Hero FinCorp Limited 'CRISIL AA+/Stable' assigned to Non Convertible Debentures
Rating Action
1 crore = 10 million Refer to annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has assigned its 'CRISIL AA+/Stable' rating to the Rs.1000 crore non convertible debentures of Hero FinCorp Limited (HFCL) and reaffirmed the ratings on the existing debt instruments and bank facilities at ‘CRISIL AA+/CRISIL PP-MLD AA+r/Stable/CRISIL A1+’.
CRISIL Ratings has also withdrawn its rating on Rs 25 crore non-convertible debentures (See Annexure: ‘Details of rating withdrawn’) at the request of HFCL since the outstanding against the entity was nil.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/FAAA/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.
In line with the measures announced by the Reserve Bank of India (RBI) for Covid-19 pandemic, HFCL had given moratorium to borrowers. Though collections declined during the initial months of the moratorium, they have improved since then. However, the second wave of the Covid-19 pandemic led to intermittent lockdowns and localised restrictions, again impacting collections. With the gradual opening up of the economy and easing of lockdown restrictions, overall collection efficiency[1] has improved again to about 116% in the second quarter of fiscal 2022 from 94% during the first quarter (106% during the fourth quarter of fiscal 2021), indicating improved recoveries from current as well as overdue accounts.
However, most of the segments wherein the company operates – SME (small and medium-sized enterprises) finance, personal loans, 2- wheeler finance and home loans -- have witnessed challenges, especially in the cash salaried and self-employed segment. This resulted in consolidated gross non-performing assets (GNPAs) inching up to 9.8% in September 2021 from 7.0% as on March 31, 2021 and 6.1% on March 31, 2020. Further, on a consolidated basis, 3.5% of the portfolio were outstanding as one-time restructuring as on September 30, 2021.
The company, nevertheless, has built adequate buffer over the last few quarters. As on September 30, 2021, on a consolidated basis, HFCL held overall provisions amounting to 7.0% of the loan book up from 4.7% as on March 31, 2021 and 3.6% as on March 31, 2020. Further, the company maintained adequate provision coverage ratio (excluding technical write-offs) at 44% as on September 30, 2021 (40% as on March 31, 2021; 39% as on March 31, 2020). However, due to the increased provisions and write-offs, profitability has been impacted with the company reporting a loss of Rs 391 crore during the first half of fiscal 2022 (profit after tax [PAT] of Rs 52 crore for fiscal 2021) at a consolidated level.
Despite impact on profitability, capitalisation remains healthy owing to regular capital infusion from shareholders. HFCL received capital infusion of Rs 472 crore in March 2021, as part of rights issue of Rs 1,075 crore announced in March 2020 (Rs 672 crore was infused in March 2020). It is also in the process of raising further capital in the near term.
Given the challenging macro environment, performance of asset quality and its impact on the earnings profile will remain closely monitored. The impact of the third wave of the pandemic, if and when it comes, in terms of its spread, intensity and duration will also be closely monitored. [1] Collection efficiencies have been calculated as EMI collections received including overdues and excluding prepayments during the month to EMI due from loans in the less than 90 days past due bucket. |
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:
HFCL receives operational, financial and managerial support from HMCL, its largest shareholder; with a 41.2% stake as on September 30, 2021. HMCL, its associate companies, and members of the Munjal family (promoters of the Hero group) together own 79.5% of HFCL's equity as on September 30, 2021. 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). The company also plans to raise additional capital in the near term. 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.
HFCL is well-capitalised, as reflected in its consolidated networth of Rs 4,567 crore and overall capital adequacy ratio (standalone) of 17.3% of risk-weighted assets as on September 30, 2021 (Rs 4,968 crore and 19.7%, respectively, as on March 31, 2021). Regular capital infusion also supports the capital profile; the company has raised capital aggregating to Rs 2,253 crore for the three fiscals till 2021. Consolidated gearing was comfortable at 5.2 times as on September 30, 2021 (4.8 times as on March 31, 2021; 4.9 times as on March 31, 2020). On a standalone basis, gearing stood at 4.6 times as on September 30, 2021 (4.3 times as on March 31, 2021; 4.5 times as on March 31, 2020)
Weaknesses:
HMCL and its associates accounted for nearly 49% 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 9,112 crore as on September 30, 2021), which constituted 33% of the overall assets under management (AUM), is entirely dependent upon HMCL's network of dealers and suppliers.
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 loans 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 and 6.1% as on March 31, 2020. In terms of segmental break-up, GNPAs in the retail, retail SME and corporate loan book segment were 9.4%, 8.7% and 12.2%, respectively as compared to 6.0%, 8.4% and 8.8% on March 31, 2021.
The company faced challenges in the retail SME segment, which witnessed increase in delinquencies in the past couple of fiscals primarily from the loan book originated prior to March 2017. In response, it had strengthened its credit underwriting standards and processes, with a redefined focus on collections. Amid the ongoing pandemic, performance of the retail segment (comprising two-wheelers, used vehicle financing, home loans and personal loans) has been weak during fiscal 2021 and the first half of fiscal 2022, reporting GNPA of 9.4% as on September 30, 2021. However, collections and recoveries picked up during October 2021 and November 2021 as the economy continues to open up. The management is also investing in analytics to improve collection and has tied-up with fintech platforms to digitise the same. Nevertheless, ability to improve asset quality will remain a key monitorable |
Liquidity: Strong CRISIL Ratings’ analysis of HFCL's asset liability maturity profile as on September 30, 2021 shows cumulative positive mismatch (cumulative inflows over cumulative outflows) in the up to one-year buckets. As on November 30, 2021 liquidity cushion was Rs 6,043 crore (Rs 1,993 crore of cash and equivalents, Rs 4,050 crore of unutilised committed working capital and term loan lines). Against this, it has total debt obligations (principal and interest) of Rs 4,419 crore over the six months through May 2022. 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
Downward factors
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About the Company HFCL, set up in 1991, 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 September 30, 2021, AUM (consolidated) stood at Rs 27,546 crore (Rs 27,490 crore as on March 31, 2021)
HMCL, its associate companies, and members of the Munjal family (promoters of the Hero group) together own 79.5% of HFCL's equity as on September 30, 2021 (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 52 crore and total income of Rs 4,333 crore for fiscal 2021, as against Rs 277 crore and Rs 3,856 crore, respectively, in the previous fiscal. On a standalone basis, PAT was Rs 71 crore and total income at Rs 4,092 crore for fiscal 2021, as against Rs 309 crore and Rs 3,703 crore, respectively, for fiscal 2020.
For the six months ended September 30, 2021, on a consolidated basis, HFCL reported loss of Rs 391 crore and total income of Rs 2,257 crore, as against net profit of Rs 109 crore and total income of Rs 2,070 crore, respectively, for the corresponding period of the previous fiscal. On a standalone basis, HFCL reported a loss of Rs 383 crore and total income of Rs 2,115 crore for the six months ended September 30, 2021, as against net profit and total income of Rs 123 crore and Rs 1,960 crore, respectively, for the corresponding period of the previous fiscal. |
Key Financial Indicators Key financials: HFCL (Consolidated)
Key financials: HFCL (Standalone)
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Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
*Yet to be issued
Annexure - Details of ratings withdrawn
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Annexure – List of entities consolidated
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| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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This Annexure has been updated on 17-Dec-2021 in line with the lender-wise facility details as on 19-Aug-2021 received from the rated entity.
Criteria Details
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