Indiabulls Housing Finance Limited Ratings reaffirmed at 'CRISIL AA / CRISIL A1+ '; outlook revised to 'Stable'
Rating Action
*Includes secured NCD and/or unsecured subordinated debt 1 crore = 10 million Refer to annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has revised its rating outlook on the long-term debt instruments and bank facilities of Indiabulls Housing Finance Limited (IBHFL) to 'Stable' from 'Negative' while reaffirming the rating at ‘CRISIL AA’. The rating on the commercial paper programme and short-term non-convertible debenture programme has been reaffirmed at 'CRISIL A1+'.
Earlier, on March 24, 2020, CRISIL Ratings had revised its rating outlook on the long-term debt instruments and bank facilities of IBHFL to ‘Negative’ from 'Stable', while reaffirming the rating at ‘CRISIL AA’. That revision in outlook was to reflect the impact of continued share price fall at that time on the financial flexibility of the company, especially in the context of the uncertainty in the macro-environment on account of fallout from Novel Coronavirus (Covid-19) situation and associated challenges, especially with respect to raising funds from a diverse set of investors. Furthermore, there was potential for the company’s asset quality to get significantly affected as cash flows of the underlying borrowers were expected to be stretched due to the pandemic and linked lockdowns.
The current revision in outlook back to ‘Stable’ reflects IBHFL’s strengthened capital position and expected further capital mobilization in the medium term, continued fund raising which has benefitted from various schemes announced by Reserve Bank of India (RBI) and Government of India and the lower than expected inching up in IBHFL’s non-performing assets (NPAs) in the retail book. The last year or so have also seen some correction in the share price of IBHFL.
From an asset quality perspective, while there is an uptick in gross NPA, it is lower than what was earlier envisaged. The reported[1] and pro-forma[2] gross NPA stood at 1.75% and 2.44%, respectively, as on December 31, 2020 (1.84% as of March 31, 2020). Furthermore, gross NPA in the housing loans and loans against property (LAP) segment {together constituting 87% of assets under management (AUM) as on December 31, 2020} continues to remain at comfortable levels. The collections have also picked up pace with overall collection efficiency at 98.8% for the month of February 2021 which has almost reached pre-Covid levels. The extent of one-time debt restructuring under the Covid-19 relief scheme has been also limited and was around 1% of the AUM. However, asset quality in commercial credit (comprising of construction finance and lease rental discounting based loans to real estate developers) continues to remain vulnerable with any slippages negatively impacting overall asset quality given the chunky nature of this segment. While proportion of commercial credit exposures in total AUM has reduced to 13% as on December 31, 2020 from 21% as on March 31, 2018, its performance will remain a key monitorable.
During fiscal 2021, IBHFL has further strengthened its capital position. It raised Rs 683 crore equity via qualified institutional placement (QIP) and also accrued Rs 1,988 crore by selling bulk of its investment in OakNorth Bank. With this, the overall capital adequacy ratio (CAR) for the company increased to 30.5% as on December 31, 2020 from 27.1% as on March 31, 2020. Adjusted gearing has also come down to 5.0 times as on December 31, 2020 from 6.2 times as on March 31, 2020. It is also expected that there will be further capital raise of at least around USD 300 million over the medium term.
On the fund raising side, IBHFL has been able to raise reasonable amount of debt. The company raised Rs 23,300 crore in the eleven months till February 28, 2021. Out of this, 12% was through bonds (predominantly through TLRO[3] and PCG[4] schemes). While a part of the bank funding has been roll-over of working capital or cash credit lines, the pace of long-term funding from banks has improved in recent months. In addition, in March 2021, the company received confirmation for additional Rs 2,000 crore term loans, and has another around Rs 2,500 crore of sanctions in the pipeline. Continued access to funding will be a key rating monitorable.
The ratings at the current level continue to reflect CRISIL Ratings’ expectation that IBHFL will maintain its strong capitalisation, with healthy cover for asset-side risks, comfortable asset quality in the retail segments and sizeable presence in retail mortgage finance. The ratings also factor in the company’s susceptibility to asset quality risks arising from the commercial real estate portfolio and ability to successfully transition to its planned new funding-light business model with focus on AUM growth instead of assets growth.
