Detailed Rationale

CRISIL Ratings has assigned its ‘CRISIL AA/Stable’ rating on Rs 300 crore subordinated debt of Hinduja Leyland Finance Limited (HLF) and reaffirmed its ratings on the existing long-term and short-term debt instruments and bank facilities of HLF at ’CRISIL AA/Stable/CRISIL A1+’.

 

The ratings factor in the high strategic importance of HLF for Ashok Leyland Limited (ALL), as it plays an active role in financing medium and heavy commercial vehicles (MHCV) segment of ALL. Around 35% of the overall assets under management (AUM) of HLF is financing towards the ALL vehicles as on September 30, 2023 (28% on consolidated basis). While the recent capital infusion in HLF resulted in a drop in the shareholding of ALL from 68.8% to 60.4%, nevertheless, ALL is expected to continue to hold the majority ownership in HLF. Furthermore, ALL’s support to HLF is expected to remain high on account of shared brand and strong linkages.

 

CRISIL Ratings has also noted that on March 16, 2022, the Board of HLF, provided an in-principle approval on the proposed merger of HLF into NDL Ventures Limited (erstwhile NXTDigital Limited, NDL). The proposed merger would result in shareholders of HLF receiving the shares of NDL as per share swap valuation approved by the Board of HLF on November 25, 2022, 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). The transaction is at the advanced stages, wherein, both the parties are seeking approval from the stock exchanges and is likely to be consummated in near term.

 

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 Limited subject to regulatory approvals. Additionally, CRISIL Ratings notes that there will not be any material changes in the future business targets of HLF. 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 Board approved valuation for the swap ratio will be 25 equity shares of the face value Rs. 10/- each of NDL shall be issued and allotted for every 10  equity shares of the face value of Rs. 10/- each held in Hinduja Leyland Finance Limited. 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 witness negligible change, as the company will be listed on the stock exhange whilst maintaining minimum 25% of public shareholding. Nevertheless, 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.

 

In terms of ALL, the operating income has increased by ~67% during fiscal 2023 on standalone basis as compared with similar period of previous fiscal. This has been driven by strong volume growth (~75%) resulting in increase in company’s domestic market share in MHCV and LCV segments to 33% and 17% in fiscal 2023 compared with 27% and 10% respectively in the previous fiscal.

 

CRISIL Ratings has also taken note of the recent measures by Reserve Bank of India (RBI) covering the Banking and NBFC sector. Firstly, on the asset side for NBFCs, there is an increase in risk weights for unsecured consumer loans (including credit card receivables), by 25 percentage points to 125% from 100% earlier. This regulation applies to all retail loans except housing loans, vehicle loans, educational loans, loans against gold and microfinance/SHG loans. The increase in risk-weighted assets will lead to a decrease in the capital adequacy ratios but is not likely to materially impact the ratios.

 

Secondly, there is an increase in risk weights for Bank’s exposure to NBFCs by 25 percentage points (over and above the risk weight associated with the given external rating) in all cases where the extant risk weight as per external rating of NBFCs is below 100%. Herein, loans to HFCs, and loans to NBFCs which are eligible for classification as priority sector are excluded. This development may potentially lead to an increase in cost of bank borrowings for NBFC sector. This could lead to diversification in the borrowings mix with higher share of capital market instruments and securitisation, amongst others. The ability of NBFCs to pass on the potentially higher borrowing costs will be monitored.

Analytical Approach

The ratings factor in expectation of strong support to HLF from ALL, given the majority ownership and strategic importance of HLF to ALL. 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 74.8% (excluding employee stock options) in HLF as on September 30, 2023, with Ashok Leyland being the primary shareholder. HLF is of high strategic importance for ALL as it continues to play an active role in financing in MHCV segment of ALL, with about 35% of the overall assets under management (AUM) of HLF, on a standalone basis, being financed towards the ALL vehicles as on September 30, 2023 (28% on consolidated basis). While the recent infusion resulted in a drop in the shareholding of ALL from 68.8% to 60.4%, nevertheless, ALL is expected to continue to hold the majority ownership in HLF. Furthermore, in CRISIL Ratings view, ALL’s shared brand and strong linkages imply a moral obligation on parent’s part to support HLF.

 

With the proposed merger into NDL Ventures, HLF plans to list itself on stock exchange and go public. Once the transaction is consummated, the shareholding in HLF would witness neglible change, as the company will be listed on the stock exhange whilst mainitaining minimum 25% of public shareholding. Nevertheless, 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. 

