Rating Rationale

Au Housing Finance Limited

Rated amount enhanced

Total Bank Loan Facilities Rated	Rs.5570 Million (Enhanced from Rs.4330.5 Million)
Long Term Rating	CRISIL A-/Positive (Reaffirmed)

(Refer to Annexure 1 for Facility-wise details)

Non-Convertible Debentures Aggregating Rs.1500 Million	CRISIL A-/Positive (Reaffirmed)
Rs.1000.0 Million Commercial Paper Programme	CRISIL A1 (Reaffirmed)

CRISIL's ratings on debt instruments and bank facilities of Au Housing Finance Ltd (Au Housing; part of the Au group) continue to reflect the expectation of strong support to Au Housing from its parent, Au Financiers (India) Ltd (Au Financiers; main operating company of Au group; rated 'CRISIL A/Positive/CRISIL A1+'). The ratings also factor in Au Housing's healthy earnings profile, adequate capitalisation, and steady improvement in its scale of operations. These rating strengths are partially offset by the susceptibility of the company's asset quality to risks related to the limited seasoning in its loan portfolio.

On April 10, 2015, CRISIL had revised its rating outlook on the long-term debt instruments and bank facilities of Au Housing to 'Positive' from 'Stable', while reaffirming the rating at 'CRISIL A-'. The rating on the company's commercial paper programme was reaffirmed at 'CRISIL A1'. The outlook revision followed a similar rating action by CRISIL on the long-term debt instruments and bank facilities of Au Financiers.

The ratings centrally factor in Au Housing's strategic importance to, and the expectation of continued financial and managerial support from, its parent, Au Financiers, which has close to 100 per cent ownership in the subsidiary. Au Housing is the vehicle to strengthen the Au group's presence in the high-growth housing finance market. The share of housing finance business in the group's overall assets under management is expected to increase gradually to around 15 per cent over the medium term from around 11 per cent as on December 31, 2014 (9 per cent as on March 31, 2014). CRISIL believes that Au Financiers will maintain near full ownership in Au Housing over the medium term and continue to provide equity capital to support the latter's strong growth plans. The parent has infused equity capital of Rs.727.5 million in the company until March 31, 2015, and intends to infuse additional capital on a regular basis to support the company's growth over the medium term. CRISIL believes that Au Financiers will continue to provide strong support to Au Housing over the medium term given the latter's strategic importance. Furthermore, the shared brand will create a strong moral obligation for the parent to support the subsidiary in the event of any distress.

Au Housing has a healthy earnings profile. The company's return on assets ratio was 3.3 per cent (annualised) for the first nine months of 2014-15 (refers to financial year, April 1 to March 31) as against 2.4 per cent in 2013-14. Its profitability is supported by an above-average net interest margin (NIM) of around 7.2 per cent (annualised) for the first nine months of 2014-15, primarily driven by its ability to charge higher interest yields (16.7 per cent in 2013-14) to its target customer segment in the rural and semi-urban areas. In many locations, Au Housing is the only organised financier lending to this segment. While the company's NIM may decline because of the increasing competition, this will be mitigated by improvement in its operating efficiency with an increase in its scale of operations. Hence, on a steady-state basis, its return on assets (RoA) is expected to be around 2.5 per cent. Its earnings profile will, however, remain susceptible to any increase in credit costs given the low seasoning of its loan book and the inherently modest credit risk profile of its borrowers.

Furthermore, Au Housing has adequate capitalisation, with a net worth of Rs.662.9 million as on December 31, 2014 (Rs.562.0 million as on March 31, 2014). Its Tier-I and overall capital adequacy ratios were 18.26 per cent and 25.61 per cent, respectively, as on December 31, 2014. Its capitalisation is well supported by continued equity capital infusion by Au Financiers. The parent infused Rs.300 million in March 2015. Au Housing's gearing was around 8.4 times as on December 31, 2014 (6.3 times as on March 31, 2014), and the peak gearing is expected to remain in the range of 7 to 8 times over the medium term.

Au Housing has steadily expanded its operations, with its loan book increasing to Rs.6.2 billion as on December 31, 2014 (Rs.4.1 billion as on March 31, 2014) from around Rs.7.0 million as on March 31, 2012. It is expected to maintain strong growth over the next two years, though on a small base; the loan portfolio is expected to increase to around Rs.15 billion by March 31, 2016. While Rajasthan remains the largest contributor, at around 52 per cent of the portfolio, Au Housing has expanded operations to adjoining states and will expand to new geographies to support its growth plans. The Au group has put in place separate infrastructure for the housing finance business to support Au Housing's growth plans. A dedicated senior management team is responsible for this business. Also, a separate operations infrastructure, including credit underwriting and operations systems, a dedicated collections team, and an independent branch network have been set up. While Au Housing will continue to benefit from good brand recognition and the presence of its parent across many locations, dedicated infrastructure, people, and processes will strongly supplement its strong growth plans in the housing finance business over the medium term.

However, Au Housing's loan book has grown primarily over the past two years, and hence its seasoning remains low. The company's one-year-lagged gross non-performing assets were around 1.14 per cent as on December 31, 2014 (0.5 per cent as on March 31, 2014). Additionally, it provides housing loans predominantly to customers that are under-served by banks and housing finance companies. While it has adequate credit underwriting and risk systems, conservative loan-to-value ratios, and adequate processes and collection mechanisms, its asset quality remains susceptible to the limited seasoning in its portfolio and the modest credit risk profiles of its target borrower segment. The sustainability of Au Housing's asset quality over the medium term will remain a key monitorable.