CRISIL Ratings has withdrawn its rating on Rs 2,782.9 crore non-convertible debentures on redemption, in line with its withdrawal policy. [1] Reported NPAs factor in the Supreme Court’s dispensation on the standstill of NPA recognition [2] Pro-forma NPAs do not factor in the Supreme Court’s dispensation on the standstill of NPA recognition [3] Targeted Long Term Repo Operations [4] Partial Credit Guarantee |
Analytical Approach For arriving at the ratings, CRISIL Ratings has combined the business and financial risk profiles of IBHFL and its subsidiaries. This is because of substantial operational and management integration, common promoters and shared brand.
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:
Capitalisation is marked by sizeable networth of Rs 16,302 crore as on December 31, 2020, supported by healthy internal accruals. Networth coverage for pro-forma net NPAs was also comfortable at around 13 times. Consolidated Tier-1 capital adequacy ratio (CAR) was healthy at 23.7% as on December 31, 2020, as was total CAR at 30.5%. Consolidated on-book gearing was comfortable at 4.0 times as on December 31, 2020 (4.9 times as on March 31, 2020). Given the strong liquidity that IBHFL maintains on a steady-state basis, net gearing was 3.3 times as on December 31, 2020.
The company has demonstrated strong ability to raise capital (including the Rs 683 crore equity raised through QIP in fiscal 2021) and the proposed capital raising will further strengthen the capital position over the medium term. CRISIL Ratings believes the company’s strong capitalisation will continue to support its overall financial risk profile over the medium term.
IBHFL reported gross NPA of 1.75% as on December 31, 2020 compared to 1.84% as on March 31, 2020. Excluding the impact of the Supreme Court order on stay on NPA recognition, pro-forma gross NPA was at 2.44% as on December 31, 2020. Accelerated write-offs, primarily in the commercial credit portfolio, also supported the asset quality metrics during the current fiscal.
Asset quality has remained comfortable in the housing loan and LAP segments. The pro-forma gross NPA in housing loan and LAP segment was 1.1% and 2.0%, respectively, as on December 31, 2020. However, with a few high ticket slippages from the commercial credit book during fiscal 2020 and continued traction in refinancing of this portfolio resulting in de-growth, gross NPAs in this segment have increased to 10.2% as on December 31, 2020. However, this can be partly attributed to the management’s decision to proactively recognize some accounts in the commercial real estate book as NPAs due to reduction in collateral values even though they are not overdue by more than 90 days.
Furthermore, the company’s risk-mitigating measures are prudent, in the form of conservative loan-to-value ratios (averaging around 50%) in the LAP segment, and emphasis on collateral with sufficient cover in the commercial real estate segment. However, any sharp increase in NPAs, mainly in the commercial credit portfolio, and its impact on profitability will remain key rating sensitivity factors for IBHFL.
IBHFL is the one of the larger housing finance companies (HFCs) in India with total AUM of Rs 86,566 crore as on December 31, 2020. The share of housing loans within the overall AUM continues to increase – the same has risen to 68% as on December 31, 2020, from 50% as on March 31, 2015. The company’s LAP portfolio accounted for 19% of the overall AUM as on December 31, 2020, with remaining 13% was towards commercial credit. Going forward, the proportion of housing loan and LAP is expected to increase further from current levels.
Given the challenging operating environment, overall AUM declined by 15% year-on-year as on December 31, 2020, on account of lower disbursements as well as higher prepayments/sell-down in commercial credit book. This is also because of the current business transition with more focus on a granular portfolio. The overall disbursements during the nine months of fiscal 2021 were Rs 9,177 crore, with pick up seen in the second and third quarters of fiscal 2021 to around Rs 3,500 crore each. IBHFL’s overall AUM growth is expected to be subdued over the next few quarters as it recalibrates its business model, but is expected to revive subsequently. While the share of own book in the total AUM is expected to come down, its overall presence in the retail mortgage finance market is expected to remain sizeable.
Weaknesses:
Asset-quality risks arising from a sizeable large-ticket commercial credit portfolio of Rs 11,340 crore as on December 31, 2020 persist, and could impact the company’s portfolio performance. Given the chunkiness of loans (average ticket size of Rs 150 crore), even a few large accounts experiencing stress could impact asset quality.
