Detailed Rationale

CRISIL Ratings has reaffirmed its ratings on the bank facilities and debt instruments of Godrej Housing Finance Limited (GHFL) at ‘CRISIL AA/Stable/CRISIL A1+’.

 

The ratings centrally factor in expectation of strong support from Godrej Industries Ltd (GIL; rated ‘CRISIL AA/Stable/CRISIL A1+’) and the Godrej group, both on an ongoing basis and in case of distress. This is on account of the strategic importance of the financial services businesses (consolidated for Godrej Housing Finance Limited (GHFL)and GFL and henceforth referred to as Godrej Capital group) to the group, and the moral obligation of the latter to provide support, given the majority shareholding and common brand. The ratings also factor in the Godrej Capital group’s comfortable capitalisation and experienced management team. These strengths are partially offset by the nascent stage of operations and limited track record of the group in the financial services business.

 

While GHFL is a newly established housing finance company (HFC) of the Godrej group and primarily focuses on mortgage backed loans, GFL is the NBFC arm of the group with a focus on non-mortgage backed loans including SME loans, and loan against property (LAP). Both these companies are ultimately held by GIL through its subsidiary, Godrej Capital Ltd (GCL; GIL holds around 85% stake in GCL).

 

GHFL intends to cater to both mid-market and prime housing segments. While it is currently operating out of eight branches in Mumbai, Pune, Bengaluru, the National Capital Region (NCR) and Ahmedabad (primarily markets in which the group’s real estate company and other reputed developers exist), it is expected to gradually expand across geographies. GFL is expected to commence lending in March 2022 and will focus on non-mortgage business in the group’s SME ecosystem and gradually expand to other areas. Both GHFL and GFL have common management, systems and treasury.

Analytical Approach

For arriving at the ratings, CRISIL Ratings has combined the financial services business of GIL, which includes GHFL and GFL (collectively referred to as the Godrej Capital group), as there are strong linkages in terms of Operational, financial, managerial, and infrastructure along with strong brand name. The ratings also factor in the strong support the company is likely to receive from GIL and the Godrej group on an ongoing basis and in times of distress.

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

Expectation of strong support from GIL and the Godrej group

The financial services business of GIL and the Godrej group got its start with GHFL. GIL, through its subsidiary GCL, has 95% stake in both GHFL and GFL. The financial services business has been identified as a focus area for the group’s overall diversification plans.

 

GIL is the flagship company of the Godrej group (promoter and promoter group companies held 67.18% equity in GIL as on September 30, 2021). GIL is expected to maintain minimum shareholding of 51% as well as management control at all points of time.

 

The Godrej Capital group benefits from the existing ecosystem of the Godrej group. It also benefits from managerial and operational support from the group. Mr Pirojsha Godrej, who is on the board of directors in various other group companies, is the chairman of GHFL and a non-executive director in GFL. Furthermore, with shared corporate identity and brand name, GHFL and GFL are expected to enjoy good financial flexibility with the ability to raise funds from diverse lenders at competitive interest rates.

 

Comfortable capitalisation

The Godrej Capital group has access to sufficient capital to scale up the business. The Godrej group has already committed equity capital of Rs 1,200-1,500 crore to financial services businesses over the medium term. It has already infused around Rs 295 crore in GHFL and around Rs 40 crore in GFL in the form of equity capital in the current fiscal. Another Rs 850-900 crore is expected to be infused in the near term. The consolidated networth was Rs 657 crore as on September 30, 2021. While consolidated gearing was 0.3 times as on September 30, 2021, it is expected to increase as the business scales up to around 6 times on a steady-state basis. Strong capital support should aid future growth and meet any asset-side risks.

 

Experienced management

The Godrej Capital group has a common management team, which is headed by Mr Manish Shah (MD and CEO), who has over two decades of experience in the financial services sector. The leadership team across other critical functions is also well qualified with each member having significant experience in retail lending, including housing finance. The management has focused on putting in place adequate systems, processes and policies for scaling up the business.

