Detailed Rationale

CRISIL Ratings’ rating on the long term bank loan facilities and non convertible debentures of Shriram Housing Finance Limited (SHFL) continues on 'Rating Watch with Positive Implications'.

 

Ratings were placed on watch on December 13, 2021, following the board of directors of Shriram Transport Finance Company Limited (Shriram Transport), Shriram Capital Limited (Shriram Capital) and Shriram City approval for the merger of the entities with Shriram Transport. The resultant entity (post the merger subject to necessary approvals) is expected to be renamed as ‘Shriram Finance Limited’. Further, SHFL, currently a subsidiary of Shriram City, will become a subsidiary of the merged entity, Shriram Finance Limited (85.02% shareholding). The merger process is expected to be completed by the third quarter of next fiscal and is subject to approvals under the applicable law including approvals from the creditors, debenture holders, National Company Law Tribunal, other relevant governmental/regulatory authorities and third parties.

 

The rating action factored likely improvement in the credit profile of Shriram City as it would be equivalent to the merged entity, Shriram Transport. Therefore, the long-term ratings have been placed on 'Watch with Positive Implications'. The merged entity will be one of the largest NBFCs in India with consolidated assets under management (AUM) of Rs 1.65 lakh crore based on reported financials as on March 31, 2022. The business risk profile of the merged entity will be also benefit from diversity in product segments, larger branch network and potential for cross sell within the customer segment. Further, CRISIL Ratings also expects the integration impact to be minimal as the merger is within the Group entities with similar policies for human resources, business practices, systems and management. In terms of profitability, the merged entity’s proforma return on managed assets (RoMA) is estimated at 2.2% for fiscal 2021 and 2.1% for fiscal 2022. In comparison, on standalone entity basis, Shriram Transport’s reported RoMA stood at 2.0% for fiscal 2021 and fiscal 2022 while Shriram City’s RoMA was at 2.8% and 2.6% for similar comparable periods. The merged entity’s adjusted gearing is also estimated at 4.2 times as on March 31, 2022 as compared to 4.4 times and 3.7 times for Shriram Transport and Shriram City respectively.

 

CRISIL Ratings believes that there are many steps and developments, which may potentially need to be considered and approved by regulators before the merger comes into effect. The rating watch will be resolved and final rating action will be taken once there is adequate progress on receipt of requisite approvals for the reorganization and, after taking into consideration other developments pertaining to the merger scheme and company’s performance.

 

The current ratings on SHFL continue to centrally factor in expectation of strong financial, operational and management support from parent, Shriram City, both on an ongoing basis and in the event of any distress. SHFL is also expected to benefit from the Shriram group’s ecosystem, which SHFL will further tap for business growth and operational efficiencies. SHFL’s capitalisation metrics are also adequate while resource profile is diversified. However, these strengths are partially offset by modest asset quality, average profitability and limited track record post revamp of business model.

 

With new core management team in place, the entity has been changing its long term strategy and plans to grow and diversify its loan portfolio considerably over the coming years. Under the revamped model, while housing finance will remain key focus area, SHFL will also offer products such as loans against property and relatively minimum portfolio construction finance to diversify its portfolio. The company plans to focus on increasing the share of loans to salaried customer portfolio which was about 21% of the portfolio as on March 31, 2022 to about 35% of the total loan book. The company also decided to continue to focus on the existing customer base of its parent Shriram City, especially in the southern states where Shriram City enjoys a strong market position, through cross sell of home loan products and also plans to leverage the customer base of Shriram Transport Finance Company Limited (Shriram Transport). 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 seventeen states. Also, to increase operational efficiency, SHFL is undertaking rationalization of staff and branches to bring down its cost to AUM ratio.

 

CRISIL Ratings draws comfort from the fact that SHFL has put in an experienced team in place and is backed by adequate risk management processes and systems that should assist in growing the book cautiously. However, the ability to manage asset quality and profitability while scaling up remains a key monitorable.

 

CRISIL Ratings has also withdrawn its rating on the non-convertible debenture of Rs 225 crore (See Annexure 'Details of Rating Withdrawn' for details) on confirmation from the debenture trustee as it is fully redeemed. The rating is withdrawn in line with CRISIL Ratings' policy.

Analytical Approach

CRISIL Ratings has evaluated the standalone business and financial risk profile of SHFL and further factors in the expectation of strong support from Shriram City both on an ongoing basis and in the event of distress.

Key Rating Drivers & Detailed Description

Strengths:

Strong support from its parent, Shriram City

SHFL is expected to receive strong support from Shriram City given the increasing strategic importance of SHFL as a critical business growth driver within the housing finance space. Shriram City is the majority owner of SHFL with 85.02% stake. There is strong management oversight from Shriram City through presence in the board of SHFL.  Mr. Y.S. Chakravarti, (Managing Director and Chief Executive Officer, Shriram City) and Mr Venkatraman Murali (Non-executive Independent Director, Shriram City) are present on the board of SHFL. The present Managing Director and Chief Executive Officer of SHFL, Mr. Jambunathan Subramanian who was appointed in November 2018 has been a part of senior management team at Shriram City for last 9 years before taking up this current assignment. Additionally, Shriram City is also assisting with key personnel on deputation basis.

