Rating Rationale

Au Financiers India Limited

Rating Reaffirmed

Total Bank Loan Facilities Rated	Rs.19.7 Billion
Long Term Rating	CRISIL A/Positive (Reaffirmed)

(Refer to Annexure 1 for Facility-wise details)

Non-Convertible Debentures Aggregating Rs.8.0 Billion	CRISIL A/Positive (Reaffirmed)
Rs.2.2 Billion Non-Convertible Debentures (Reduced from Rs.3.3 Billion)	CRISIL A/Positive (Reaffirmed)
Rs.0.5 Billion Non-Convertible Debentures #	CRISIL A/Positive/CRISIL A1+(Reaffirmed)
Rs.0.5 Billion Non-Convertible Debentures *	CRISIL A/Positive/CRISIL A1+ (Withdrawal)
Rs.50 Million Subordinated Debt Bonds (Reduced from Rs.500 Million)	CRISIL A/Positive (Reaffirmed)
Subordinated Debt Bonds Aggregating Rs.1.40 Billion	CRISIL A/Positive (Reaffirmed)
Rs.5.0 Billion Commercial Paper Programme	CRISIL A1+ (Reaffirmed)

*With put/call options exercisable after 91 days and thereafter every quarter up to the 27^th month from the date of allotment.
# With put/call options exercisable after every six months in the first year and thereafter every quarter up to the 30^th month from the date of allotment.

CRISIL has reaffirmed its ratings on Au Financiers (India) Ltd's (Au Financiers; main operating company of the Au group) debt instruments and bank facilities at 'CRISIL A/Positive/CRISIL A1+'. CRISIL has withdrawn its rating on the company's Rs.0.5 billion non-convertible debentures as the instrument has been fully redeemed. CRISIL has also withdrawn its rating on Au Financiers' Rs.1.1 billion non-convertible debentures and Rs.0.45 billion subordinated debt as these instruments have not been placed by the company.

The ratings on Au Financiers' debt instruments and bank facilities continue to reflect the company's above-industry-average asset quality, comfortable earnings profile, and adequate capitalisation. These rating strengths are partially offset by the company's moderate scale of operations and average resource profile. The ratings do not factor in the implications of the Au group's plans to enter the banking business following its recent application to the Reserve Bank of India (RBI) for small finance bank licence.

In April 2015, CRISIL had revised its rating outlook on the long-term debt instruments and bank facilities of Au Financiers to 'Positive' from 'Stable', while reaffirming the rating at 'CRISIL A'. The rating on the company's short-term debt instruments was upgraded to 'CRISIL A1+' from 'CRISIL A1'.

The outlook revision primarily reflects CRISIL's belief that the initial signs of improvement in Au Financiers' asset quality witnessed in the recent past will be sustained over the medium term, helped by the gradual improvement in the commercial vehicle (CV) cycle and increased focus on collections. Consequently, CRISIL believes that Au Financiers will improve its profitability such that it is significantly better that that of its peers. Profitability metrics are expected to improve with fall in provisioning costs on the back of improving asset quality metrics and increase in net interest margin because of changing portfolio mix in favour of relatively high-yield, longer-tenure asset segments.

The upgrade in the rating on Au Financiers' commercial paper programme was driven by the company's comfortable liquidity management. Au Financiers maintains significant cover in the form of unutilised bank lines for upcoming short-term debt maturities on a consistent basis. Also, the company ensures that short-term debt maturities are adequately staggered on an ongoing basis.

Au Financiers' asset quality has witnessed initial signs of improvement in recent months after cyclical deterioration over the past one-and-a-half years in line with the industry. The company's overall delinquencies in the 90+ days-past-due (dpd) bucket (on a one-year-lagged basis) were at 4.24 per cent as on December 31, 2014, down from its peak in 2014-15 (refers to financial year, April 1 to March 31) of 4.6 per cent as on September 30, 2014 (3.1 per cent as on March 31, 2014). The deterioration in its asset quality was primarily because of the increased delinquencies in the vehicle-financing segment, which has now started to show initial signs of improvement, as reflected in the declining trend in the 90+ dpd on a month-on-month basis. The improvement in asset quality is primarily on account of the company's significantly increased focus on collections over the past few quarters. Au Financiers has strengthened its portfolio monitoring and collection infrastructure by ramping up collections staff and restructuring the collections team for greater focus on deeper and more difficult to collect delinquency buckets.

