| Shriram Finance Limited | ||||||||
| Ratings reaffirmed at 'CRISIL PPMLD AA+/Stable’, ‘CRISIL AA+/Stable/CRISIL A1+'; rated amount enhanced for Bank Debt | ||||||||
| Rating Action | ||||||||
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| Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. | ||||||||
| 1 crore = 10 million | ||||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has reaffirmed its ratings on the existing debt instruments and enhanced bank facilities of Shriram Finance Limited (SFL) at ‘CRISIL AA+/CRISIL PPMLD AA+/Stable/CRISIL A1+’.
CRISIL Ratings had in December 2022 assigned its ‘CRISIL AA+/CRISIL PPMLD AA+r/Stable/CRISIL A1+’ rating to the debt instruments transferred from erstwhile Shriram City Union Finance Ltd (SCUF) and reaffirmed its existing ratings, following the consummation of the merger of SCUF and the demerged undertaking of Shriram Capital Limited (Shriram Capital) with Shriram Transport Finance Company Ltd, which was subsequently 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.
Consequent to redemption, CRISIL Ratings has withdrawn its rating on debentures of Rs.2913.4 crore, subordinated debt of Rs.98.9 crore and market linked debentures of Rs.150 crore (See Annexure 'Details of rating withdrawn' for details) in line with its withdrawal policy. CRISIL Ratings has received independent confirmation that these instruments are fully redeemed.
SFL is now the largest retail NBFC in India and fourth largest non-bank financier (including HFCs) with consolidated assets under management (AUM) of Rs 193,730 crore (including SHFL) as on March 31, 2023. 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 (50%), passenger vehicle (18%), MSME (10%), and others. Pre-merger, STFCL and SCUF had reported AUM of Rs 135,249 crores and Rs 36,117 crores respectively as on September 30, 2022. 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 and also supported by higher NIM and lower credit costs. SFL reported an improved ROMA of 3.0% for fiscal 2023 as against 2.0% for fiscal 2022 (pre-merger) for erstwhile STFCL and 2.2% for fiscal 2022 (based on merged proforma financials).
The capital profile continues to remain comfortable with the merged entity reflecting a consolidated networth of around Rs 43,800 crores and adjusted gearing at 3.8 times as on March 31, 2023 as against Rs 26,094 crores and 4.4 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. SFL reported Gross Stage 3 of 6.2% as on March 31, 2023. 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.
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Analytical Approach CRISIL Ratings has evaluated the consolidated financial and business risk profile of SFL, its subsidiary, Shriram Housing Finance Ltd and its associate Shriram Automall Limited.
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:
Post the consummation of the merger, SFL is now the largest NBFC in India and the fourth largest non-bank financier (including HFCs) with AUM of Rs 193,730 crore (including SHFL) as on March 31, 2023. 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 (50%), passenger vehicle (18%), MSME (10%), and others. Pre-merger, STFCL and SCUF had reported AUM of Rs 135,249 crores and Rs 36,117 crores respectively as on September 30, 2022.
The company is expected to continue to retain its predominant market position in the pre-owned CV financing business and the SME loan segment. The erstwhile STFCL has created a strong and sustainable competitive advantage through deep understanding of the borrower profile and their credit behaviour. They have done so by building a scalable operating model, extensive reach and strong valuation capabilities of pre-owned vehicles. The company faces limited competition from other organized financiers, including banks, in this segment, due to inherent riskiness of the target product and the customer profile. SCUF on the other hand had a well-established market position in SME loan and two-wheeler financing segments. In the SME loan segment, the company is a leading financier among retail NBFCs. The company has grown significantly in the unique space created from its legacy chit fund ecosystem. The main characteristics of SME loan portfolio are that the borrowers have limited documentary income proof and the ticket size is small at average of Rs 10 lakh-Rs 15 lakhs.
Overall, CRISIL Ratings believes that SFL has strong structural advantages over its peers, which will support its growth plans and help it maintain leadership position over the medium term. Further, the merger also enables higher potential for cross sell within the customer segments of the entities. Ability to continue to scale up operations remains a key monitorable.
SFL’s capitalisation remains adequate with consolidated networth of Rs 43,800 crore and an adjusted gearing of 3.8 times as on March 31, 2023. CRISIL Ratings believes that the capitalisation profile will remain comfortable over the medium term, given the demonstrated ability to access markets.
