Rating Rationale

Key Rating Drivers & Detailed Description

Strengths:

Market leadership in the pre-owned commercial vehicle (CV) financing segment

STFCL is the largest CV financier in the country with assets under management (AUM) of Rs 127,041 crore as on March 31, 2021, up ~8% Y-o-Y. With presence of over four decades in the pre-owned CV financing business, STFCL has created a strong and sustainable competitive advantage 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.

Of all the business segments, CV financing (HCV and M&LCV) together constituted the largest portion of AUM at ~75% as on March 31, 2022. Passenger vehicles formed another 21% of AUM. The composition of AUM has remained largely unchanged with the pre-owned vehicle loan book comprising almost 93% of the AUM. While STFCL’s growth will continue to be driven by pre-owned vehicle financing business, the new vehicle segment also remains a key focus area of the company in spite of competition from banks and NBFCs.

CRISIL Ratings believes that the business prospects for the pre-owned CV financing segment remain strong given the large unorganized market and significant entry barriers. STFCL has gradually expanded into rural markets and had 1,025 branches and 775 rural centres as on March 31, 2022. Owing to increased demand for pre-owned vehicles in deep rural areas, the company has been increasing its presence in rural and semi urban areas to maintain its niche presence. End March 2022, the total branches stood at 1,854 of which ~55% were in rural areas. In the last one year the company has been adding new branches, majority of which are the satellite branches outside the semi-urban centres. Consequently, the share of rural AUM has also risen to 51% of total AUM as on March 31, 2022 against 49% end March 2021.

STFCL had also innovated in establishing Shriram Automall India Ltd (SAMIL), a reliable platform for sale, refurbishment, and auction of pre-owned vehicles, besides enabling better price discovery of such vehicles. While STFCL sold majority stake in SAMIL in April 2018, it will continue to hold a large minority stake. CRISIL Ratings believes that despite the minority stake, SAMIL’s business operations will continue to be closely integrated with STFCL.

Overall, CRISIL Ratings believes that STFCL has strong structural advantages over its peers, which will support its growth plans and help it maintain leadership position in the pre-owned CV financing segment over the medium term.

Adequate capitalisation and earnings profile

STFCL’s capitalisation remains adequate with networth of Rs 25,932 crore and an adjusted gearing of 4.4 times as on March 31, 2022. STFCL has raised capital of Rs 1,493 crore in August 2020 which has helped in improving capitalisation and gearing metrics. CRISIL believes that STFCL’s capitalisation will remain comfortable over the medium term, given its demonstrated ability to access markets. The company’s Tier 1 and total capital adequacy ratio improved to 20.70% and 22.97% respectively as on March 31, 2022 (19.94% and 22.50% respectively as on March 31, 2021), well above the regulatory minimum.

Despite business volumes dropping till the first quarter of fiscal 2022 and the company providing adequately towards Covid related provisioning, the earnings profile remains resilient. This comes on the back of the high yields on the portfolio given the focus of STFCL on pre-owned vehicle financing. Credit costs stood at 2.8% for fiscal 2022 marginally higher than fiscal 2021. Over the course of the past 4 fiscals the credit costs for STFCL have remained in the range of 2.3%-2.8%. Nevertheless, STFCL reported return on average managed assets (RoMA) of 2.0% for fiscal 2022 similar to last fiscal.

Weakness:

Modest asset quality

The asset quality metrics for STFCL 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. The borrowers of the company are primarily individual small road transport operators whose truck utilisation and income streams are more vulnerable to weak economic activity. Given the customer profile, the reported gross non-performing assets (GNPA)/ Gross Stage 3 metrics has remained elevated in the range of 7.1 to 8.4% for STFCL over the past 4 years.

The collection efficiency for STFCL was impacted during the first and second wave of Covid. However, post the reopening of the economy, the collection efficiencies have improved and remained above 95% since second quarter of fiscal 2022. Consequently, the asset quality metrics remained stable reported gross non-performing assets (GNPA)/ Gross Stage 3 metrics to 7.07% as of March 31, 2022. CRISIL ratings also notes that the restructuring in the portfolio was about 0.7% as on March 31, 2022.

Having said that the asset quality metrics continue to be elevated. Nevertheless, CRISIL Ratings notes that STFCL has displayed ability in the past to ultimately recover from these accounts, even post loan maturity date. The overall credit costs have been range bound over the past 3 years. This is further supported by the analysis of vintage wise static pool data which shows recovery / roll-back of around 50-60% from peak 90+ reached for a particular disbursement vintage. This has been due to the company’s long track record in the vehicle financing business, understanding of the target customer segment and relationship based lending model could support the asset quality metrics.

Average, albeit improving resource profile

STFCL has an average, though improving, resource profile. It has an established track record in raising retail borrowings which helps diversify its resource profile. However, its cost of borrowings continues to be higher than peers. While the company has managed to tap various borrowing sources having raised over Rs 57,685 crore in fiscal 2022, the biggest traction across funding avenues was post Q4FY21. Further the company has also been able to raise funds via retail deposits.

Nevertheless, the yields for bonds of STFCL in the secondary market had fluctuated in the previous year and consequently have been on an improving trend for the past few months. However, any significant impact on the yields could impact the fund raising ability if STFCL. Consequently, the ability of STFCL to consistently raise resources from traditional routes of term loans and capital market instruments at optimal costs remains a key monitorable.