Rating Rationale

Detailed Rationale

CRISIL Ratings has upgraded its long-term rating on the debt instruments of Shriram City Union Finance Limited (SCUF) to ‘CRISIL AA+/CRISIL PPMLD AA+r’ from ‘CRISIL AA/CRISIL PPMLD AAr’ and removed the ratings from ‘Rating Watch with Positive Implications’ and assigned a ‘Stable’ outlook to the long term rating. The commercial paper is reaffirmed at 'CRISIL A1+'. CRISIL Ratings has also withdrawn its outstanding ratings on the debt instruments of SCUF as these have been transferred to Shriram Finance Ltd (SFL) post the consummation of the merger transaction. The rating action follows receipt of the required documentation in line with CRISIL Ratings’ withdrawal policy

Consequent to redemption, CRISIL Ratings has withdrawn its rating on debentures of Rs 350 crore (See Annexure 'Details of rating withdrawn' for details) and also debentures of Rs 1542.15 crore in line with its withdrawal policy. CRISIL Ratings has received independent confirmation that these instruments are fully redeemed and hence not transferred to SFL.

The rating action follows the consummation of the merger of SCUF and the demerged undertaking of Shriram Capital Limited (Shriram Capital) with STFCL which has subsequently been renamed to Shriram Finance Ltd (SFL). Shriram Housing Finance Ltd (SHFL) continues to operate as a subsidiary with SFL holding around 85.02% stake in the same. Pursuant to the consummation of the transaction, Shriram Capital and SCUF cease to exist.

SFL is now the largest NBFC in India and fourth largest non-bank financier (including HFCs) with consolidated assets under management (AUM) of Rs 177,912 crore (including SHFL) as on September 30, 2022. The AUM continues to be predominantly vehicle finance based given the size of erstwhile STFCL; however, diversification in the book has increased consisting primarily of commercial vehicle (60%), passenger vehicle (16%), SME (8%), and others. Pre-merger, STFCL and SCUF reported AUM of Rs 135,249 crores and Rs 36,117 crores respectively. The merger also enables higher potential for cross sell within the customer segments of the entities.

With the merger going through, the earnings profile of the SFL has improved driven by the addition of the high yielding book of erstwhile SCUF. Post the consummation the net interest margins for the SFL are estimated to have increased to 7.8% for the first half of fiscal 2023 as against 7.3% for the erstwhile STFCL. Nevertheless, while yield benefit is accretive, SME business is operational intensive, and therefore, the operating expenses are estimated to have increased to 2.4% for the first half as against a 1.6% for STFCL. The credit costs however, remain range bound despite the elevated reported asset quality metrics driven by the ability of the entities to recover even post an account turning NPA. Credit costs were at around 2.0% for the first half of fiscal 2023 for both the merged entity as well as for the erstwhile STFCL. Consequently, the ROMA stood at an estimated 2.8% for the first half (2.2% for fiscal 2022) as against 2.7% for erstwhile STFCL.

The capital profile continues to remain comfortable with the merged entity reflecting a networth of around Rs 38,152 crores and adjusted gearing at 4.3 times as on September 30, 2022 as against Rs 27,856 crores and 4.6 times for STFCL.

The ratings however, continue to remain constrained by SFLs modest asset quality and average resource profile. Historically, STFCL and SCUF have operated at elevated reported asset quality metrics with GNPA/Gross Stage 3 assets at 6.9% and 5.9% as on September 30, 2022. The asset quality metrics have been elevated over the past several years given the fact that the company largely caters to borrowers with modest credit profile and relatively under-banked customers. Nevertheless, CRISIL Ratings notes that the entities have displayed ability in the past to ultimately recover from these accounts, even post loan maturity date. Consequently, the overall credit costs have been range bound over the past 3 fiscals. However, ability to scale up the portfolio whilst improving asset quality metrics remains a key monitorable.

The resource profile too remains average with the group having demonstrated its ability to raise funds consistently from banks and FIs. Nevertheless, the cost of borrowings is relatively higher than peers. Ability to trim down borrowing costs from the current levels and diversify further into domestic capital market will be key to support the earnings profile amidst the current environment.