 

• Diversified portfolio with significant presence in the Indian vehicle finance market

AUM for the company has also witnessed sharp rebound post the two fiscals of low growth amidst the Covid-19 linked impact on the economic performance. During fiscal 2023, the disbursements for HLF stood at Rs 16,134 crores surpassing pre-pandemic levels. Consequently, the AUM reflected an annual growth of 16% reaching Rs 30,239 crores as on March 31, 2023, which further grew to Rs. 33,606 crore end September 30, 2023, on a standalone basis. Post the two waves of the pandemic, the company and implementation of the RBI IRACP norms, the company has made some strategic decisions in order to focus on segments where the impact on asset quality was limited as well as focus on co-lending which will drive growth going forward.

 

As on September 30, 2023, the overall portfolio of the company remained fairly diversified with vehicle loans accounted for bulk of the portfolio (68%), making HLF a large player in the vehicle finance space. The balance portfolio comprises loans against property or LAP (22% share) and portfolio buyouts. HLF forayed into these segments to diversify its business mix and increase the share of the non-vehicle portfolio.

 

Within vehicle finance, commercial vehicles/construction equipment/tipper accounted for 51% of the AUM, followed by new two- and three-wheelers (11%), and other vehicles (~6%). The loan book is also well-diversified in terms of geographic reach, as HLF is present at more than 1,750 locations across 25 states and union territories.

 

Further, the housing finance business also remains core to the strategy going forward and its share to overall consolidated AUM is expected to increase. At a consolidated level, as on September 30, 2023, the AUM stood at Rs 42,010 crores as against Rs 36,906 crores as on March 31, 2023, of which the housing finance business accounted for 20%.

 

Going forward, the company plans to expand its product portfolio towards the other non-vehicle segments, thereby resulting in further diversification in the portfolio. Furthermore, the company plans to diversify within its vehicle portfolio also and start with higher yield segments such as leasing and used vehicle finance. Additionally, the company has already started with co-lending with one partner and plans to bring in more partners into its portfolio. 

 

• Improvement in the capitalization metrics

The capitalisation metrics of HLF remained comfortable, bolstered by the equity raise of Rs 910 crore through Qualified Institutional Buyers in October 2022. Consequently, the networth and the adjusted gearing of the company improved to Rs 5,133 crore and 5.1 times as on March 31, 2023, as against Rs 3,852 crore and 5.5 times respectively as on March 31, 2022, which, on a standalone level, improved further with networth and adjusted gearing at Rs 5,302 crore and 5.5 times respectively as on September 30, 2023, driven by positive internal accruals.

With the equity raise, at the consolidated level too, the group saw an improvement in its capitalization metrics with the networth and the adjusted gearing metrics improving to Rs 5,599 crore and 5.8 times as on March 31, 2023, as against Rs 4,103 crore and 6.0 times as on March 31, 2022.

 

Further, the completion of the merger with NDL will also add around Rs 200 crores to the networth for HLF. CRISIL Ratings expects the gearing metrics for HLF to continue to remain under 6 times on a steady state basis.

 

With the completion of the merger, the group is expected to receive another Rs 200 crore from NDL Ventures, which will further provide some support to the capital position.

 

• Diversified resource profile with low cost of borrowings

Hinduja Leyland Finance standalone resource profile remained well-diversified across banks and capital market instruments. As on September 30, 2023, the company had 72% of bank borrowings, followed by 21% of securitized book, 7% of capital market borrowings (NCDs and bonds) and balance quantum via commercial paper. While large portion of borrowings came from the banks, nevertheless, within the bank funding, the lender-base of the company remained well diversified across 32 large PSUs/private sector banks. Consequently, the cost of borrowings of the company also remained low for the company. The on-book cost of borrowings (interest expense as a % of average on-book borrowings) stood at 8.4% (annualized) as on September 30, 2023 (7.6%: March 31, 2023), as against 8.0% as on March 31, 2022. Going forward, CRISIL Ratings understands that the share of capital market borrowings is also expected to increase in the medium term, while the average cost of borrowing for fiscal 2024 is expected to remain range-bound at 8.2-8.4%.