With the consummation of the merger, the earnings profile of the SFL has improved driven by the addition of the high yielding book of erstwhile SCUF, and also supported by higher NIM and lower credit costs as compared to the previous fiscal. SFL, on a consolidated basis, reported improved net interest margin (based on total income) of 8.7% for fiscal 2023 as compared to 6.9% for fiscal 2022 (pre-merger) for erstwhile STFCL and 7.7% for fiscal 2022 (based on merged proforma financials). Nevertheless, while yield benefit is accretive, SME business is operational intensive, and therefore, the operating expenses are estimated to have increased to 2.6% for fiscal 2023 as compared to 1.6% for fiscal 2022 (pre-merger) for STFCL and 2.2% for fiscal 2022 (based on merged proforma financials). 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 2.1% for fiscal 2023 for SFL (consolidated) as compared to 2.8% for fiscal 2022 (pre-merger) for STFCL and 2.7% for fiscal 2022 (based on merged proforma financials). Consequently, SFL reported an improved ROMA at 3.0% for fiscal 2023 as against 2.0% for fiscal 2022 (pre-merger) for erstwhile STFCL and 2.2% for fiscal 2022 (based on merged proforma financials).
Weaknesses:
The asset quality metrics for SFL have been elevated over the past several years. 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. SFL reported Gross Stage 3 of 6.2% as on March 31, 2023. 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. Further, the restructured portfolio for the company was also negligible at sub 1% as on March 31, 2023. However, ability to scale up the portfolio whilst improving asset quality metrics remains a key monitorable. Nevertheless, company’s long track record in its business segments, understanding of the target customer segment and relationship-based lending model could support the asset quality metrics.
SFL has an average, though improving, resource profile. Both STFCL and SCUF had an established track record in raising funds from the markets with STFCL also being able to tap retail borrowings which helps diversify its resource profile. However, the cost of borrowings continues to be higher than peers. The company has managed to tap various borrowing sources having raised around Rs 69,851 crore during fiscal 2023. The company has also been able to raise funds via retail deposits (around Rs 16,000 crore raised in fiscal 2023 included in above).
However, 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. CRISIL Ratings notes that the yields for bonds of STFCL in the secondary market which were higher than benchmarks in the previous years have now been on an improving trend over the last six months. Consequently, the ability of SFL to now consistently raise resources from traditional routes of term loans and capital market instruments at optimal costs remains a key monitorable. |
Liquidity: Strong The structural asset liability maturity (ALM) statement of SFL as on March 31, 2023, shows that ALM position is adequate with cumulative positive gaps upto the 1 year bucket indicating that business inflows also support repayments. On the liquidity side, CRISIL Ratings believes that SFL has adequate liquidity. As of March 31, 2023, SFL had liquidity of Rs 19,205 crore (comprising of cash and equivalents and unutilized CC/WCDL lines) which comfortably cover 3 months of debt obligations of Rs. 16,644 crore.
ESG Profile CRISIL Ratings believes that SFL’s ESG profile supports its already strong credit risk profile.
The ESG profile for financial sector entities typically factors in governance as a key differentiator. The sector has reasonable social impact because of its substantial employee and customer base, and it can play a key role in promoting financial inclusion. While the sector does not have a direct adverse environmental impact, the lending decisions may have a bearing on the environment.
SFL has a continuous focus on strengthening various aspects of its ESG profile.
Key ESG highlights:
There is growing importance of ESG among investors and lenders. SFL’s commitment to ESG principles will play a key role in enhancing stakeholder confidence, given the sizable share of market borrowings in its overall debt and access to both domestic and foreign capital markets. |
Outlook: Stable CRISIL Ratings believes that SFL will continue to maintain healthy capitalisation and strong earnings profile which will help mitigate inherent asset quality-related challenges. CRISIL Ratings also believes that the company will maintain its competitive position in the key business segments. |
Rating Sensitivity factors Upward Factors:
Downward Factors:
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About the Company Following the consummation of the merger of SCUF and demerged undertaking of Shriram Capital Limited with STFCL, the company has been renamed to Shriram Finance Ltd (SFL). Shriram Housing Finance Ltd (SHFL) continues to operate as a subsidiary of SFL which holds around 85.02% stake in the same. Pursuant to the consummation of the transaction, Shriram Capital and SCUF cease to exist.
STFCL, incorporated in 1979, was registered with RBI as a deposit-taking, asset-financing non-banking financial company. STFCL provides financing for vehicles such as CVs (both pre-owned and new), tractors, and passenger vehicles.
SCUF, was incorporated in 1986 and predominantly operates in the retail financing segment with a focus on small enterprise loans, two-wheeler financing, gold loans, housing loans and others (auto and personal loans). |
Key Financial Indicators: STFCL Standalone
Key Financial Indicators: SCUF Consolidated
Key Financial Indicators: SFL consolidated
*Gross Stage-3 estimated on combined basis for SFL and SHFL |
Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
#yet to be issued ^transferred from Shriram City Union Finance Limited upon its merger into Shriram Finance Limited *Interchangeable with short term facility
Annexure - Details of Rating Withdrawn
^transferred from Shriram City Union Finance Limited upon its merger into Shriram Finance Limited |
Annexure – List of entities consolidated
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| Annexure - Rating History for last 3 Years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Criteria Details
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