Detailed Rationale

CRISIL Ratings has assigned its ‘CRISIL AA/Stable’ rating to Rs 300 crore perpetual bonds of Hinduja Leyland Finance Limited (HLF) and has also reaffirmed its ratings on the bank facilities and existing debt instruments at ‘CRISIL AA+/Stable/CRISIL A1+’.

 

The ratings continue to factor in the strong support expected from the parent, Ashok Leyland Limited (ALL) and HLF’s high strategic importance for ALL, as the former plays an active role in financing the MHCV segment of ALL. Furthermore, ALL’s support to HLF is expected to remain high on account of shared brand and strong linkages. ALL, as on September 30, 2024, held 60.4% shareholding in HLF and is expected to continue to hold the majority ownership in HLF

 

The rating also continues to factor in the steady scale up in operations of HLF with significant market presence in vehicle finance and the diversified resource profile of HLF with competitive cost of borrowings.  

 

At a consolidated level, HLF’s asset under management (AUM) grew at a CAGR of ~18% over the last 3 years to ~Rs 49,235 crores as on March 31, 2024, which further rose to ~Rs 54,283 crores as on September 30, 2024. The loan book is also well-diversified in terms of geographic reach, as HLF is present at more than 1,750 locations across 25 states and union territories. The company’s capitalisation stood healthy with its networth improving to Rs 7,345 crore as of September 30, 2024, from Rs 6813 crore as on March 31, 2024, and Rs 5,597 crore as on March 31, 2023.

 

These strengths are partially offset by modest asset quality and earnings profile. At a consolidated level, while 90+ dpd has improved to 3% as on September 30, 2024, compared to 3.1% as on March 31, 2024, and 3.5% as on March 31, 2023, however, sustenance of the same will remain monitorable. Moreover, while the profitability continues to remain moderate currently, however, going forward, the company plans to enter other non-vehicle higher yields segments. This, along with the expectation of improvement in the credit costs, should support the overall earnings profile going forward and this will remain a key monitorable. 

 

The rating on the perpetual debt instruments reflects the subordinated nature of instruments and factors in the extent of comfortable buffer consistently maintained by HLF over the regulatory capital adequacy requirements and high financial flexibility due to majority ownership by ALL. HLF has maintained an average cushion of more than 3% over the regulatory minimum capital ratio over the last five years and CRISIL Ratings believes that it will continue to maintain a comfortable cushion going forward.

 

CRISIL Ratings has also noted that on March 16, 2022, the Board of HLF, provided an in-principle approval on the proposed merger of HLF into NDL Ventures Limited (erstwhile NXTDigital Limited, NDL). The proposed merger would result in shareholders of HLF receiving the shares of NDL as per share swap valuation approved by the Board of HLF on November 25, 2022, subject to further regulatory and shareholders’ approval. NDL, a media vertical of Hinduja Group, is listed on both Bombay Stock Exchange (BSE) and National Stock Exchange (NSE). The transaction is at the advanced stages, wherein both the parties are seeking approval from the stock exchanges and is likely to be consummated in the near term.

 

CRISIL Ratings believe that the proposed merger will not have any material impact on the business profile of the company as the existing business operations of HLF will continue to run in a similar manner. With NDL becoming non-operational post the transfer, only the financing business will be there in the merged entity, which will subsequently be renamed to Hinduja Leyland Finance Limited subject to regulatory approvals. Additionally, CRISIL Ratings notes that there will not be any material changes in the future business targets of HLF. In addition to the above, CRISIL Ratings does not expect any cash outflow from HLF from the proposed transaction and the existing shareholders of HLF will be allotted additional shares on the basis of swap valuation. The Board approved valuation for the swap ratio will be 25 equity shares of the face value Rs. 10/- each of NDL shall be issued and allotted for every 10 equity shares of the face value of Rs. 10/- each held in Hinduja Leyland Finance Limited. Post the transaction is completed Hinduja Housing Finance Limited would continue to operate as a 100% wholly owned subsidiary of HLF.

