Detailed Rationale CRISIL Ratings has assigned its ‘CRISIL AA+/Stable’ rating to Rs.500 crore Non-Convertible Debentures of Shriram Housing Finance Limited (SHFL). CRISIL Ratings has also reaffirmed its ratings on the company’s other debt instruments and enhanced bank facilities at ‘CRISIL AA+/CRISIL PPMLD AA+/Stable’.
Consequent to redemption, CRISIL Ratings has withdrawn its rating on debentures of Rs.65 crore (See Annexure 'Details of rating withdrawn' for details) in line with its withdrawal policy. CRISIL Ratings has received independent confirmation that these instruments are fully redeemed.
CRISIL Ratings had upgraded the ratings in December 2022, following the consummation of the merger of Shriram City Union Finance Limited (SCUF) and the demerged undertaking of Shriram Capital Limited (Shriram Capital) with Shriram Transport Finance Company Limited (STFCL); STFCL was renamed as Shriram Finance Ltd (SFL). Shriram Housing Finance Ltd (SHFL) now operates as a subsidiary of SFL which holds around 84.82% stake in the same. In the earlier analytical approach, CRISIL Ratings had factored in expectation of strong support from SCUF both on an ongoing basis and in the event of distress. With the merger process completed, the parent for SHFL is now the merged entity, SFL which is rated ‘CRISIL AA+/CRISIL PPMLD AA+ r/Stable/CRISIL A1+’.
The ratings continue to factor in the expectation of strong support from the parent SFL both on an ongoing basis and in the event of distress. SHFL’s strategic importance has been consistently growing within the Shriram eco system, since it widens the product offerings in the financial services space while simultaneously adding scale and granularity into its already retail oriented lending book. Also, conducting the home loan business through a housing finance company allows more efficient use of capital. In addition to their revamped business model, SHFL which was actively tapping the existing branches of SCUF will now further look to benefit from synergies with STFCL branch network. Furthermore, SFL has the financial flexibility to infuse capital into SHFL to support its growth. It is expected to provide equity capital whenever required. Given the majority ownership, shared name, increasing strategic importance, management oversight, common branding and operational synergies, CRISIL Ratings believes SFL will continue to provide the required support to SHFL.
The ratings on SHFL continue to factor in the comfortable capitalisation metrics and well diversified resource profile. However, these strengths are partially offset by limited track record of operations post the revamp of business model and average profitability metrics.
The prefix ‘PPMLD’ indicates that the principal amount of the debentures is protected, while returns remain market-linked. Also, payments to investors are not fixed and are linked to external variables such as government yield, commodity prices, equity indices, foreign exchange rates, or equity valuation of the company. |
Analytical Approach CRISIL Ratings has evaluated the standalone business and financial risk profile of SHFL and factored in the expectation of strong support from SFL both on an ongoing basis and in the event of distress. |
Key Rating Drivers & Detailed Description Strengths:
SHFL is expected to receive strong support from its parent given the increasing strategic importance of SHFL as a critical business growth driver within the housing finance space and Shriram Group. SFL is the majority shareholder of SHFL with 84.82% stake.
SHFL’s strategic importance has been consistently growing within the Shriram eco system, since it widens the product offerings of SCUF in the financial services space while simultaneously adding scale and granularity into its already retail oriented lending book. Also, conducting the home loan business through a housing finance company allows more efficient use of capital. In addition to their revamped business model, SHFL has also been actively tapping the existing branches of SCUF to identify synergies and further improve operational efficiencies.
Furthermore, SFL has the financial flexibility to infuse capital into SHFL to support its growth. It is expected to provide equity capital whenever required. Given majority ownership, shared name, increasing strategic importance, management oversight, common branding and operational synergies, CRISIL Ratings believes SFL will continue to provide the required support to SHFL.
SHFL’s networth stood at Rs 1,299 crore while the total capital adequacy ratio (per Ind-AS) stood at 25.5% as on March 31, 2023. SHFL had raised Rs 200 crore of equity from SCUF in May 2021 and Rs 300 crore in October 2021. The adjusted gearing (including the off book securitised portfolio) stood at 5.9 times and the reported gearing of SHFL was 4.8 times as on March 31, 2023. On a steady-state basis, reported gearing is expected to be at 5-5.5 times over the medium term. CRISIL Ratings believes that SHFL will raise the required equity to manage capitalisation levels for future growth.
SHFL’s resource profile primarily consisted of bank borrowings (73% including NHB refinance), debt instruments (21%), and PTC transactions (6%) as on March 31, 2023. Also, the company has access to line of credit of Rs 300 crore from its parent SFL is also available to tide over any short-term liquidity concerns.
Weakness:
With the new core management team in place, SHFL has been changing its long-term strategy and plans to grow and diversify its loan portfolio substantially over the coming years. Under the revamped model, while housing finance will remain key focus area, SHFL has also been offering products such as loans against property and relatively a small portion towards construction finance for diversifying its portfolio. SHFL’s AUM has grown by a 4-year CAGR of 44% to Rs 8,047 crore as on March 31, 2023. The Company continues to focus on self-employed sector with Bureau score of more than 700. Currently more than 75% of the SHFL’s portfolio is having bureau score of over 700. The company also focuses on the existing customer base of its parent. With the parentage of SFL, SHFL is expected to benefit through cross sell of home loan products. The company wants to concentrate its focus on select geographies and has decided to contain its operations to seven to eight states instead of current fifteen states.
