Detailed Rationale CRISIL Ratings has revised its rating outlook on the long term debt instruments of Shriram Transport Finance Company Limited (STFCL) to 'Stable' from ' Negative' while reaffirming the ratings at 'CRISIL AA+'. The rating on commercial paper has been reaffirmed at 'CRISIL A1+'.
The outlook revision is driven by the sustained improvement in the month-on-month collection efficiencies for STFCL leading to limited slippages and therefore asset quality metrics of the company remaining in line with pre-Covid levels. The outlook revision also factors in the continued strong market position in the pre-owned vehicle finance segment and sustained earnings profile despite elevated provisioning.
The outlook on the ratings was previously revised to Negative amidst expectations on pressure on asset quality immediately post the imposition of the lockdown and the weak macroeconomic environment. This was on account of 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. Consequently, expectations were on high likelihood of collection efficiency remaining low and thereby result in increase in delinquencies.
However, post the moratorium period and with the gradual reopening up of the economy, the monthly collection efficiency[1] jumped to almost 95% in September 2020. This improvement has been sustained with collection efficiency crossing 100% in December 2020 reflecting upon the fact that the company is collecting from overdue accounts as well. CRISIL also notes that restructuring in the portfolio which was initially estimated at 2.5% may also end up much lower levels. Consequently, the asset quality metrics are expected to be better than earlier estimates and closer to the pre-pandemic metrics. The reported gross non-performing assets (GNPA)/ Gross Stage 3 metrics as of December 31, 2020, stood at 7.1% for STFCL, owing to moratorium offered to its borrowers and asset classification freeze resulting in roll-back from overdue collections.
Having said that the asset quality metrics would 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 in the range of 1.7% to 3.0% 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. So while, there would be an inch up in the asset quality metrics, Consequently, the performance is expected to be better than earlier anticipated.
Despite business volumes dropping till the first half of fiscal 2021 and the company providing almost Rs 2507 crores towards Covid related provisioning from Q4FY20 till Q3FY21, 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 have increased to 2.7% (annualised) in the nine months ended December 31, 2020 from 2.0% for fiscal 2020. Nevertheless, STFCL reported annualised return on average managed assets (RoMA) of ~2.0% (annualised) for the nine months ended December 31, 2020 as against 2.2% last fiscal. CRISIL Ratings expects the profitability to be sustained at these levels over the near term.
STFCL raised capital of Rs 1,493 crore in August 2020 which has helped in improving capitalisation and gearing metrics. The adjusted gearing (including off-book) of the company stood at 4.6 times as on December 31, 2020. CRISIL believes that STFCL’s capitalisation will remain comfortable over the medium term, given its demonstrated ability to access markets. On the liquidity side, CRISIL believes that STFCL has adequate liquidity, to manage this period wherein asset-side collections are lower than budgeted and may be uncertain, while liability-side outflows continue as per schedule. As of February 28, 2021, the company had liquidity of Rs 7,734 crore (comprising of cash and equivalents and unutilized CC/WCDL lines) which comfortably covered more than 3 months of cash outflows (including debt repayments) assuming zero collections. Additionally, the liquidity profile is expected to be supported by collections which have been on an improving trend and sanctioned undrawn term loans of Rs 7,170 crore.
[1] Collection Efficiency = Total Collections including Overdues (excluding Prepayments) / Scheduled Billing for the month |
Analytical Approach CRISIL has evaluated the consolidated financial and business risk profile of Shriram Transport Finance Company Ltd and its subsidiaries.
Please refer Annexure - Details of Consolidation, which captures the list of entities considered and their analytical treatment of consolidation. |
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 113,579 crore as on December 31, 2020, up ~5% Y-o-Y and ~5% (annualised) since March 31, 2020. 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 ~69% as on December 31, 2020. Passenger vehicles formed another 22% of AUM. The composition of AUM has remained largely unchanged with the pre-owned vehicle loan book at Rs 101,035 crore as on December 31, 2020 and comprising 88% of the AUM, marginally higher than the 86% as of March 31, 2020. 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 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 808 rural centres as on December 31, 2020. 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 December 2020, the total branches stood at 1,799 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 49% of total AUM as on December 31, 2020 as against 41% end March 2020.
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.
