Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA-/Stable/CRISIL A1+’ ratings on the long term bank facilities and debt instruments of Hinduja Leyland Finance Limited (HLF).

 

CRISIL Ratings has also withdrawn its rating on the subordinated debt of Rs.205 crore (See Annexure 'Details of Rating Withdrawn' for details) on confirmation from the debenture trustee as it is fully redeemed. The rating is withdrawn in line with CRISIL Ratings' policy.

 

The ratings continue to reflect the majority ownership of HLF held by its parent, Ashok Leyland Ltd (Ashok Leyland), and the Hinduja group; and the company’s strategic importance to the parent and the group. The ratings also factor in HLF’s growing presence in the Indian vehicle finance market. These strengths are constrained by the moderate asset quality metrics and earnings profile.

 

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

The ratings factor in expectation of strong support to HLF from Ashok Leyland and the Hinduja group, given the majority ownership and strategic importance of HLF to Ashok Leyland and the group. 

 

CRISIL Ratings has fully consolidated the business and financial risk profiles of HLF and its subsidiaries, given the managerial, operational, and financial linkages between them.

Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

* Majority ownership by, and strategic importance to, Ashok Leyland and the Hinduja group

The Hinduja group entities held 99.35% in HLF as on December 31, 2021, with Ashok Leyland being the primary shareholder with around 68.80% stake. With the recent in-principle approval from the board, HLF plans to list itself on stock exchange and go public, - ALL post the transaction is- is likely to have majority stake.  

 

The Ashok Leyland portfolio vehicles constituted around 34% of HLF’s portfolio as on December 31, 2021. Existing shareholders have also infused capital at regular intervals; and have infused fresh capital of around Rs 650 crore since June 2017.

 

The company is also planning to raise an interim funding from third parties before the listing in order to comply with the listing requirements of public shareholding . Nevertheless, CRISIL Ratings understands that the shareholding of ALL would continue to remain as controlling majority - and the same would therefore remain as the single largest shareholding 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.

 

* Significant presence in the Indian vehicle finance market

Scale of operations had improved, with AUM recording 18% CAGR over the past four fiscals, to Rs 27,294 crore as on March 31, 2021. However, growth has been subdued amidst the low disbursements reported due to second wave of Covid-19, followed by the rise in the fuel prices, with AUM shrinking by 5% (year-to-date) over the first nine-months of fiscal 2022, to reach Rs 25,859 crore as on December 31, 2021.

 

Vehicle loans accounted for bulk of the portfolio (77%), making HLF a large player in the vehicle finance space. The balance portfolio comprises loans against property or LAP (18% share) and portfolio buyouts. HLF forayed into these segments so as to diversify its business mix and increase the share of the non-vehicle portfolio.

 

Within vehicle finance, commercial vehicles/construction equipment/tipper accounted for 50% of the AUM, followed by new two- and three-wheelers (16%), and other vehicles (~11%). The loan book is also well-diversified in terms of geographic reach, as HLF is present at more than 1,500 locations cross 24 states and union territories.

 

Weakness:

* Moderate asset quality metrics and earnings profile

Asset quality metrics, remained elevated, with delinquencies at 5% as on December 31, 2021, [as measured by 90 days past due (dpd)], as compared to 4.0% as on March 31, 2021 and 4.4% as on March 31, 2020. The increase in delinquencies was in line with the industry. Collection efficiencies after dropping to 74%[1] in May 2021, following the second-wave and state-wise lockdowns, have improved to 108%2 for December 2021 and have remained comfortable from June 2021 onwards.

 

Segment-wise, the 90+ dpd in vehicle portfolio stood at 5.7% as on December 31, 2021, as against 4.5% as on March 31, 2021. LAP 90+ dpd stood at 1.7% as on December 31, 2021, vis-a-vis 1.4% as on March 31, 2021. Also, under the one-time restructuring scheme announced by the Reserve Bank of India (RBI), HLF has restructured around 7.7% of portfolio as on December 31, 2021. The company is trying to reduce its focus on first-time users/buyers, and rather increase the share of large and medium fleet operators to support asset quality metrics in the medium term. Further, while the company has forayed into non-vehicle loans, this segment is relatively new, having been built up only over the last few years. 

