| Hinduja Housing Finance Limited | ||||||
| Ratings Reaffirmed | ||||||
| Rating Action | ||||||
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| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has reaffirmed its ‘CRISIL AA-/Stable/CRISIL A1+’ ratings on the debt instruments of Hinduja Housing Finance Limited (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.
On March 16, 2022, the Board of HLF, provided an in-principle approval on the proposed merger of HLF into NXTDigital Limited (NDL). The proposed merger would result in shareholders of HLF receiving the shares of NDL as per share swap valuation subject to further regulatory and shareholders approval. NDL, a media vertical of Hinduja Group, is listed on both Bombay Stock Exchange (BSE) and National Stock Exchange (NSE). In February 2022, NDL decided to transfer its digital media and communications business to Hinduja Global Solutions Limited (subject to regulatory and shareholders’ approval). Post completion of this business transfer, NDL, will effectively become a non-operating company with no active business.
CRISIL Ratings believe that the proposed merger will not have any material impact on the business profile of the company as the existing business operations of HLF will continue to run in the similar manner. With NDL becoming non-operational post the transfer, only the financing business will be there in the merged entity, which will subsequently be renamed to Hinduja Leyland Finance subject to regulatory approvals. Additionally, CRISIL Rating notes that there will not be any material changes in the future business targets of Hinduja Leyland Finance.The merged entity is expected to have a consolidated AUM of over Rs 29000 crore. In addition to the above, CRISIL Ratings does not expect any cash outflow from HLF from the proposed transaction and the existing shareholders of HLF will be alloted additional shares on the basis of swap valuation. The valuation for the swap ratio is currently in progress and the final ratio will be arrived at post the completion of valuation. Post the transaction is completed Hinduja Housing Finance Limited would continue to operate as a 100% wholly owned subsidiary of HLF.
Once the transaction is consummated, the shareholding in HLF would change. The Hinduja group entities held 99.35% in HLF as on December 31, 2021, with Ashok Leyland Limited (ALL) being the primary shareholder with around 68.80% stake. Even post merger, CRISIL Ratings understands that the shareholding of ALL - is likely to continue with majority stake, and the same would therefore remain as the single largest shareholder in HLF. Consequently, CRISIL Ratings doesn’t envisage any change in the strategic importance of HLF to ALL and believes that HLF will continue to receive strategic support from Ashok Leyland over the medium term.
On the capital front, the current capitalization metrics of the company remained comfortable for the existing size of operations. The company is also planning to raise equity funding from third parties before the listing in order to comply with the listing requirements of public shareholding. With the additional capital expected to come, the capitalization metrics are expected to further improve. The said transaction is subject to regulatory and statutory approvals and CRISIL Ratings would continue to monitor the developments with respect to the transaction closely. |
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 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 31st December 2021, of which Rs 25 crore was infused in last quarter of fiscal 2021 only. 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 418 crore as on December 31, 2021, with regular capital infusions from HLF. Adjusted gearing was moderate at 7.3 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 31st December 2021. 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 funding[1] of the company was 7.3% (annualised) in the first nine months of fiscal 2022 lower than 8.2% in fiscal 2021 and 9.0% in fiscal 2020. Credit costs, albeit stable, stood at 0.8% (annualised) and 0.8% in 9MFY22 and FY21, respectively, as compared to 0.96% in fiscal 2020 and 0.4% in fiscal 2019. The same was majorly on account of increase in provisioning coverage for Stage 1 and 2 accounts. Operating expenses reduced in 9MFY22 due to low volumes and cost saving measures taken by the company. Consequently, return on managed assets (RoMa) stood at 2.9% (annualised) in 9MFY22 as compared to 2.9% in fiscal 2021 and 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, 2021, the assets under management for HHFL stood at Rs 3,531 crore with over 80% of the loans being to self-employed professionals. Of this, 59% of the AUM comprises housing loans, 29% is small ticket LAP and balance 12% 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. 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, the GNPAs remained comfortable at 2.8% as on December 31, 2021, as compared to 2.5% as on March 31, 2021. 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 unseasoned. Within segments, the GNPA stood at 3.8%, 1.7% and 0%, for housing loans, small ticket LAP and portfolio buyouts, respectively.
Collection efficiencies while improved to 107%[2] in Mar-21 from as low as 40%3 in May-20, were again impacted during the second-wave, with efficiency ratio dropping to 83% and 86% in April 2021 and May 2021, respectively. Nevertheless, the same started improving June onwards and reached 109% in December 2021, respectively.
During fiscal 2021, the company changed their organisation structure and set up a dedicated team of more than 150 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. [1]Finance cost divided by average of end period on-book borrowing [2]Collection efficiency= Current + OD collections divided by current billing |
Liquidity: Strong HHFL has an adequate ALM profile with positive cumulative mismatches up to 6 months bucket and negative cumulative mismatch in 6 months to 1 year bucket as on December 31, 2021 (excluding unutilised bank lines). Furthermore, the inflows in the ALM statement are plotted as per behavioural pattern analysis. As on January 31, 2021, the company had Rs 171 crore of debt repayment (excluding CC/WCDL renewal or roll-over, but including interest payments) till April 2022, against which the company had cash and cash equivalents of Rs 1.3 crore, unutilized CC/WCDL lines of Rs 94 crore and undrawn term loans of Rs 295 crore. In addition to this, the company has collections of around Rs 55 crore and foreclosures of around Rs 25 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
Downward factors
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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. |
Key Financial Indicators
#All figures for December 2021 are as per provisional financials *Annualised |
Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL Ratings' complexity levels are assigned to various types of financial instruments. The CRISIL Ratings' complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL Ratings' 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)
^Yet to be issued |
| Annexure - Rating History for last 3 Years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Criteria Details
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