STFCL’s capitalisation remains adequate with networth of Rs 20,947 crore and an adjusted gearing of 4.6 times as on December 31, 2020. 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 I and total capital adequacy ratio also were comfortable at 20.51% and 23.61% respectively as on December 31, 2020, well above the statutory minimum.
STFCL has adequate earnings profile with annualised return on average managed assets (RoMA) of ~2.0% (annualised) for the nine months ended December 31, 2020 as against 2.2% last fiscal. The profitability continues to remain healthy despite elevated provisioning in fiscal 2021 backed by the relatively high yields in the pre-owned vehicle financing segment. STFCL has provided Rs 2507 crores towards Covid related provisioning from Q4FY20 till Q3FY21 and consequently, the credit costs increased to 2.7% in the nine months ended December 31, 2020 from 2.0% for fiscal 2020. Nonetheless, CRISIL Ratings expects the profitability to be sustained at these levels over the near term.
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 8.5 to 9.0% for STFCL over the past 5 years.
The collection efficiency for STFCL was low during the moratorium period till August 2020. However, post the moratorium period and with the gradual reopening up of the economy, the monthly collection efficiency[2] jumped to almost 95% in September 2020. This improvement has been sustained with collection efficiency crossing 100% in December 2020 reflecting upon the fact that the company is collecting from overdue accounts as well. CRISIL also notes that restructuring in the portfolio which was initially estimated at 2.5% may also end up much lower levels. Consequently, the asset quality metrics are expected to be better than earlier estimates and closer to the pre-pandemic metrics. The reported gross non-performing assets (GNPA)/ Gross Stage 3 metrics as of December 31, 2020, stood at 7.1% for STFCL, owing to moratorium offered to its borrowers and asset classification freeze resulting in roll-back from overdue collections.
Having said that the asset quality metrics would 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 in the range of 1.7% to 3.0% 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. So while, there would be an inch up in the asset quality metrics, consequently, the performance is expected to be better than earlier anticipated.
* 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 20,000 crores in the nine months ended December 31, 2020, the biggest traction across funding avenues was seen in Q3FY21. Further the company has also been able to raise funds via retail deposits.
Nevertheless, the yields for bonds of STFCL in the secondary market have fluctuated which could impact the primary market fund raising ability for 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. [1] Collection Efficiency = Total Collections including Overdues (excluding Prepayments) / Scheduled Billing for the month |
Liquidity: Strong The structural asset liability maturity (ALM) statement of STFCL as on December 31, 2020 shows that ALM position is adequate with cumulative positive gaps upto the 1 year bucket indicating that business inflows also support repayments.
On the liquidity side, CRISIL believes that STFCL has adequate liquidity, to manage this period wherein asset-side collections are lower than budgeted and may be uncertain, while liability-side outflows continue as per schedule. As of February 28, 2021, the company had liquidity of Rs 7,734 crore (comprising of cash and equivalents and unutilized CC/WCDL lines) which comfortably covered more than 3 months of cash outflows (including debt repayments) assuming zero collections. Additionally, the liquidity profile is expected to be supported by collections which have been on an improving trend and sanctioned undrawn term loans of Rs 7,170 crore. |
Outlook Stable CRISIL believes that STFCL will continue to maintain healthy capitalisation and strong earnings profile which will help mitigate inherent asset quality-related challenges. CRISIL also believes that the company will maintain its competitive position in the key business segments used vehicle financing |
Rating Sensitivity factors Upward Factors:
Downside Factors:
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About the Company STFCL, incorporated in 1979, is the flagship company of the Shriram group. It is registered with RBI as a deposit-taking, asset-financing non-banking financial company. STFCL provides financing for vehicles such as CVs (both pre-owned and new), tractors, and passenger vehicles. It has pan-India presence, with about 1,799 branches and 808 rural centres as on December 31, 2020.
STFCL’s reported total income (net of interest expense) and profit after tax (PAT) of Rs 8,312 crore and Rs 2,502 crore respectively, for fiscal 2020 against Rs 7,637 crore and Rs 2,564 crore, respectively, for fiscal 2019. |
Key Financial Indicators
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Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
Annexure - Details of Instrument(s)
#yet to be issued @Long term bank facilities of Rs 1243 crore transferred from Shriram Equipment Finance Company Limited to Shriram Transport Finance Company Limited upon amalgamation of the former with latter
Annexure - Details of Rating Withdrawn
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Annexure – List of entities consolidated
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