Furthermore, the improvement in the company's asset quality is supported by the improving outlook for the CV industry, as reflected in the reduction in roll-forward rates (proportion of delinquent accounts that remain uncollected and become overdue for longer periods of time) for many CV financiers and better growth rates in primary market sales of medium and heavy CVs. The expectation of sustained low diesel prices, easing of infrastructure constraints, pick-up in industrial activity, as well as lower inflation are expected to result in improvement in the utilisation of CVs on the ground and improvement in transporters' cash flows. The asset quality of Au Financiers' collateralised micro, small, and medium enterprises (MSME) portfolio remained stable, with 90+ dpd (on a one-year lagged basis) at 1.99 per cent as on December 31, 2014. CRISIL believes that Au Financiers' asset quality will continue to improve gradually over the next few quarters and will remain significantly better than that of other vehicle financiers over the medium term.

Au Financiers has comfortable earnings profile, supported by a relatively high net interest margin. The company's return on average managed assets (RoMA; adjusted for gains on securitisation/assignment transactions), at around 2.1 per cent in 2013-14, was better than the industry average. Its RoMA, however, declined from 2.8 per cent in 2012-13, primarily because of the decline in its net interest margin (NIM) and increase in credit costs. The RoMA is estimated at 2.2 per cent (on an annualised basis) during the first nine months of 2014-15, driven by improved NIM. Its net interest margin (including securitisation and other income), at around 7.2 per cent in 2013-14 (7.8 per cent in 2012-13), was better than that of many of its peers. The company's net interest margin improved further to 8.0 per cent (annualised) during the first nine months of 2014-15, driven by increased contribution from higher yielding MSME business and reduction in its borrowing costs driven by benefits of lower rates on capital market borrowings and greater reliance on relatively cheap direct assignment/securitisation transactions. While the company's credit cost increased to 2.0 per cent (annualised) during the first nine months of 2014-15 (1.7 per cent in 2013-14) from 0.8 per cent in 2012-13, it is likely to decline gradually with improvement in asset quality. CRISIL believes that Au Financiers' profitability will remain significantly better than that of its peers, supported by the company's ability to maintain relatively high net interest margin and expectation of gradual improvement in credit cost over the next few quarters.

Au Financiers has adequate capitalisation, supported by its ability to raise capital at regular intervals to support its strong growth plans. The company has raised equity capital from established financial institutions and private equity investors, which enhances stakeholder confidence. During March and April 2014, it raised equity capital of Rs.1.1 billion through a preferential equity issue to existing investors. It had a net worth of Rs.7.5 billion and adjusted gearing (including securitisation) of 5.9 times as on December 31, 2014 (Rs.6.4 billion and 6.4 times, respectively, as on March 31, 2014). The adjusted gearing is expected to remain between 6 and 7 times over the medium term, in line with those of most large vehicle financiers. CRISIL believes that Au Financiers will need to continually raise capital to support its strong growth plans over the medium term, and its ability to raise need-based capital in a timely manner will remain a key monitorable.

Au Financiers' scale of operations is moderate, despite growing at above-industry-average rates. While its assets under management (AUM) registered a three-year compound annual growth rate of 52 per cent to reach Rs.44.5 billion as on March 31, 2014, it remains a relatively small player in the retail financing segment. The AUM was Rs.49.0 billion as on December 31, 2014; vehicle financing constituted 63 per cent of the AUM and MSME financing accounted for the remainder. Furthermore, the Au group has presence in the housing finance business through Au Housing Finance Ltd (rated 'CRISIL A-/Positive/CRISIL A1'); it had AUM of Rs.6.2 billion as on December 31, 2014. While growth has moderated in the recent past, mainly in vehicle finance, Au Financiers is likely to maintain growth momentum over the medium term. However, the company will remain exposed to challenges associated with managing its increasing scale of operations. The company has a strong track record of operations in Rajasthan. However, it is likely to continue to face challenges associated with human resources and ensuring quality of origination of assets in the relatively new geographies and product segments. Moreover, competition in the MSME segment has intensified following increasing competition from other retail non-banking financial companies and private sector banks. Competition in the vehicle financing business is also expected to intensify with pick-up in primary sales. Au Financiers' ability to scale up its operations while maintaining its asset quality and profitability in the challenging and intensely competitive environment will remain key rating sensitivity factors over the medium term.

Au Financiers also has an average resource profile. The company's dependence on securitisation has increased in recent times and is expected to remain high in the near term. Securitisation comprised around 48 per cent of its overall borrowings (including securitisation) as on March 31, 2014 (43 per cent as on March 31, 2013). Nevertheless, Au Financiers is gradually diversifying its resource mix by increasing the proportion of capital market borrowings (around 23 per cent as on March 31, 2014, against 2 per cent as on March 31, 2012). Hence, the company's cost of borrowing (adjusted for securitisation) declined to around 10.6 per cent (annualised) during the first nine months of 2014-15 (11.5 per cent in 2013-14) from 12.3 per cent in 2012-13; however, it remains higher than that of other vehicle financiers. Au Financiers' ability to maintain competitive borrowing cost while diversifying its resource profile will remain a key monitorable over the medium term.