June 30, 2015
Mumbai
Shriram Transport Finance Company Limited
 
Rating upgraded to 'CRISIL AA+/FAAA/Stable'
 
Total Bank Loan Facilities Rated Rs.300.00 Billion
Long Term Rating CRISIL AA+/Stable (Upgraded from 'CRISIL AA/Positive')
Short Term Rating CRISIL A1+ (Reaffirmed)
(Refer to Annexure 1 for Facility-wise details)
 
Non Convertible Debentures Aggregating Rs.132.80 Billion CRISIL AA+/Stable(Upgraded from CRISIL AA/Positive)
Subordinated Debt Issue (Tier-II Bonds) Aggregating Rs.15.00 Billion CRISIL AA+/Stable(Upgraded from CRISIL AA/Positive)
Fixed Deposits Programme FAAA/Stable (Upgraded from FAA+/Positive)
Rs. 20 Billion Short Term Debt Programme CRISIL A1+(Reaffirmed)

CRISIL has upgraded its rating on the long-term debt instruments and bank facilities, and fixed deposit programme of Shriram Transport Finance Company Ltd (STFCL) to 'CRISIL AA+/FAAA/Stable' from 'CRISIL AA/FAA+/Positive'. The rating on the company's short-term debt instrument and bank facilities has been reaffirmed at 'CRISIL A1+'.
 
The rating upgrade reflects the improving outlook for the commercial vehicle (CV) industry, which will support sustained improvement in the company's asset quality and profitability over the medium term. This is already visible in the gradual reduction in STFCL's delinquencies from the second half of 2014-15 (refers to financial year, April 1 to March 31). The cash flows of transport operators are improving, resulting in higher collection efficiencies for CV financiers as also reflected in CRISIL-rated pools (see CRISIL release 'On securitisation road, commercial vehicle pools gaining traction', dated June 1, 2015). CRISIL also believes that the company will sustain its strong competitive position in the pre-owned CV financing market and benefit from the sound growth potential for this segment over the medium term. 
 
STFCL's Board has approved the merger of its 100 per cent subsidiary, Shriram Equipment Finance Company Ltd (SEFC; rated CRISIL AA/Placed on 'Rating Watch with Positive Implications/CRISIL A1+) with the parent, subject to regulatory and other necessary approvals. CRISIL's ratings on SEFC centrally factor in the expectation of continued strong support from its parent, STFCL. Despite the severity of the recent asset quality challenges faced by SEFC and its impact on the subsidiary's profitability, CRISIL believes that the impact of the merger, on the credit profile of STFCL will be limited given its relatively small scale of operations.
 
The ratings continue to reflect STFCL's healthy capitalisation, which provides a cushion against any asset-side risks, and its comfortable earnings profile. These rating strengths are partly offset by the company's average, though improving, resource profile.
 
CRISIL believes that the early signs of turnaround in the CV cycle will sustain over the medium term. Lower diesel prices, likely pick-up in industrial activity, easing of infrastructure constraints and lower inflation are expected to result in higher capacity utilisation of CVs and improve transporters' cash flows. STFCL's asset quality has also shown signs of gradual improvement in recent months, after witnessing cyclical deterioration over the past two years because of the prolonged economic downturn. The overall 90+ days past due (dpd) delinquencies have reduced by around 200 basis points over the past six months to 8.0 per cent as on March 31, 2015. This has been primarily supported by its relationship-based lending model and continued focus on collections throughout the almost two-year downturn in the CV financing segment.
 
STFCL's gross non-performing assets (NPAs) at 3.8 per cent as on March 31, 2015 (3.9 per cent, a year ago), are expected to have reached near peak levels (at 180+ dpd recognition). The gross NPAs are expected to improve gradually from the second half of 2015-16; the extent of improvement, however, may not be visible in the reported gross NPAs on account of transition to 150+ dpd norm for NPA recognition by March 31, 2016 as per the revised RBI guidelines. Furthermore, STFCL has made adequate provisions for NPAs; its net NPAs have, therefore, remained low at 0.78 per cent as on March 31, 2015.
 
STFCL has pioneered the organised pre-owned CV financing market in India ' it held around 90 per cent share in this market as on March 31, 2015. It is also the largest CV financier in the country. Pre-owned CV financing constituted about 91 per cent of the company's assets under management (AUM) of Rs.591 billion as on March 31, 2015. With presence of over three decades in this business, STFCL has created a strong and sustainable competitive advantage through deep understanding of the borrower profile and their credit behaviour, by building an scalable operating model, extensive reach, as well as strong valuation capabilities of pre-owned vehicles. STFCL faces very limited competition from other organised financiers, including banks, in this segment due to their limited presence given the inherent riskiness of the target product and customer profile. While growth in the new vehicle financing segment has been impacted in recent times because of intense competition from banks, the same is expected to gradually pick up in line with growth in primary market sales.
 