The loan portfolio remains susceptible to inherent challenges related to asset quality due to lending to borrowers with modest credit profiles and under-banked customers previously. However, following the revamp of its operations, SHFL has put up adequate systems and processes and has employed an experienced team in place to manage risks in the business, especially in the self-employed segments. The company has decentralised its credit operations, has increased its focus on underwriting practices and has heightened its collection efforts to bring asset quality stress under control.
End fiscal 2018, the asset quality had weakened with gross non-performing assets (NPA) and net NPA at 5.0% and 3.7%. Delinquencies were relatively higher in the loan against property (LAP) segment. After a detailed analysis of delinquent contracts, they sold NPAs aggregating to approx. Rs 80 crore to an asset reconstruction company on all-cash basis. Additionally, under the revamped business model which was adopted from January 2019 onwards, SHFL has been improving its sourcing profile and collection efforts. Around 90% of the current outstanding loan book of SHFL has been sourced after January 2019, which has 90+ DPD of 0.4%. As a result, the overall reported GNPA ratios improved since then. The GNPA and NNPA stood at 0.9% and 0.7% respectively as on March 31, 2023 as per the new RBI recognition norms. Excluding the circular impact, the GNPA and NNPA have improved to 0.6% and 0.4% respectively as on March 31, 2023 from 2.8% and 2.2% respectively as on March 31, 2019. In addition, the company had standard restructured assets of about Rs 110 crore (1.6% of loan book) as on March 31, 2023. Nonetheless, given the higher susceptibility of self-employed borrowers in the affordable housing segment to economic cycles, the asset quality will remain a monitorable.
SHFL reported a net profit of Rs 138 crore on total income (net of interest expenses) of 401 crore for fiscal 2023 against net profit of Rs 80 crore on total income (net of interest expenses) of Rs 269 crore for fiscal 2022. SHFL reported return on managed assets (RoMA) of 1.8% for fiscal 2023 as compared to 1.6% for 2022 and 1.8% for fiscal 2021. Operating expenses (excluding loan loss expense) remained high with cost to average managed assets at 3.0% for fiscal 2023 as compared to 2.9% in fiscal 2022 and 3.1% in fiscal 2021.
Under its revamped business model, over the last few quarters, SHFL has seen a steady growth in margins and these are expected to improve further on the basis of growth of affordable housing segment in India and stable portfolio, generated post January 2019. Additionally, the company expects operational efficiencies to further enhance on account of increasing book size of the overall portfolio. Also, owing to greater focus on underwriting practices and heightened collection efforts, the company expects its provision costs to come down further. CRISIL Ratings, however, expects profitability to remain slightly subdued in the next couple of years owing to the additional costs which may occur on account of the transformation exercise and as SHFL continues to build scale through setting processes and people to revamp the operations and decentralize the credit units. However, cost efficiencies are expected to be generated from the staff/branch rationalization exercise conducted by SHFL. Also, the company’s ability to raise funding at competitive cost will have bearing on the bottom-line. |
Liquidity : Strong In terms of liquidity, as on March 31, 2023, SHFL was holding liquidity of Rs 1,481 crore (Rs. 436 crore of cash and equivalents, Rs 864 crore of liquid investments and Rs. 180 crore of unutilized working capital lines). Additionally, it was holding undrawn sanctions of Rs 600 crore. Against the same, they have total debt payments of Rs 621 crore over the next three months till June 2023. The Asset Liability Management (ALM) statement as on March 31, 2023 stood comfortable with positive cumulative mismatch across all buckets (the inflows include existing committed bank lines). |
Outlook Stable CRISIL Rating expects SHFL to continue to maintain its comfortable capitalisation metrics and improve the earnings profile going forward. Further, support from the parent SFL both on an ongoing basis and in the event of distress is expected to continue. |
Rating Sensitivity factors Upward factor:
Downward factor:
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Incorporated in 2010 under the Companies Act 1956, Shriram Housing Finance Limited (SHFL) started its operations in 2011 after obtaining Certificate of Registration from National Housing Board (NHB). The company is a majority owned subsidiary of Shriram Finance Limited (SFL) that owns 84.82% of equity shares. 14.94% of the shareholding is held by Valiant Mauritius Partners FDI Ltd and balance 0.24% by individuals.
SHFL was incorporated to provide longer tenured home products to Shriram group of customers and use this entity as means of cross-selling other products within the Shriram group. Currently the company is engaged in the business of providing loans for construction or purchase of residential property and loans against property. The company predominantly caters to self-employed borrowers and informed salaried customers in Tier II and Tier III cities and the focus has been on lower income segment with a ticket size of under Rs. 20 lacs. Going forward, the company plans to leverage on the Shriram Group network and build synergies for steady growth. The company currently has 123 branches across 15 states in India. |
Key Financial Indicators
* including off-book DA portfolio; reported gearing of 4.8x |
Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
^yet to be issued *Interchangeable with short term facility
Annexure - Details of Rating Withdrawn
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Criteria Details
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