Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA+/CRISIL PPMLD AA+/Stable/CRISIL A1+’ ratings on the existing debt instruments and bank facilities of Hero Fincorp Ltd (HFCL).

 

CRISIL Ratings has also withdrawn its rating on Rs 300 crore non-convertible debentures (See Annexure: ‘Details of rating withdrawn’) at the request of HFCL since the outstanding against the entity was nil. The withdrawal is in line with the withdrawal policy of CRISIL Ratings.

 

The ratings continue to reflect the strong support that HFCL receives from its largest shareholder, Hero MotoCorp Ltd (HMCL; 'CRISIL AAA/Stable/CRISIL A1+'), and HFCL's adequate capitalisation. These strengths are partially offset by limited seasoning in newer asset classes, and its high, although reducing, dependence on HMCL and its associates for business.

 

Capital position remains healthy, given the regular capital infusion by the parent and other marquee investors. The company raised Rs 2,000 crore as compulsory convertible preference shares (CCPS) in June 2022. Its net worth stood at Rs 5,325 crore with gearing of 7.2 times as on June 30, 2023 (Rs 5,248 crore and 7.0 times respectively as on March 31, 2023).[1]

 

The company faced some challenges in the segment (especially in cash salaried and self-employed segment) in which it operates during the pandemic. However, the company created adequate buffers over last few quarters. This resulted in improving the GNPA to 4.8% as on June 30, 2023 (5.1% as on March 31, 2023) as against 7.5% as on March 31, 2022.

 

Owing to this, the company reported a profit after tax (PAT) of Rs 480 crore during fiscal 2023 with return on assets (RoA) of 1.2%, as against a loss of Rs 192 crore and RoA of (-) 0.6% in fiscal 2022. PAT during the first quarter of fiscal 2024 was Rs 98 crore with an annualised RoA of 0.9%.

 

Given the challenging macro environment, performance of asset quality and its impact on the earnings profile will remain closely monitored.

[1] The networth and gearing excludes Rs 2,000 crore that was raised as Compulsory Convertible Preference Shares. Upon including the CCPS as part of the networth, adjusted gearing would be 4.65 times as on June 30, 2023 and 4.54 times as on March 31, 2023.

Analytical Approach

For arriving at its rating, CRISIL Ratings has consolidated the business and financial risk profiles of HFCL and its subsidiary, HHFL. CRISIL Ratings has also factored in the strong support that HFCL receives from its largest shareholder, HMCL.

 

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 HMCL

HFCL receives operational, financial and managerial support from HMCL, its largest shareholder; with a 41.2% stake as on June 30, 2023. HMCL, its associate companies, and members of the Munjal family (promoters of the Hero group) together own 79.6% of HFCL's equity as on same date. The promoters rely strongly on the financial services business and have been regularly infusing equity capital to support growth. In fiscal 2020, HFCL announced to raise Rs 1,075 crore through rights issue, which was infused in two tranches; Rs 672 crore infused in March 2020 and the remaining capital commitment of Rs 472 crore was infused in March 2021 (of the total rights issue of Rs 1,075 crore, the promoters infused around Rs 824 crore). Rs 2,000 crore were further infused in fiscal 2023, of which the promoters infused Rs 1,000 crores. Further, HMCL and HFCL have two common directors on their boards. On the operational front, HMCL provides inputs on dealers, vendors, and vendors' suppliers for financing by HFCL. Furthermore, HFCL finances two-wheeler sales of HMCL.

 

Adequate capitalisation

HFCL is well-capitalised, as reflected in consolidated net worth of Rs 5,325 crore and overall capital adequacy ratio of 19.8% of risk-weighted assets as on June 30, 2023 (Rs 5,248 crore and 20.6%, respectively, as on March 31, 2023). Regular capital infusion also supports the capital profile; the company has raised capital aggregating to Rs 6,080 crore since inception. Consolidated gearing was adequate at 7.2 times as on June 30, 2023 (7.0 times as on March 31, 2023; 6.0 times as on March 31, 2022).[2]

 

Weaknesses:

High, though reducing, dependence on HMCL and its associates for business

HMCL and its associates accounted for nearly 42% of total business sourced within the HMCL ecosystem. Though HFCL will remain significantly dependent on HMCL and its associates, an improvement in scale of operations and the foray into new businesses should help diversify its revenue profile. The two-wheeler financing business (Rs 9,466 crore as on June 30, 2023), which constituted 22% of the overall assets under management (AUM), is entirely dependent upon HMCL's network of dealers and suppliers.