 

Weakness:

Nascent stage of operations

GHFL commenced operations in November 2020 and GFL is expected to commence lending in March 2022. GHFL’s loan book stood at Rs 1,001 crore as on December 31, 2021, comprising home loans and LAP. GFL would focus on SME loans (secured and unsecured). The loan portfolio of the Godrej Capital group is expected to grow significantly over the medium term and expand geographically.

 

Furthermore, given the initial stage of operations and investment in setting up the requisite infrastructure, operating expenses remain high and constrain the earnings profile. For the first nine months of fiscal 2022, the Godrej Capital group reported loss of Rs 66 crore while in fiscal 2021 the net loss was Rs 33 crore. Earnings are expected to remain modest in the near term and gradually improve thereafter with scaling-up of operations. The ability to successfully build the business with healthy asset quality and profitability will remain a key monitorable.

Liquidity : Strong

Liquidity of the Godrej Capital group is comfortable with adequate cash and cash equivalent (around Rs 110 crore) and unutilised bank lines (around Rs 1,550 crore) as on January 31, 2022. Total debt obligation of the Godrej Capital group over February 2022 to May 2022 is Rs 246 crore. Liquidity is further supported by expectation of continued capital support from the Godrej group as well as good financial flexibility resulting in the ability to raise funds from diverse lenders at competitive interest rates.

Outlook Stable

The Godrej Capital group should continue to derive financial, managerial and operational support from the Godrej group, including GIL, and maintain comfortable capitalisation.

Rating Sensitivity factors

Upward factors:

• Upward revision in the credit view on the ultimate parent by CRISIL Ratings
• Attaining sizable market share while maintaining healthy asset quality (gross non-performing assets [NPAs] less than 1%) and sustained improvement in earnings

 

Downward factors

• Reduction in support to the Godrej Capital group from GIL and the Godrej group
• Downward revision in the credit view on the ultimate parent by CRISIL Ratings
• Deterioration in asset quality with gross NPAs increasing to above 3%, over an extended period

About the Group

Godrej Industries Limited, the flagship entity of the Godrej group, is one of India’s leading manufacturers oleochemicals and surfactants. GIL through its subsidiaries is also a leading player in fast moving consumer goods (FMCG) business, real estate business and food and agro-business. GCL is a 85% subsidiary of GIL and holds the financial services businesses – GHFL and GFL. Both the entities are 95% held by GCL. The remaining 5% stake is held by a private equity investor.

 

GHFL received housing finance licence in October 2020 from the Reserve Bank of India. The company is primarily engaged in the mid and premium housing segment and offers two products: home loans and LAP. It started operations from November 2020 and built-up a total loan book of Rs 1001 crore as on December 31, 2021. The company expects to maintain contribution of home loans and LAP in the total portfolio at around 65:35, respectively, over the medium to long term. It currently operates in Mumbai, Pune, Bengaluru, Delhi/NCR and Ahmedabad through eight branches. During 9M of fiscal 2022 GHFL reported a loss of Rs 66 crore on a total income (net of interest expenses) of Rs 9 crore. During fiscal 2021 the company reported a loss of Rs 50 crore on a total income (net of interest expenses) of Rs 0.4 crore as compared to a loss of Rs 19 crore on a total income (net of interest expenses) of Rs 0.4 crore during the previous fiscal.

 

GFL, incorporated in 1994 as Ensemble Holdings and Finance Ltd, held the NBFC license and was a part of the Godrej group. Later, with change in shareholding structure it was brought under GCL, with GIL being the ultimate holding parent. The company would focus on non-mortgage loans including SME loans and LAP and is expected to commence lending in March 2022. During fiscal 2021 the company reported a loss of Rs 0.003 crore on a total income (net of interest expenses) of Rs 0.13 crore as compared to a PAT of Rs 0.23 crore on a total income (net of interest expenses) of Rs 0.41 crore during the previous fiscal.

 

During fiscal 2021 the financial services businesses reported a loss of Rs 52 crore on a total income (net of interest expenses) of Rs 0.5 crore as compared to loss of Rs 19 crore on a total income (net of interest expenses) of Rs 0.8 crore during the previous fiscal.

Any other information: Not applicable

Annexure - Details of Instrument(s)

*Not yet issued