Detailed Rationale

CRISIL Ratings has assigned its ‘CRISIL AA/Stable’ rating on Rs 150 crore subordinated debt of Hinduja Housing Finance Limited (HHFL) and reaffirmed its ratings on the existing debt instruments at ‘CRISIL AA/Stable/CRISIL A1+’.

 

The ratings continue to 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. HHFL is the housing finance arm of HLF, which holds 100% stake in the company. HHFL 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 452 crore since inception, of which Rs 161 crore was infused in fiscal 2023.

 

On a standalone basis too, the performance of HHFL has remained comfortable with comfortable capitalisation metrics, strong growth in the loan book along with sequential rise in operational profitability, while maintaining comfortable asset quality metrics.  Nevertheless, these strengths are partially offset by the limited seasoning profile, given the lower vintage profile of the overall loan book, with majority of it being built over the past three years. Therefore, ability to continue to scale up business whilst maintaining asset quality metrics and earnings remains a key monitorable.

Analytical Approach

To arrive at the ratings, CRISIL Ratings has factored in support to HHFL from HLF because of the strategic importance of the former to the latter in the form of the parent support 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 452 crore since inception, of which Rs 161 crore was infused in fiscal 2023. The parent plans to hold single largest majority stake over the medium 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 earnings profile

HHFL has been profitable since inception, supported by controlled credit costs and low operational expenses, as it operates out of branches of HLF, in a shared model, albeit the company has started opening its own standalone branches as well in areas/regions where HLF is not present. Of the total 253 branches for HHFL, 159 are shared with HLF. Consequently, the operating expenses, as a percentage of average managed assets, remained comfortable at 1.8% in fiscal 2023, as compared to 1.9% in fiscal 2022 and 2% in fiscal 2021.

 

What has also supported the earnings profile is the low cost of funds as the company leverages its parent’s tie-ups with lenders. Consequently, the cost of funding[1] remained comfortable at 7.6% during fiscal 2023.

 

With controlled asset quality metrics, credit costs too remained comfortable at 0.8% (1.3% for fiscal 2022), return on managed assets (RoMA) for HHFL improved sequentially to 4.0%, in fiscal 2023, as compared to 3.2% in fiscal 2022 and 2.9% in fiscal 2021. 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.

 

• Comfortable capitalisation

Networth position of HHFL improved to Rs 916 crore as on March 31, 2023, with regular capital infusions from HLF. Adjusted gearing was moderate at 6.4 times as on that date. Adjusted gearing is expected to remain between 7-8 times on a steady state basis. Capitalisation has been supported by regular capital infusion by the parent with HLF infusing Rs 452 crore since inception. Out of this, Rs 161 crore was infused in fiscal 2023. 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.

 

Weakness

• Moderate seasoning profile, albeit high loan book growth

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.

 

During fiscal 2023, HHFL reported an annual growth of 65% in its overall assets under management (AUM), with it increasing to Rs 6,667 crore as against an AUM of Rs 4,048 crore as on March 31, 2022.

 

The growth in AUM was supported primarily due to higher disbursements towards on-book retail housing loan portfolio, while the share of off-book loan portfolio has been kept around ~7%. Of the overall AUM, 60% of the AUM comprises organic housing loans, 33% is small ticket LAP and balance 7% 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 overall AUM of HHFL remains relatively unseasoned with around 62% of overall cumulative disbursements having taken place over the last 24 months only.

 

• Asset quality remains a monitorable

Driven by dedicated collection efforts, the GNPAs remained comfortable at 2.6% as on March 31, 2023, as compared to 2.8% as on March 31, 2022. The inch up post March 2021 was primarily on account of the impact of the second wave of Covid-19. The company has not done any restructuring under RBI Covid-19 restructuring scheme. Having said that, the portfolio is relatively unseasoned. Within segments, the GNPA stood at 3.2%, 1.9% and 0%, for housing loans, small ticket LAP and portfolio buyouts, respectively as on March 31, 2023.

 

Collection efficiency of the entity, post second wave of Covid pandemic, has remained strong and stable at around ~97-99% levels, supported by additional workforce and collection infrastructure enhancement steps taken by the entity in fiscal 2021 and fiscal 2022. 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 while scaling up the portfolio remains a key monitorable.

[1] Finance cost divided by average of end period on-book borrowing

Liquidity: Strong

HHFL has an adequate ALM profile with positive cumulative mismatches up to one year time bucket and negative cumulative mismatches thereafter as on March 31, 2023 (excluding unutilised bank lines). Furthermore, the inflows in the ALM statement are plotted as per behavioural pattern analysis.  As on March 31, 2023, the company had cash and cash equivalents of Rs 91 crore, unutilized CC/WCDL lines of Rs 295 crore and undrawn term loans of Rs 525 crore. In addition to this, the company has collections of around Rs 55 crore and foreclosures of around Rs 80 crore on monthly basis.

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 HHFL 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.

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of the instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue size (Rs. Crore)	Complexity Level	Rating assigned with outlook
NA	Subordinated debt^	NA	NA	NA	150	Complex	CRISIL AA/Stable
NA	Debenture^	NA	NA	NA	200	Simple	CRISIL AA/Stable
NA	Debenture^	NA	NA	NA	300	Simple	CRISIL AA/Stable
INE401Y08017	Subordinated debt	12-Jun-23	9.75%	12-Jun-30	100	Complex	CRISIL AA/Stable
NA	Commercial paper	NA	NA	7-365 days	250	Simple	CRISIL A1+
NA	Subordinated debt^	NA	NA	NA	50	Complex	CRISIL AA/Stable

^Yet to be issued