 

Weaknesses:

• Moderate asset quality metrics

The asset quality metrics also remained comfortable with the company’s 90+ dpd remaining range bound at 3.5%-4.5% over the last 5 years. As on September 30, 2023, the 90+ dpd (including repossessed assets) stood at 3.4%, as compared to 4.2% as on March 31, 2023. The asset quality metrics are further supported by the reducing repossessed portfolio, which has dropped to 0.3% of the overall AUM in September 2023, as against 2.5% in March 2019. Even on a lagged basis, the asset quality metrics remained comfortable with 1-year lagged 90+ dpd range-bound at 4.3% as on September 30, 2023, similar to that as on March 31, 2023. The comfortable asset quality metrics were supported by the strong collection efficiency numbers, wherein, the company has been reporting the efficiency ratio in the range of 95%-105% across months, thereby indicating strong collections from the overdue portfolio also. Nevertheless, the company had a restructured portfolio of 3.3% as on September 30, 2023.

 

CRISIL Ratings understands that most of the restructured portfolio remained at the current stage. Additionally, the company has already provided Rs 150 crore on the restructured portfolio, which is expected to be retained in the near term, thereby providing comfort for any potential slippages which might arise from the restructured portfolio, nevertheless, the same remains a key monitorable.

 

In terms of segment-wise performance at the standalone level, the 90+ dpd in vehicle portfolio stood at 4.6% as on September 30, 2023, as against 4.9% as on March 31, 2023. LAP 90+ dpd stood at 1.3% as on September 30, 2023, vis-a-vis 1.5% as on March 31, 2023. 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 asset quality metrics remained comfortable at the consolidated level also, supported by the relatively safer home loan segment parked at the housing finance subsidiary. The 90+ dpd, at the consolidated level, stood at 3.2% as on September 30, 2023, as against 3.5% as on March 31, 2023.

 

• Moderate earnings profile

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. At the standalone level, the NIMs have fallen sharply from their levels seen in fiscal 2014, in line with change in focus towards the competitive strategic segment. Annualized NIM stood at 3.9% for fiscal 2023. The same was offset by the lower operating expenses and reduction in the credit costs. The credit costs improved to 2.1% in fiscal 2023, as against 2.7% in fiscal 2022. Consequently, return on managed assets (RoMA) remained stable at 1.0% during the fiscal.

 

End September 30, 2023, with NIMs remaining range-bound, while the average borrowing cost elevated during the period on the back of RBI’s repo-rate hike, HLF reported RoMA of 0.8% (annualized) during the six-month period, with PAT of Rs 139 crore.

 

While the earnings profile is marked by relatively lower NIMs at the consolidated level also, nevertheless, given the presence of the housing finance subsidiary in the affordable home loans and small-ticket size LAP, the top line gets some comfort in the form of higher yields. Additionally, the relatively safer asset class in the housing finance further provides comfort on the credit cost. Consequently, the RoMA for the consolidated entity stood at 1.3% during six-month period ending September 30, 2023, (1.4%: Fiscal 2023), as against 1.1% in fiscal 2022.

 

The group plans to enter other non-vehicle higher yields segments, which expected to provide support on the NIMs. In addition to this, the company also plans to enter leasing and used vehicle financing, which will further add to the revenue stream. This coupled with the company’s recent entry into co-lending, is expected to provide comfort on the top-line.  Furthermore, with the expectation of improvement in the credit costs as the asset quality remains comfortable, especially for the restructured portfolio, the overall earnings profile is expected to remain comfortable going forward.

Liquidity: Strong

HLF has an adequate asset liability management profile, with positive cumulative mismatches across all buckets (excluding unutilized bank limit and committed disbursement).

 

As on September 30, 2023, HLF had liquidity of around Rs 6,059 crore, comprising cash and liquid investments, unutilised cash credit/working capital demand loan (CC/WCDL) and unavailed term loans. Against the same, the company had total debt obligation (including interest payment) of Rs 2,878 crore (excluding DA payout) over the next three months i.e. October 2023 to December 2023.

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 on AUM 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 4-5 years to diversify its product profile, thereby augmenting net interest margin.

 

During fiscal 2023, HLF reported PAT of Rs 277 on a total income of Rs 2,755 crore.