 

SHFL widens the product offerings of Shriram City 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. As part of their revamped business model, SHFL will actively tap the existing branches of Shriram City to identify synergies and bring in operational efficiencies.

 

Furthermore, Shriram City has the financial flexibility to infuse capital into SHFL to support growth. It is expected to provide equity capital whenever required. SHFL also has access to a credit line of Rs 300 crore from its parent Shriram City to meet any contingency requirements. Given majority ownership, shared name, management oversight, common branding and operational synergies, CRISIL Ratings believes Shriram City has a strong moral obligation to support SHFL.

 

Adequate capitalisation and resource profile

SHFL’s networth was around Rs 1158 crore while the total capital adequacy ratio (per Ind-AS) stood at 30.89% as on March 31, 2022. SHFL has raised Rs 200 crore of equity from Shriram City in May 2021 and further Rs 300 crore in October 2021. The adjusted gearing (including the off book securitised portfolio)  stood at 4.0 times as on March 31, 2022. The reported gearing of SHFL was is 3.4 as on  times as on March 31, 2022.  On a steady-state basis, reported gearing is expected to be at 4-5 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, Rs 3320 crore (71% including NHB refinance), Rs 518 crore (11%) was from NCDs, Rs 775 crore (17%) was from securitisation and direct assignment transactions and remaining Rs 57 crore (1%) was from PTC transactions  as on Mach 31, 2022. Also the company has access to line of credit of Rs 300 crore from its parent Shriram City to tide over any short term liquidity concerns.

 

Weakness:

Modest asset quality metrics

SHFL’s 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. As a result, the reported GNPA ratios improved since. The GNPA and NNPA stood at 1.7% and 1.3% respectively as on March 31, 2022 as per the new recognition norms. Further, the company had restructured assets of about Rs 140 crore (2.6% of AUM) as on March 31, 2022. Nonetheless, given the higher susceptibility of self-employed borrowers in the affordable housing segment to economic cycles, the asset quality will remain a monitorable.

 

Moderate profitability

For fiscal 2022, the company reported a net profit of Rs 80 crore on total income (net of interest expenses) of Rs 269 crore against net profit of Rs 62 crore on total income (net of interest expenses) of Rs 220 crore in fiscal 2021. fiscal 2022, the return on managed assets (RoMA) stood at 1.5% against 1.7% for fiscal 2021. Operating expenses (excluding loan loss expense) remained high with cost to AUM (annualised) at 2.8% in fiscal 2022 against 2.9% in fiscal 2021 and 4.9% in fiscal 2020.

 

Under its revamped business model, in the next few quarters, SHFL expects the margins to improve on the basis of affordable housing and relatively stable newer portfolio while it expects operational efficiencies to kick in on account of increase in the 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. CRISIL Ratings, however, expects profitability to remain subdued in the next couple of years of given the additional costs on 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

Analysis of asset liability maturity profile of SHFL as on March 31, 2022 (CRISIL Ratings adjusted; excluding committed lines of credit) shows no negative cumulative mismatches till one-year buckets. In terms of liquidity, SHFL, as on May 31, 2022 had liquidity of Rs 641 crore (Rs 460 crore of cash and equivalents and Rs 181 crore of unutilised working capital lines). Against the same, they have total debt payments of Rs 339 crore over the next three months till August 2022.

Rating Sensitivity Factors

Upward factor:

• Successful completion of the merger with no material impact on the merged entity’s financials will result in the overall credit profile of SHFL to be equivalent to that of the merged entity
• Upward revision in the rating of the parent, Shriram City by 1 notch or higher

 

Downward factor:

• Downward revision in the rating of the parent Shriram City by 1 notch or higher
• Any change in support philosophy or stance by Shriram City
• Sharp deterioration in the asset quality of SHFL thereby impacting the profitability of the company

About the Company

Incorporated in 2010 under the Companies Act 1956, 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 City Union Finance (Shriram City) that owns 85.02% of equity shares. The remaining 14.98% of the shareholding is held by Valiant Mauritius Partners FDI Ltd.

 

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. Till fiscal 2018, the company has predominantly catered 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 ahead, the company plans to leverage on the customer base of Shriram city and Shriram Transport and also focus on salaried customers’ portfolio for growth. The company currently has 103 branches across 15 states in India.

Key Financial Indicators

As on/For the year ended	Unit	31-Mar-2022	31-Mar-2021
Assets Under Management	Rs.Cr	5355	3929
Total income (net of interest expenses)	Rs.Cr	269	220
Profit after tax	Rs.Cr	80	62
RoMA	%	1.5	1.7
Gross NPA	%	1.7	1.9
Adjusted gearing*	Times	4.0	5.5

*Including off-book DA portfolio; reported gearing of 3.4

Any other information: Not applicable