs 25 crore was infused in the fourth quarter of fiscal 2021. Despite strong growth plans over the medium to long term, the capitalisation metrics are expected to remain comfortable, supported by regular capital infusion and internal accruals.

* Adequate earnings

HHFL has been profitable since inception as a result of controlled credit cost and low operational expenses as it operates out of branches of HLF. Also, the cost of funds for HHFL is low as the company leverages its parent’s tie-ups. Cost of funding2 of the company was 8.6% (annualised) in first nine-months of fiscal 2021 lower than 9.0% in fiscal 2020. Credit costs increased and were at 0.9% (annualised) and 1.0% in 9M FY21 and FY20, respectively, as compared to 0.4% in fiscal 2019 majorly on account of increase in provisioning coverage for Stage 1 and 2 accounts. Operating expenses reduced in 9M FY21 due to low volumes in Q1 FY21 and cost saving measures taken by the company. Consequently, return on managed assets (RoMa) stood at 1.8% (annualised) in 9M FY21 as compared to 2.2% in fiscal 2020. The ability to manage asset quality amidst the weak macro-economic environment and, hence, maintain credit cost will determine the earnings profile of the company which remains a key monitorable.

 

Weakness:

Moderate scale of operations with limited track record

HHFL started full-fledged operations in July 2016. While housing finance will remain the focus area, HHFL will also continue to offer products such as small-ticket LAP, while large-ticket LAP will be on HLF’s books. As on December 31, 2020, the assets under management for HHFL stood at Rs 2,130 crore with over 90% of the loans being to self-employed professionals. Of this, 60% of the AUM comprises housing loans, 25% is small ticket LAP and balance 15% comprises of portfolio buyouts.

 

HHFL leverages HLF’s infrastructure and resources to source business, and operates from HLF’s branches across metro and non-metro cities. Given the synergies with its parent, HHFL should scale up its loan portfolio rapidly over the long term. However, the growth will be moderate over the near to medium term on account of the weak macro-economic environment induced by the pandemic. The overall AUM is also relatively unseasoned with around 50% of overall cumulative disbursements having taken place over the last 24 months only.

 

*Asset quality remains a monitorable

Driven by dedicated collection efforts, pro-forma GNPA remained comfortable at 2.4% as on December 31, 2020 as compared to 2.2% as on March 31, 2020. Having said that, the portfolio is unseasoned. Within segments, pro-forma GNPA stood at 3.6%, 0.8% and 0%, for housing loans, small ticket LAP and portfolio buyouts, respectively. Collection efficiencies while improved to 107%3 in Mar-21 from as low as 40%3 in May-20, given the gradual improvement in collection efficiencies post moratorium period, there was inch-up in early delinquency buckets which is witnessed across players..

 

Furthermore, there are no overdues in the portfolio buyouts. Adjusted for the same, the 60+ delinquencies are high at 15.8% as on December 31, 2020 posing a risk of roll-forwards to NPA especially in this pandemic-stricken weak economic environment. Therefore, the ability to restrict the same will remain a key monitorable.

 

Having said that, during first nine-months of fiscal 2021, the company changed their organisation structure and set up a dedicated team of more than 100 on-field collection personnel along with having proper supervisory collection chain. Earlier, on field sales team of around 500 people used to be responsible for collections. This helped the company in improving its collection efficiency along with keeping NPAs under control.

 

Also, HHFL has put in place adequate systems and processes to manage risks which it keeps on tightening and refining regularly based on the feedback from the collections team. It operates on a cluster-based model, wherein each cluster consists of at most eight locations, and up to eight clusters form a region. Each application is run through several checks including know-your-customer norms, risk assessment, personal discussion and verification of the business, and bank statements and references from existing customers. The income assessment is done by multiple methods depending on whether the income is based on salary or self-employment. The technical and the legal teams verify the quality of the asset that is given as collateral. The final approval for sanctioning the loan is from the credit team.

 

However, ability to manage asset quality as over the near term amidst the environment and as HHFL scales up its loan portfolio remains a key monitorable.

Liquidity: Strong

HHFL has an adequate ALM profile with positive cumulative mismatches up to 1 year bucket as on December 31, 2020 (excluding unutilised bank lines). Furthermore, the inflows in the ALM statement are plotted as per behavioural pattern analysis.  As on March 31, 2021, the company had Rs 162 crore of debt repayment (including CC/WCDL renewal or roll-over and interest payment) till June 2021, against which the company had liquidity of Rs 163 crore (including cash and equivalents and unutilised CC / WCDL lines). HHF also had Rs 280 crore of undrawn term loans.

Outlook Stable

CRISIL Ratings believes that HHFL will continue to benefit from strong support from HLF.

Rating Sensitivity factors

Upward factors

• Upward revision in CRISIL's view on HLF's credit risk profile by 1 notch or higher

 

Downward factors

• Decline in support from HLF or material change in HLF's shareholding in HHLF or downward revision in CRISIL's view on the credit profile of HLF by 1 notch or higher
• Deterioration in asset quality metrics translating into pressure on profitability and capitalisation

About the Company

HHFL, the housing finance arm of HLF, was incorporated as a wholly owned subsidiary of HLF on April 15, 2015. On September 30, 2015, HHFL received a certificate of registration from the National Housing Bank. The company offers various retail products such as home loans, construction loans, composite loans, home extension loans, home improvement loans, and LAP.

 

 ¹Collection efficiency= Current + OD collections divided by current billing

2 Finance cost divided by average of end period on-book borrowing

3 Collection efficiency= Current + OD collections divided by current billing.

Key Financial Indicators

As on/for the nine months/for the year ended	Unit	Dec - 20	March- 20	March- 19
Total assets	Rs crore	2157.3	1696.6	1301.8
Total income	Rs crore	173.0	208.9	140.2
PAT	Rs crore	25.5	33.7	25.0
GNPA	%	2.36	2.21	1.78
Adjusted gearing	Times	6.0	5.2	5.7
Return on managed assets	%	1.8*	2.2	2.4

 *Annualised

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs.Crore)	Complexity Level	Rating outstanding with outlook
NA	Debenture^	NA	NA	NA	200	Simple	CRISIL AA-/Stable
NA	Commercial paper	NA	NA	7-365	125	Simple	CRISIL A1+

^Yet to be issued