Shriram Transport Finance Company Limited 'CRISIL PPMLD AA+ r/Stable' assigned to Long Term Principal Protected Market Linked Debentures
Rating Action
1 crore = 10 million Refer to annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has assigned its ‘CRISIL PPMLD AA+ r /Stable’ rating on Rs 2000 crore of Long Term Principal Protected Market Linked Debentures of Shriram Transport Finance Company Limited (STFCL) while reaffirming the ratings of bank loans and other debt instruments at 'CRISIL AA+/ CRISIL PPMLD AA+ r /FAAA/Stable/CRISIL A1+'.
CRISIL had revised the outlook on the ratings of STFCL to ‘Stable’ from ‘Negative’ on March 16, 2021. The outlook revision was 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 earlier.
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 and remaining at similar levels till March 2021 reflecting upon the fact that the company is collecting from overdue accounts as well. Consequently, the asset quality metrics with reported gross non-performing assets (GNPA)/ Gross Stage 3 metrics to 7.06% as of March 31, 2021 from 8.36% as of March 31, 2020. CRISIL ratings also notes that the restructuring in the portfolio was about 0.5% against the initial estimation of about 2.5% as of December 2020.
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 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.
Nevertheless, 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. With the onset of second wave, the collection efficiency for the months of April and May 2021 is expected to be lower than the previous months. Any material disruption in the collection efficiencies and therefore asset quality metrics remains a key monitorable.
Despite business volumes dropping till the first half of fiscal 2021 and the company providing almost Rs 2,591 crores towards Covid related provisioning from Q4FY20 till Q4FY21, 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 2.5% for fiscal 2021 in line with fiscal 2020. Nevertheless, STFCL reported annualised return on average managed assets (RoMA) of ~2.0% (annualised) for fiscal 2021 against 2.2% last fiscal.
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 4.9 times as on March 31, 2021. CRISIL Ratings 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 March 31, 2021, the company had liquidity of Rs 12,723 crore (comprising of cash and equivalents and unutilized CC/WCDL lines) which comfortably cover 3 months of debt repayments with a cover of 2.42 times 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 about Rs 5,000 crore.
CRISIL has also withdrawn its rating on the non-convertible debenture of Rs 1,507.9 crore and subordinated debt of Rs 25 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's policy. [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. |
Key Rating Drivers & Detailed Description Strengths:
STFCL is the largest CV financier in the country with assets under management (AUM) of Rs 117,242 crore as on March 31, 2021, up ~7% 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 ~72% as on March 31, 2021. Passenger vehicles formed another 21% of AUM. The composition of AUM has remained largely unchanged with the pre-owned vehicle loan book at Rs 104,573 crore as on December 31, 2020 and comprising 89% 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 992 rural centres as on March 31, 2021. 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 2021, the total branches stood at 1,817 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 March 31, 2021 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 21,568 crore and an adjusted gearing of 4.9 times as on March 31, 2021. 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 19.94% and 22.50% respectively as on March 31, 2021, well above the statutory minimum.
Despite business volumes dropping till the first half of fiscal 2021 and the company providing almost Rs 2,591 crores towards Covid related provisioning from Q4FY20 till Q4FY21, 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 2.5% for fiscal 2021 in line with fiscal 2020. Nevertheless, STFCL reported annualised return on average managed assets (RoMA) of ~2.0% (annualised) for fiscal 2021 against 2.2% last fiscal.
Weaknesses:
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. 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 and remaining at similar levels till March 2021 reflecting upon the fact that the company is collecting from overdue accounts as well. Consequently, the asset quality metrics with reported gross non-performing assets (GNPA)/ Gross Stage 3 metrics to 7.06% as of March 31, 2021 from 8.36% as of March 31, 2020. CRISIL ratings also notes that the restructuring in the portfolio was about 0.5% against the initial estimation of about 2.5% as of December 2020.
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 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.
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 40,000 crores in fiscal 2021, the biggest traction across funding avenues was seen in 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. [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 April 30, 2021 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 March 31, 2021, the company had liquidity of Rs 12,723 crore (comprising of cash and equivalents and unutilized CC/WCDL lines) which comfortably cover 3 months of debt repayments with a cover of 2.42 times 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 about Rs 5,000 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:
Downward 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 1,817 branches and 992 rural centres as on March 31, 2021.
STFCL’s reported total income (net of interest expense) and profit after tax (PAT) of Rs 8,382 crore and Rs 2,487 crore respectively, for fiscal 2021 against Rs 8,312 crore and Rs 2,502 crore, respectively, for fiscal 2020. |
Key Financial Indicators
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Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
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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Criteria Details
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