Rating Rationale

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 March 31, 2024. 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 of capital was further infused in fiscal 2023, of which the promoters infused Rs 1,000 crores of capital. 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 capitalization

HFCL is well-capitalised, as reflected in consolidated net worth of Rs 5,772 crore and overall capital adequacy ratio of 16.3% of risk-weighted assets as on March 31, 2024 (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 8.0 times as on March 31, 2024 (7.0 times as on March 31, 2023; 6.0 times as on March 31, 2022).[1]

Weakness:

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

HMCL and its associates accounted for nearly 40% of total business sourced within the HMCL ecosystem. Though HFCL has significant linkages with 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 10,452 crore as on March 31, 2024), which constituted 20% of the overall assets under management (AUM), is majorly 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 pre-owned -car loans. HFCL incorporated a 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 2021 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, the company 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 5.1% as on March 31, 2023 (7.5% as on March 31, 2022) and further to 4.0% as on March 31, 2024.

In terms of segmental break-up, GNPAs in the retail, retail SME and corporate loan book segment were 4.8%, 2.2% and 4.4% as on March 31, 2024, respectively as compared to 5.5%, 3.0% and 8.7% on March 31, 2023.

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

[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 5.2 times as on March 31, 2024 and 4.5 times as on March 31, 2023.