 

Once the transaction is consummated, the shareholding in HLF would witness negligible change, as the company will be listed on the stock exchange whilst maintaining a minimum of 25% public shareholding. Nevertheless, even post-merger, CRISIL Ratings understands that the shareholding of ALL – is likely to continue with a majority stake, and the same would therefore remain as the single largest shareholder in HLF. Consequently, CRISIL Ratings doesn’t envisage any change in the strategic importance of HLF to ALL and believes that HLF will continue to receive strategic support from ALL over the medium term.

Analytical Approach

CRISIL Ratings has fully consolidated the business and financial risk profiles of HLF and its subsidiaries, given the managerial, operational, and financial linkages between them. The ratings also factor in expectation of strong support to HLF from ALL, given the majority ownership and strategic importance of HLF to ALL.

 

The rating on the perpetual debt instruments reflects the subordinated nature of instruments and factors in the extent of comfortable buffer consistently maintained by HLF over the regulatory capital adequacy requirements and high financial flexibility due to majority ownership by ALL. The ratings on the perpetual bonds additionally takes into account restriction to HLF from servicing these instruments if it breaches the minimum regulatory capital requirement, or if the regulator denies permission to the company to make payments of interest and principal, if it reports losses.

 

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:

Majority ownership by, and strategic importance to, Ashok Leyland and the Hinduja group

The Hinduja group entities held 74.8% (excluding employee stock options) in HLF as on September 30, 2024, with Ashok Leyland being the primary shareholder (60.4% shareholding). HLF is of high strategic importance for ALL as it continues to play an active role in financing in MHCV segment of ALL, with about 31% of the overall assets under management (AUM) of HLF, on a standalone basis, being financed towards the ALL vehicles as on September 30, 2024 (24% on a consolidated basis).  ALL is expected to continue to hold the majority ownership in HLF. Furthermore, in CRISIL Ratings view, ALL’s shared brand and strong linkages imply a moral obligation on parent’s part to support HLF.

 

With the proposed merger into NDL Ventures, HLF plans to list itself on the stock exchange and go public. Once the transaction is consummated, the shareholding in HLF would witness negligible change, as the company will be listed on the stock exchange whilst maintaining a minimum of 25% of public shareholding. Nevertheless, even post-merger, CRISIL Ratings understands that the shareholding of ALL – is likely to continue with a majority stake, and the same would therefore remain as the single largest shareholder in HLF. Consequently, CRISIL Ratings doesn’t envisage any change in the strategic importance of HLF to ALL and believes that HLF will continue to receive strategic support from Ashok Leyland over the medium term. 

 

Diversified portfolio with significant presence in the Indian vehicle finance market

The AUM of the standalone entity, HLF, grew at an annual growth of 28% to Rs 38,685 crores as on March 31, 2024, which further grew to Rs. 41,834 crore by end of September 30, 2024 (growth of 16%, annualized), primarily supported by steady share and growth of the commercial vehicle financing segment.

 

As on September 30, 2024, the overall portfolio of the company remained fairly diversified with vehicle loans accounting for bulk of the portfolio (67%), making HLF a large player in the vehicle finance space. Of this, commercial vehicles/construction equipment/tipper accounted for 50% of the overall AUM, followed by two and three-wheelers (10%), and other vehicles (7%). The balance portfolio comprises loans against property or LAP (25% share) and portfolio buyouts (8%). HLF forayed into these segments to diversify its business mix and increase the share of the non-vehicle portfolio.

 

The loan book is also well-diversified in terms of geographic reach, as HLF is present at more than 1,750 locations across 25 states and union territories.

 

Further, the housing finance business also remains core to the strategy going forward and its share to overall consolidated AUM is expected to increase. At a consolidated level, as on September 30, 2024, the AUM stood at Rs 54,283 crores as against Rs 49,235 crores as on March 31, 2024 (Rs 36,906 crores as on March 31, 2023). Of the total AUM as on September 30, 2024, housing finance business (under HLF) accounted for ~ 23%.