Key Financial Indicators

As on / for the period ended		Sep-23	Mar-23	Mar-22	Mar-21
Total assets	Rs crore	29,414	26,660	20,961	21,923
Total income	Rs crore	1,575	2,755	2,660	2,775
Profit after tax	Rs crore	139	277	232	270
90+ dpd	%	3.4	3.7	4.2	4.0
Adjusted gearing ^	Times	5.5	5.1	5.5	5.9
Return on managed assets^	%	0.8*	1.0	0.9	1.0

*Annualized

Note: All figures are as per IND-AS

^based on year-end averages

 

Key Financial Indicators (Consolidated)

As on / for the period ended		Sep-23	Mar-23	Mar-22	Mar-21
Total assets	Rs crore	36,590	32,419	24,476	24,240
Total income	Rs crore	2,085	3,502	3,098	3,053
Profit after tax	Rs crore	267	490	341	333
90+ dpd	%	3.2	3.5	4.0	3.9
Adjusted gearing ^	Times	6.1	5.8	6.0	6.2
Return on managed assets^	%	1.3	1.4	1.1	1.1

*Annualized

Note: All figures are as per IND-AS

^based on year-end averages

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of Instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue Size (Rs.Cr)	Complexity Level	Rating Outstanding with Outlook
NA	Subordinated debt^	NA	NA	NA	300	Complex	CRISIL AA/Stable
NA	Subordinated debt^	NA	NA	NA	40	Complex	CRISIL AA/Stable
INE146O07474	Debenture	8-Mar-22	7.45	8-Mar-24	200	Simple	CRISIL AA/Stable
NA	Debenture^	NA	NA	NA	2000	Simple	CRISIL AA/Stable
INE146O08233	Subordinated debt	23-Aug-23	9.45	23-Aug-33	135	Complex	CRISIL AA/Stable
INE146O08233	Subordinated debt	20-Sep-23	9.45	23-Aug-33	90	Complex	CRISIL AA/Stable
INE146O08233	Subordinated debt	13-Nov-23	9.45	23-Aug-33	50	Complex	CRISIL AA/Stable
INE146O08233	Subordinated debt	21-Nov-23	9.45	23-Aug-33	35	Complex	CRISIL AA/Stable
INE146O08225	Subordinated debt	22-Jun-23	9.5	22-Jun-33	75	Complex	CRISIL AA/Stable
INE146O08209	Subordinated debt	22-Apr-21	9.75	21-Apr-28	50	Complex	CRISIL AA/Stable
INE146O08191	Subordinated debt	26-Mar-21	9.75	25-Sep-26	75	Complex	CRISIL AA/Stable
INE146O08183	Subordinated debt	19-Mar-21	9.75	18-Sep-26	50	Complex	CRISIL AA/Stable
INE146O08175	Subordinated debt	8-Mar-21	9.75	8-Oct-26	55	Complex	CRISIL AA/Stable
INE146O08167	Subordinated debt	16-Feb-21	9.75	18-Aug-26	45	Complex	CRISIL AA/Stable
INE146O08159	Subordinate Debt	29-Mar-19	11.6	29-Sep-24	100	Complex	CRISIL AA/Stable
NA	Commercial Paper	NA	NA	7-365 days	1800	Simple	CRISIL A1+
NA	Proposed Long Term Bank Loan Facility	NA	NA	NA	101.34	NA	CRISIL AA/Stable
NA	Term Loan	NA	NA	31-Oct-24	112.4	NA	CRISIL AA/Stable
NA	Term Loan	NA	NA	31-Dec-27	150	NA	CRISIL AA/Stable
NA	Term Loan	NA	NA	31-Jan-28	150	NA	CRISIL AA/Stable
NA	Term Loan	NA	NA	31-Mar-25	131.24	NA	CRISIL AA/Stable
NA	Term Loan	NA	NA	30-Apr-24	40	NA	CRISIL AA/Stable
NA	Term Loan	NA	NA	31-Mar-24	10	NA	CRISIL AA/Stable
NA	Term Loan	NA	NA	30-Nov-24	150	NA	CRISIL AA/Stable
NA	Term Loan	NA	NA	31-Jan-25	184.28	NA	CRISIL AA/Stable
NA	Term Loan	NA	NA	30-Sep-28	750	NA	CRISIL AA/Stable
NA	Term Loan	NA	NA	28-Feb-26	91.66	NA	CRISIL AA/Stable
NA	Term Loan	NA	NA	30-Jun-28	1500	NA	CRISIL AA/Stable
NA	Term Loan	NA	NA	30-Jun-24	100	NA	CRISIL AA/Stable
NA	Term Loan	NA	NA	30-Jun-28	500	NA	CRISIL AA/Stable
NA	Term Loan	NA	NA	30-Jun-27	300	NA	CRISIL AA/Stable
NA	Term Loan	NA	NA	30-Sep-28	1000	NA	CRISIL AA/Stable
NA	Term Loan	NA	NA	30-Sep-28	1729.08	NA	CRISIL AA/Stable

^ Yet to be issued

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