Shriram Finance Limited 'CRISIL AA+/Stable' assigned to Subordinated Debt
Rating Action
Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. 1 crore = 10 million Refer to annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has assigned its ‘CRISIL AA+/Stable’ rating to Rs.1000 crore subordinate debt of Shriram Finance Limited (SFL). Ratings on existing debt instruments and bank facilities has been reaffirmed at ‘CRISIL AA+/CRISIL PPMLD AA+/Stable/CRISIL A1+’.
CRISIL Ratings has also withdrawn its rating on redeemed non convertible debentures of Rs.68.97 crore and long term principal protected market linked debentures of Rs.309.8 crore (see ‘Annexure - Details of Rating Withdrawn’ for details) at the client’s request and on receipt of requisite documentation. The withdrawal is in line with the CRISIL Ratings’ policy on withdrawal of ratings.
The ratings continue to reflect SFL's market leadership in the overall NBFC ecosystem, especially pre-owned commercial vehicle (CV) financing segment, comfortable capitalisation as well as adequate earnings profile. These strengths are partly offset by the company's average yet improving asset quality and resource profile. |
Analytical Approach CRISIL Ratings has considered the consolidated financial and business risk profiles of SFL, its subsidiary, Shriram Housing Finance Ltd (SHFL) and its associate Shriram Automall Limited
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: 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 Rs 2,47,841 crore as on June 30, 2024 (2,38,624 crore as on March 31, 2024). The standalone AUM stood at Rs 2,33,444 crore as on June 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 June 30, 2024, comprised commercial vehicle (47.0%), passenger vehicle (19.7%), MSME (12.3%), construction equipment (7.3%), two-wheeler (5.5%) 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 50,306.04 crore and gearing of 3.8 times as on June 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 50,560 crore and gearing of 3.8 times as on June 30, 2024 (48,568 crore and gearing was 3.8 times as on the same date. The company has regrouped equity pertaining to non-controlling interest in SHFL with Liabilities directly associated with discontinued Operations in Jun'24, as result of which the consolidated networth is lower.
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 8.4x as on March 31, 2024 (7.7x as on March 31, 2023). The overall capital adequacy ratio and tier 1 capital ratio of SFL remained comfortable at 20.30% and 19.55% respectively as on March 31, 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 83.78% in SHFL to Mango Crest Investments Ltd (an entity affiliated with Warburg Pincus LLC) at a purchase consideration of Rs 4,630 crore. This should further aid capitalisation profile of SFL post consummation of transaction.
Adequate earnings profile The earnings profile of SFL has benefited from the merger synergies, as reflected by improvement in the Return on Managed Assets (RoMA) to 3.1% for fiscal 2024 and 3.0% for fiscal 2023 as compared to 2.0% for fiscal 2022 (pre-merger), on a consolidated basis. It reported net profit after tax of Rs 7,399 crore for fiscal 2024 against Rs 6,020 crore for fiscal 2023. The consolidated net profit was Rs 2,031 crore with annualized ROMA of 3.2% during the first quarter of fiscal 2025.
Total income (net of interest expense) improved to 8.8% for FY24 as compared to 8.7% for fiscal 2023 aided by yield improvement owing to change in product mix and reduction in negative cash & carry with normalization of liquidity maintenance. While yield benefit is accretive, SME business is operational intensive, and therefore, the operating expense ratio increased post business restructuring to 2.7% in fiscal 2024 (fiscal 2023: 2.6%) as compared to 1.6% for fiscal 2022 (pre-merger). The credit costs, however, improved to 1.9% for FY24 (fiscal 2023: 2.1%) as compared to 2.8% in fiscal 2022 (pre-merger), with gradual improvement in the asset quality metrics.
The annualized total income (net of interest expense), operating expense ratio and credit costs remained range bound at 8.6%, 2.6% and 1.9% in first quarter of fiscal 2025.
Weaknesses: 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 5.39% (standalone basis) as on June 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 has improved across product segments in June 2024 and stood at 5.9% for CV segment, 5.3% for passenger vehicles, 6.2% for construction equipment, 8.9% for farm equipment, 4.9% for MSME financing, 3.1% for two-wheeler, 1.9% for gold loans and 4.6% for personal loans. The Net Stage 3 was 2.7% as on June 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. Consequently, the overall credit costs have been range bound over the past 3 fiscals. Further, the restructured portfolio for the company was also negligible at sub 1% as on June 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 24.8% as on June 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 of 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. |
Liquidity: Strong The structural asset liability maturity (ALM) statement of SFL as on June 30, 2024, shows that ALM position is adequate with cumulative positive gaps upto the 1-year bucket indicating that business inflows also support repayments. As of June, 30, 2024, SFL had liquidity of Rs 15,229 crore (comprising of cash and equivalents and unutilized CC/WCDL lines) which comfortably covers 2 months of debt obligations. The liquidity coverage ratio was 225.19% as of June 30,2024.
ESG Profile CRISIL Ratings believes that SFL’s ESG profile supports its already strong credit risk profile.
The ESG profile for financial sector entities typically factors in governance as a key differentiator. The sector has reasonable social impact because of its substantial employee and customer base, and it can play a key role in promoting financial inclusion. While the sector does not have a direct adverse environmental impact, the lending decisions may have a bearing on the environment.
SFL has a continuous focus on strengthening various aspects of its ESG profile.
Key ESG highlights:
There is growing importance of ESG among investors and lenders. SFL’s commitment to ESG principles will play a key role in enhancing stakeholder confidence, given the sizable share of market borrowings in its overall debt and access to both domestic and foreign capital markets. |
Outlook: Stable CRISIL Ratings believes that SFL will continue to maintain healthy capitalisation and strong earnings profile which will help mitigate inherent asset quality-related challenges. CRISIL Ratings also believes that the company will maintain its competitive position in the key business segments. |
Rating Sensitivity Factors Upward Factors:
Downward Factors:
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About the Company Following the consummation of the merger of SCUF and demerged undertaking of Shriram Capital Limited with SFL (erstwhile STFCL), the company has been renamed to Shriram Finance Ltd (SFL). Shriram Housing Finance Ltd (SHFL) continues to operate as a subsidiary of SFL which holds around 83.78% stake in the former. Pursuant to the consummation of the transaction, Shriram Capital and SCUF ceased to exist.
SFL, incorporated in 1979, was registered with RBI as a deposit-taking, asset-financing non-banking financial company and predominantly provides financing for vehicles such as CVs (both pre-owned and new), tractors, and passenger vehicles. Erstwhile SCUF (now merged into SFL) was incorporated in 1986 and operated in the retail financing segment with a focus on small enterprise loans, two-wheeler financing, gold loans, housing loans and others (auto and personal loans). |
Key Financial Indicators: SFL consolidated
*Gross Stage-3 estimated on combined basis for SFL and SHFL ^Pre-merger **annualised |
Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
#Yet to be issued
Annexure - Details of Rating Withdrawn
^transferred from Shriram City Union Finance Limited upon its merger into Shriram Finance Limited |
Annexure - List of Entities Consolidated
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Criteria Details
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