Given the current macroeconomic environment, asset quality in segments such as commercial credit and LAP remain vulnerable and will be monitored closely, since the borrowers in these segments are more sensitive to an environment of prolonged liquidity tightness. However, RBIs measure on extension of date of commencement of commercial operations (DCCO) for commercial real estate projects and one-time debt restructuring should provide some respite. IBHFL has restructured ~7% of commercial credit AUM and none of the projects has been given extension under DCCO.
Furthermore, the share of commercial credit in overall AUM has decreased over last couple of years and was 13% as on December 31, 2020. The management is also in discussion with a potential investor for launching an alternative investment fund (AIF) platform (expected to be launched in fiscal 2022) for this segment.
However, any weakening in asset quality, specifically in the commercial real estate book and its impact on profitability, remains a monitorable.
The management has recalibrated their business model in light of funding access challenges that the company, as well as non-banking financial companies (NBFCs) in general have faced in recent times. Under the revised business model IBHFL plans to move towards a less risky and asset-light framework, wherein disbursements will primarily be in the housing loans and LAP segments (with potentially 60:40 split), with a low proportion of incremental disbursals in developer finance portfolio. Furthermore, on a steady state basis, of the overall disbursals, a significant proportion will be either co-originated or sold-down to banks.
IBHFL has started working towards this new model and has entered into co-origination agreement with a few public sector banks and is also in advanced stages of discussion with few other banks. However, the management’s ability to increase the disbursement pace, establish tie-ups with multiple banks and successfully scale up this model, while maintaining healthy profitability and asset quality is to be witnessed, though the company has demonstrated good execution capabilities in scaling up businesses in the past.
While earnings are expected to decline from levels seen in recent years, it will be supported by income from co-origination, off-balance sheet portfolio, and from spread on sold down loans. Furthermore, this will be commensurate with the more granular, lower-risk portfolio which will be the focus as part of the new business model. In recent times, earnings were impacted on account of decline in AUM, as well as higher credit cost. Overall, IBHFL’s return on assets (RoA) decreased to 1.3% during fiscal 2020 and nine months ended December 31, 2020 from 1.9% for fiscal 2020. |
Liquidity: Strong CRISIL Ratings’ analysis of IBHFL’s asset liability maturity (ALM) profile as of September 30, 2020, shows a cumulative positive gap (cumulative inflows over cumulative outflows) in the up to 1-year bucket. The company has reduced its reliance on commercial paper funding and elongated its liability duration. It had nil commercial paper borrowings as of December 31, 2020, against 16% as of September 2018.
Liquidity remains strong as IBHFL maintains a sufficient amount of liquid investments at any point in time, to cover the debt repayments for the next twelve months. As on March 8, 2020, against total debt of around Rs 4,587 crore maturing till August 31, 2021, IBHFL had total liquidity of around Rs 18,000 crore in the form of investments in mutual funds, certificates of deposits, bank balances, fixed deposits and undrawn available sanctions. |
Outlook: Stable CRISIL Ratings believes IBHFL will maintain strong capitalisation, comfortable asset quality in the retail segments and sizeable presence in retail mortgage finance. |
Rating Sensitivity factors Upward factors
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About the Company IBHFL is one of the larger housing financing companies in India. In its current legal form, its origins date back to April 1, 2012, when Indiabulls Financial Services Ltd was reverse-merged with it. The process was completed on March 8, 2013, following the Delhi High Court's approval on December 12, 2012. After the merger, IBHFL continues to operate as a housing finance company registered with the National Housing Bank. The company, along with its subsidiary Indiabulls Commercial Credit Ltd (ICCL), focuses on asset classes such as mortgages and commercial real estate. As on December 31, 2020, the promoter group held 21.7% stake in the company.
For fiscal 2020, IBHFL had a profit after tax (PAT) of Rs 2,200 crore on a total income of Rs 13,223 crore, compared with PAT of Rs 4,091 crore and total income of Rs 17,027 crore in the previous fiscal. During the nine months ended December 31, 2020, IBHFL reported PAT of Rs 925 crore on a total income of Rs 7,635 crore, compared with a PAT of Rs 2,063 crore and total income of Rs 10,393 crore during the corresponding period of the previous fiscal. |
Key Financial Indicators
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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)
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Annexure: Details of ratings withdrawn
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Annexure – List of entities consolidated
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Criteria Details
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