 

Limited track record in newer asset classes

Over the past few years, HFCL has made conscious efforts to diversify its loan book, from mainly operating as a bill discounting player, to entering two-wheeler financing, loans against property (LAPs), SME and MSME financing, personal loans and used-car loans. HFCL has started it wholly owned subsidiary, HHFL¸ to operate in the home loan segment. However, HFCL is yet to demonstrate its ability to manage asset quality in these newer segments.

 

Over the period March 2020 to September 2021, asset quality weakened with GNPAs on a consolidated basis inching up to 9.8% as on September 30, 2021 from 7.0% as on March 31, 2021. In response, it had strengthened its credit underwriting standards and processes, with a redefined focus on collections. The management also invested in analytics to improve collection and has tied-up with fintech platforms to digitise the same. Owing to the same, the GNPA improved to 4.8% as on June 30, 2023 (5.1% as on March 31, 2023) as against 7.5% as on March 31, 2022.

 

In terms of segmental break-up, GNPAs in the retail, retail SME and corporate loan book segment were 5.7%, 2.6% and 6.3% as on June 30, 2023, respectively as compared to 5.5%, 3.0% and 8.7% on March 31, 2023.

 

Nevertheless, ability to improve asset quality will remain a key monitorable.

[2] The networth and gearing excludes Rs 2,000 crore that was raised as Compulsory Convertible Preference Shares. Upon including the CCPS as part of the networth, adjusted gearing would be 4.65 times as on June 30, 2023 and 4.54 times as on March 31, 2023.

Liquidity: Strong

CRISIL Ratings’ analysis of HFCL's asset liability maturity profile as on June 30, 2023 shows cumulative positive mismatch (cumulative inflows over cumulative outflows) in all the buckets. As on July 31, 2023 liquidity cushion was Rs 5,047 crore (Rs 2,303 crore of cash and cash equivalents, Rs 2,744 crore of unutilised committed working capital and term loan lines). Against this, debt repayments stood at Rs 2,287 crore over the three months through October 2023. Further, HFCL continues to tap debt capital market for fresh issuances and raised funding via bank borrowing.

Outlook: Stable

CRISIL Ratings believes HFCL will continue to benefit from the operational, financial and managerial support received from HMCL.

Rating Sensitivity factors

Upward factors

• Significant improvement in market position and asset quality
• Improvement in profitability, with return on managed assets (RoMA) beyond 2.5% on a sustained basis

 

Downward factors

• Downward change in the credit risk profile of HMCL by 1 notch and/or material change in the shareholding or support philosophy of HMCL impacting the quantum and timing of support
• Significant and sustained deterioration in asset quality, coupled with weakening of profitability

About the Company

HFCL, set up in 1991, as a part of Brij Mohan Munjal’s Hero MotoCorp Group. The company undertakes bill discounting for HMCL's vendors and suppliers, apart from retail financing of HMCL’s two-wheelers, corporate lending to mid-sized clients and SME, LAPs, and the operating lease business. It has also ventured in used car financing and loyalty personal loans (as a cross sell loan given to existing two-wheeler customers having excellent track record with no overdue in the nine-month period post sanctioning of loan). As on June 30, 2023, AUM (consolidated) stood at Rs 43,712 crore (Rs 41,751 crore as on March 31, 2023)

 

HMCL, its associate companies, and members of the B.M. Munjal family (promoters of the Hero MotoCorp group) together own 79.6% of HFCL's equity as on June 30, 2023 (41.2% owned by HMCL), while external investors (Apis, Otter Ltd and Credit Suisse (Singapore); 14.0%) and HMCL's dealers, employees, and associates (6.4%) own the remainder.

 

On a consolidated basis, HFCL reported PAT of Rs 480 crore and total income of Rs 6,448 crore during fiscal 2023, as against loss of Rs 192 crore and Rs 4,798 crore, respectively, in the previous fiscal.

 

For the three months ended June 30, 2023, on a consolidated basis, HFCL reported PAT of of Rs 98 crore and total income of Rs 1,912 crore, as against net profit of Rs 94 crore and total income of Rs 1,471 crore, respectively, for the corresponding period of the previous fiscal.

Any other information: Not applicable

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs crore)	Complexity  levels	Rating assigned with outlook
INE957N07609*	Non-convertible debenture	20-May-21	Floating Rate linked with 3M T-bill	20-May-24	200	Complex	Withdrawn
INE957N07484	Non-convertible debenture	20-Dec-19	7.75%	20-Dec-22	100	Simple	Withdrawn