CRISIL believes that the growth opportunity in the pre-owned CV financing business remains strong, given that a large proportion of the financing requirement is still being catered to by the unorganised market comprising local money lenders, coupled with the replacement demand for more than three million units of CVs sold over the past five years. STFCL has been gradually expanding into rural markets and has set up 776 rural centers (up to March 31, 2015) to tap this opportunity. STFCL's innovation in establishing Shriram Automall India Ltd (wholly owned subsidiary; rated 'CRISIL AA+/Stable') provides a reliable platform for sale, refurbishment, and auction of pre-owned vehicles, besides enabling better price discovery of such vehicles. This innovation will support the development of the pre-owned CV industry, besides providing a steady source of customers to STFCL for its financing business.
 
CRISIL believes that STFCL has strong structural advantages over its peers, which will support its above-average growth plans and enable it to maintain its leadership position in the pre-owned CV financing segment over the medium term.
 
STFCL's capitalisation remains healthy, with net worth of Rs.92.0 billion and adjusted gearing (including securitisation) of 5.9 times as on March 31, 2015 (Rs.82.3 billion and 6.4 times, respectively, as on March 31, 2014). Its healthy capital position provides a cushion against asset-side risks as reflected in its above-average net worth coverage of net NPAs of around 24.3 times as on March 31, 2015 (27 times as on March 31, 2014). CRISIL expects the company to maintain comfortable net worth coverage for net NPAs, despite transition to 150+ dpd recognition of NPA as per revised RBI norms. CRISIL believes that STFCL's capitalisation will remain healthy over the medium term, given its demonstrated ability to access equity markets, and its comfortable return on net worth of 14.2 per cent for 2014-15 (16.4 per cent in 2013-14).
 
STFCL has a comfortable earnings profile. The company's return on managed assets ratio, at 1.8 per cent for 2014-15 (2.0 per cent in 2013-14), remained close to that of other CV financiers (average of 1.8 per cent). Its profitability has been impacted in the past few years primarily because of increase in credit costs. The company's profitability is expected to improve gradually over the next few quarters in line with the likely improvement in its asset quality, resulting in above-industry average profitability for the company over the medium term. However, this will be partly offset by the impact of the relatively high provisioning requirements due to transition to revised NPA recognition norms. Nevertheless, the company is expected to maintain a healthy net interest margin (NIM; including securitisation and other income 6.3 per cent for 2014-15 and 6.0 per cent in 2013-14) given its strong competitive position and relatively high yields in the pre-owned vehicle financing segment. STFCL's operating costs are lower than those of its peers, with an operating expenses ratio at 1.7 per cent for 2014-15 (1.5 per cent for 2013-14). CRISIL believes that the company's leadership position in the pre-owned CV financing market will ensure that its profitability remain better than that of other CV financiers over the medium term.
 
However, STFCL has an average, though improving, resource profile. The company's cost of borrowings, at 10.9 per cent for 2014-15 (11.2 per cent for 2013-14; based on quarterly average borrowings), remained higher than that of its peers. While the company's dependence on securitisation has declined significantly to around 18 per cent of overall borrowings (including securitisation) as on March 31, 2015, from 32 per cent as on March 31, 2014, it is expected to remain higher than that of its peers over the medium term. CRISIL believes that STFCL's ability to diversify its resource profile and maintain competitive borrowing cost will remain key rating monitorables over the medium term.
Outlook: Stable

CRISIL believes that STFCL will sustain its strong market position in the pre-owned CV financing segment, along with its healthy capitalisation and comfortable earnings profile, over the medium term. The outlook may be revised to 'Positive' if the company achieves higher scale while significantly de-risking the business, and maintaining comfortable asset quality and strong financial risk profile. Conversely, the outlook may be revised to 'Negative' if STFCL's asset quality and earnings weaken significantly.

About the Company

STFCL, incorporated in 1979, is the flagship company of the Shriram group. The company is registered with the Reserve Bank of India as a deposit-taking, asset-financing non-banking financial company. STFCL operates in the asset-financing sector and provides financing for vehicles such as CVs (both pre-owned and new), tractors, and passenger vehicles. The company has pan-India presence, with 741 branches and 776 rural centers as on March 31, 2015.
 
STFCL reported total income (net of interest expense) and profit after tax (PAT) of Rs.41.8 billion and Rs.12.4 billion, respectively, for 2014-15, against Rs.38.1 billion and Rs.12.6 billion, respectively, for 2013-14.

Annexure 1 - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Million) Rating Facility Amount (Rs.Million) Rating
Bank Guarantee 32075.7 CRISIL A1+ Bank Guarantee 32075.7 CRISIL A1+
Bank Guarantee 8000 CRISIL AA+/Stable Bank Guarantee 8000 CRISIL AA/Positive
Cash Credit & Working Capital demand loan 64545 CRISIL AA+/Stable Cash Credit & Working Capital demand loan 64545 CRISIL AA/Positive
Long Term Bank Facility 153982.7 CRISIL AA+/Stable Long Term Bank Facility 153982.7 CRISIL AA/Positive
Proposed Long Term Bank Loan Facility 29567.1 CRISIL AA+/Stable Proposed Long Term Bank Loan Facility 29567.1 CRISIL AA/Positive
Short Term Bank Facility 11829.5 CRISIL A1+ Short Term Bank Facility 11829.5 CRISIL A1+
Total 300000 -- Total 300000 --
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June 30, 2015

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