Rating Rationale

Key Rating Drivers & Detailed Description

Strengths:

Market leadership in overall NBFC ecosystem

SFL is the second largest retail NBFC in India and third largest non-bank financier (including HFCs) with consolidated assets under management (AUM) of Rs 2,58,279 crore as on September 30, 2024 (2,38,624 crore as on March 31, 2024). The standalone AUM stood at Rs 2,43,043 crore as on September 30, 2024 (Rs 2,24,862 crore as on March 31, 2024). While CV financing shall remain the key product segment, the company is also focusing on growing its other higher yielding product segments like passenger vehicle finance, two-wheeler, gold loans, MSME etc. The standalone AUM as of September 30, 2024, comprised commercial vehicle (46.20%), passenger vehicle (20.2%), MSME (13.3%), construction equipment (7.3%), two-wheeler (5.4%) and others.

The company is expected to continue to retain its predominant market position in the pre-owned CV financing business and the SME loan segment. This is because of the strong and sustainable competitive advantage of the company through deep understanding of the borrower profile and their credit behaviour. They have done so by building a scalable operating model, extensive reach and strong valuation capabilities of pre-owned vehicles. The company faces limited competition from other organized financiers, including banks, in this segment, due to inherent riskiness of the target product and the customer profile. In the SME loan segment, the company is a leading financier among retail NBFCs. The company has grown significantly in the unique space created from its legacy chit fund ecosystem.

Overall, Crisil Ratings believes that SFL has strong structural advantages over its peers, which will support its growth plans and help it maintain a leadership position over the medium term. Nevertheless, company’s ability to continue to scale up operations remains a key monitorable.

Comfortable capitalisation

SFL’s capitalisation remains adequate with consolidated networth of Rs 53,142 crore and gearing of 3.9 times as on September 30, 2024 (Rs 49,677 crore and gearing of 3.9 times as on March 31, 2024). On a standalone basis, its networth was Rs 52,136 crore and gearing of 4 times as on September 30, 2024 (48,568 crore and gearing was 3.8 times as on the same date).

The company had last raised capital in fiscal 2022 through issue of equity shares through qualified institutional placement of shares and preferential issue of shares to promoters, aggregating to Rs 2,479 crore (net of issue expenses). On a consolidated basis, the networth to net NPA ratio improved to 8.5x as on September 30, 2024 (8.3x as on March 31, 2024). The overall capital adequacy ratio and tier 1 capital ratio of SFL remained comfortable at 20.16% and 19.36% respectively as on September 30, 2024.

Crisil Ratings believes that the capitalisation profile will remain comfortable over the medium term, given the demonstrated ability to access markets. Moreover, Crisil Ratings takes note of the company’s announcement regarding sale of its entire stake of 84.44% in SHFL to Mango Crest Investments Ltd (an entity affiliated with Warburg Pincus LLC) at a purchase consideration of Rs 3,929 crore. This should further aid capitalisation profile of SFL.

Adequate earnings profile

SFL’s earning profile has improved over the years benefitting from merger synergies, strong growth in AUM, stable margins and reduced credit costs. The company reported Return on Managed Assets (RoMA) of 3.1% (consolidated) for the first half of fiscal 2025 against 3.1% for fiscal 2024 and 3.0% for fiscal 2023 (2.0% for fiscal 2022 i.e. pre-merger). The consolidated net profit after tax was Rs 4,184 crore for the first half of fiscal 2025 against Rs 7,399 crore for fiscal 2024 and Rs 6,020 crore for fiscal 2023.

On a standalone basis, the ROMA was 3.2% in first half of fiscal 2025 and 3.2% in fiscal 2024 as well, against 3.4% in fiscal 2023 (2% in fiscal 2022 pre-merger). The company’s profitability is primarily supported by reduction in credit costs to 1.9% in first half of fiscal 2025 from 2.0% and 2.4% in fiscal 2024 and fiscal 2023 (2.8% in fiscal 2022) supported improved asset quality.

The company’s Net Interest margin (NIM; on own book) remained range bound at 9.3% in first half of fiscal 2025 against 9.4% in fiscal 2024 after dropping from 10.4% in fiscal 2023 (7.4% in fiscal 2022; pre-merger). The NIM benefit in fiscal 2023 owning to change in product mix on merger with Shriram City Union Finance was largely set off by increase in opex to 2.7% in fiscal 2023 (1.6% in fiscal 2022), however it remained rangebound at 2.8% in first half of fiscal 2025 against 2.7% in fiscal 2024.

Going forward, the company’s ability to maintain NIM and contain credit cost will be key to overall profitability.

Weakness:

Exposure to inherent asset quality-related challenges arising from lending to borrowers with modest credit profile

The asset quality metrics for SFL have been elevated over the past several years given the fact that the company largely caters to borrowers with modest credit profile and relatively under-banked customers. It has been improving each quarter with SFL reporting Gross Stage 3 (GS3) ratio of 5.32% (standalone basis) as on September 30, 2024, against 5.45% as on March 31, 2024 (6.21% as on March 31, 2023). This is due to lower slippages and higher reductions including write-offs. The GS3 ratio as on September 30, 2024 was 5.78% for CV segment, 5.19% for passenger vehicles, 6.34% for construction equipment, 8.86% for farm equipment, 4.64% for MSME financing, 3.08% for two-wheeler, 1.95% for gold loans and 4.45% for personal loans. The overall Net Stage 3 was 2.64% as on September 30, 2024, and March 31, 2024 (3.19% as on March 31, 2023).

Crisil Ratings notes SFL and erstwhile SCUF have displayed ability in the past to ultimately recover from delinquent accounts, even post loan maturity date. Further, the restructured portfolio for the company was also negligible at sub 1% as on September 30, 2024. However, ability to scale up the portfolio whilst improving asset quality metrics remains a key monitorable. Nevertheless, company’s long track record in its business segments, understanding of the target customer segment and relationship-based lending model should support the asset quality metrics.

Average, albeit improving resource profile

SFL has an average, though improving, resource profile. SFL has an established track record in raising funds from the markets and also being able to tap retail borrowings, which helps diversify its resource profile. The share of public deposits increased to 24.2% as on September 30, 2024, from 23.9% as on March 31, 2024 and 19% as on March 31, 2022. Furthermore, the company has also been tapping the External Commercial Borrowing (ECB) route which adds diversity to its resource profile, with the latest issuance in December 2024 of USD 1.277 billion equivalent in multiple currencies, including USD, EUR, and AED. The company had also raised USD 468 million in June 2024 and USD 750 million social bonds in January 2024.

However, the cost of borrowings is relatively higher than peers. The ability to trim down borrowing costs from the current levels and diversify further into the domestic capital market will be key to support the earnings profile. Also, the ability of SFL to now consistently raise resources from traditional routes of term loans and capital market instruments at optimal costs remains a key monitorable.