 

Going forward, the company plans to expand its product portfolio towards the other non-vehicle segments, thereby resulting in further diversification in the portfolio. Furthermore, the company plans to diversify within its vehicle portfolio also and enter higher yield segments such as leasing and used vehicle finance.

 

Improvement in the capitalization metrics

The capitalization metrics of HLF remained comfortable with net worth having improved to Rs 6,021 crore as on September 30, 2024, as against Rs 5,726 crore as on March 31, 2024, driven by positive internal accruals during the period. The adjusted gearing inched up marginally to 6.4 times as on September 30, 2024, compared to 6.2 times as of March 31, 2024.

 

At a consolidated level too, the company also saw an improvement in its capitalization metrics with the net worth improving to Rs 7,345 crore as of September 30, 2024, from Rs 6,813 crore as on March 31, 2024. The adjusted gearing stood at 6.8 times as on September 30, 2024, compared to 6.7 times as of March 31, 2024.

 

Further, the completion of the merger with NDL will also add around Rs 200 crores to the networth for HLF. However, CRISIL Ratings expects the gearing metrics for HLF to continue to remain under 6 times on a steady state basis.

 

Diversified resource profile with low cost of borrowings

HLF’s standalone resource profile remained well-diversified across banks and capital market instruments. As on September 30, 2024, the company had 73% of bank borrowings, followed by 19% of securitized book, 6% of capital market borrowings (NCDs and bonds) and balance quantum via commercial paper. While a large portion of borrowings came from the banks, nevertheless, within the bank funding, the lender-base of the company remained well diversified across multiple large PSUs/private sector banks. Nevertheless, given that almost all of HLF’s bank borrowings are linked to external benchmark rates, the cost of borrowings had inched up in fiscal 2024 in tandem with rise in external benchmark rates. The on-book cost of borrowings (interest expense as a % of average on-book borrowings) stood at 8.6% as on September 30, 2024 (8.2%: March 31, 2024).

 

Weaknesses:

Moderate asset quality metrics

The asset quality metrics remained moderate with the company’s 90+ dpd remaining range bound at 3.5%-4.5% over the last 5 years at a standalone level. As on September 30, 2024, the 90+ dpd stood at 3.2%, as compared to 3.3% as on March 31, 2024 (3.7% as on March 31, 2023) On a lagged basis, 1-year lagged 90+ dpd was range-bound at 4.3% as on March 31, 2024, similar to that as on March 31, 2023.

 

Nevertheless, the asset quality metrics remain supported by the healthy collection efficiency numbers, wherein, the company has been reporting the efficiency ratio in the range of 95%-105% across the past twelve months, thereby indicating strong collections from the overdue portfolio also.

 

The company is also trying to reduce its focus on first-time users/buyers, and rather increase the share of large and medium fleet operators to support asset quality metrics in the medium term. Further, while the company has forayed into non-vehicle loans, this segment is relatively new, having been built up only over the last few years.

 

At a consolidated level, 90+ dpd stood at 3% as on September 30, 2024, range-bound compared to 3.1% as on March 31, 2024. Albeit improving marginally from 3.5% as on March 31, 2023, on account of steady delinquency trend in the housing finance segment. Sustained improvement in asset quality metrics would remain monitorable.

 

Moderate earnings profile

The earnings profile remains moderate because of relatively lower net interest margin (NIMs), though partly aided by the operating expenses ratio, which lags the industry average. On a standalone basis, NIM stood at 2.9% for fiscal 2024 as against 3.8% in fiscal 2023. The reduction in NIM was offset by the lower operating expenses and reduction in the credit costs. The credit costs (as a percentage of average managed assets) improved to 1.4% in fiscal 2024, as against 2.1% in fiscal 2023. Consequently, return on managed assets (RoMA) remained stable at 0.9% during the fiscal 2024. During six months ended September 30, 2024, with the rise in average borrowing cost during the period to 8.6% (8.2%: fiscal 2024), HLF reported RoMA of 0.7% (annualized). Nevertheless, earnings remained cushioned owing to improving credit costs, which reduced further to 1.2% during the period.