 

The earnings profile is marked by relatively lower net interest margin (NIMs), though partly aided by the operating expenses ratio, which lags the industry average. NIMs have fallen sharply from their levels seen in fiscal 2014, in line with change in focus towards the competitive strategic segment. Annualised NIM fell to 3.9% for the first nine months of fiscal 2022, owing to low revenue and limited growth. On the other hand, due to increased provisioning, credit cost also remained elevated at 2.5% (annualised) in the first nine months of fiscal 2022, as against 2.7% in fiscal 2021 and 2.4% for fiscal 2020. Consequently, return on managed assets (RoMA) remained stable at 1.0% (annualised) in the nine months ended December 31, 2021 aided by reduction in operating expenses and increase in other income. Ability to manage asset quality amidst the weak macro-economic environment, and hence, credit cost, will remain a key monitorable. In the long-run, asset quality management as the portfolio seasons and scales up will be the key determinant of earnings profile of the company.

[1] Collection Efficiency = Total Collections divided by current billing assuming no moratorium during moratorium period.

Liquidity: Strong

HLF has an adequate asset liability management profile, with positive cumulative mismatches across all buckets upto 1 year as on September 30, 2021 (excluding unutilised bank limit and committed disbursement).

 

As on – December 31, 2021, HLF had liquidity of around Rs -4280 crore, comprising cash and liquid investments, unutilised cash credit/working capital demand loan (CC/WCDL), and term loan lines. Additionally, HLF has around Rs -3250 crore of funds in pipeline in the form of bank loans. Against the same, the company has total debt obligation (including interest payment) of Rs-1,858 crore (excluding scheduled CC/WCDL renewal/roll-over) over -January  2022 to - March 2022.

Outlook: Stable

CRISIL Ratings believes HLF will continue to receive strong support from Ashok Leyland and the Hinduja group and will also increase its share in the Indian vehicle finance market over the medium term.

Rating Sensitivity Factors

Upward factors

• Better asset quality metrics, with gross non-performing assets declining below 2.5%, translating to improved earnings profile as the portfolio scales up
• Upward revision in CRISIL's view on Ashok Leyland’s credit risk profile

 

Downward factors

• Decline in support from Ashok Leyland or material change in Ashok Leyland’s shareholding in HLF, or any downward revision in CRISIL’s view on the credit profile of Ashok Leyland
• Weakening of asset quality metrics, with GNPAs exceeding 6% and exerting pressure on profitability

About the Company

HLF, incorporated in 2008, commenced operations in 2010. It was promoted as a captive financier by the Hinduja group’s flagship automobile manufacturing company, Ashok Leyland. Gradually, HLF ventured into financing of non- Ashok Leyland vehicles, and forayed into the LAP segment in fiscal 2015. Apart from commercial vehicles, the company also funds purchase of two- and three-wheelers, tractors, construction equipment and used CVs. The company has also been buying portfolios over the past two years to diversify its product profile, thereby augmenting net interest margin.

 

Profit after tax (PAT) was Rs 270 crore on total income of Rs 2775 crore in fiscal 2021, against Rs 292 crore and Rs 2927 crore, respectively, in the previous fiscal.

 

In the nine months ended December 31, 2021, PAT of Rs 191 crore was reported on total income of Rs 1993 crore.

Key Financial Indicators: (Standalone)

As on/for the half year/for the year ended	Unit	Dec-21**	Mar-21**	Mar-2020**
Total assets	Rs crore	20,955	21,923	20,761
Total income	Rs crore	1,993	2,775	2,927
Profit after tax	Rs crore	191	270	292
Gross NPA	%	5.0	4.0	4.4
Overall capital adequacy ratio	%	18.6	18.0	17.3
Adjusted gearing^	Times	5.2	5.9	6.8
Return on managed assets^	%	1.0*	1.0	1.1

*annualized;

**as per IND-AS

^based on year end averages

Any other information: Not applicable

Annexure - List of Entities Consolidated

Names of Entities Consolidated	Extent of Consolidation	Rationale for Consolidation
Hinduja Leyland Finance Ltd	Full	Parent
Hinduja Housing Finance Ltd	Full	Subsidiary