 

On a consolidated basis, given the presence of the housing finance subsidiary in the affordable home loans and small-ticket size LAP, the top line gets benefit in the form of higher yields. Consequently, the RoMA for the consolidated entity stood at 1.1% (annualized) during the six-month period ending September 30, 2024, as against 1.4% in fiscal 2024 as well as fiscal 2023.

 

The company plans to enter other non-vehicle higher yields segments, which could aid improvement in NIMs. In addition to this, the company also plans to enter leasing and used vehicle financing, which will further add to the revenue stream. Furthermore, with the expectation of improvement in the credit costs, the overall earnings profile is expected to improve going forward and this will remain a key monitorable. 

Liquidity: Strong

HLF has an adequate asset liability management profile, with positive cumulative mismatches across all buckets (excluding unutilized bank limit and committed disbursement). As on September 30, 2024, HLF had liquidity of around Rs 7,655 crore, comprising cash and liquid investments, unutilized cash credit/working capital demand loan (CC/WCDL) and unavailed term loans. Against the same, the company had total debt obligation (including interest payment) of Rs 3,123 crore (excluding DA payout) over the next three months i.e. October 2024 to December 2024.

 

Outlook: Stable

CRISIL Ratings believes HLF will continue to receive strong support from ALL and the Hinduja group. Moreover, HLF is also expected to increase its share in the Indian vehicle finance market over the medium term.

 

In addition, the rating on perpetual debt instruments remains sensitive to the capital buffer maintained by HLF, over regulatory capital requirements, and rating transition on these instruments could potentially be sharper than those on other debt instruments and bank facilities.

Rating Sensitivity Factors

Upward factors

• Better asset quality metrics, with gross non-performing assets declining below 2.5%, translating to improved earnings profile as the portfolio scales up
• Upward revision in CRISIL Ratings' view on ALL’s credit risk profile

 

Downward factors

• Decline in support from ALL or material change in ALL’s shareholding in HLF, or any downward revision in CRISIL Ratings’ view on the credit profile of ALL
• Weakening of asset quality metrics, with GNPAs on AUM exceeding 6% and exerting pressure on profitability.

About the Company

HLF, incorporated in 2008, commenced operations in 2010. It was promoted as a captive financier by the Hinduja group’s flagship automobile manufacturing company, Ashok Leyland. Gradually, HLF ventured into financing of non- Ashok Leyland vehicles, and forayed into the LAP segment in fiscal 2015. Apart from commercial vehicles, the company also funds purchase of two- and three-wheelers, tractors, construction equipment and used CVs. The company has also been buying portfolios over the past 4-5 years to diversify its product profile.

Key Financial Indicators: (Standalone, HLF)

As on / for the period ended		Sep-24	Mar-24	Mar-23	Mar-22	Mar-21
Total assets	Rs crore	38,392	35,522	26,660	20,961	21,923
Total income	Rs crore	2,094	3,453	2,755	2,660	2,775
Profit after tax	Rs crore	149	340	277	232	270
90+ dpd	%	3.2	3.3	3.7	4.2	4.0
Adjusted gearing	Times	6.4	6.2	5.1	5.5	5.9
Return on managed assets	%	0.7*	0.9	1.0	0.9	1.0

*Annualized

Note: All figures are as per IND-AS

 

Key Financial Indicators: (Consolidated, HLF)

As on / for the period ended		Sep-24	Mar-24	Mar-23	Mar-22	Mar-21
Total assets	Rs crore	49,272	44,877	32,419	24,476	24,240
Total income	Rs crore	2,891	4,660	3,502	3,098	3,053
Profit after tax	Rs crore	305	636	490	341	333
90+ dpd	%	3.0	3.1	3.5	4.0	3.9
Adjusted gearing	Times	6.8	6.7	5.8	6.0	6.2
Return on managed assets	%	1.1*	1.4	1.4	1.1	1.1

*Annualized

Note: All figures are as per IND-AS

Any other information: Not Applicable