Shriram Housing Finance Limited Rating downgraded to 'CRISIL AA/Stable'; Removed from ‘Watch Negative’
Rating Action
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 removed its rating on the bank facilities and debt instruments of Shriram Housing Finance Limited (SHFL) from ‘Rating Watch with Negative Implication’ and downgraded it to ‘CRISIL AA’ from ‘CRISIL AA+’ while assigning it a ‘Stable’ outlook.
The watch resolution and rating action follows the consummation of the sale of the 84.44% stake held by Shriram Finance Ltd (SFL) and 13.35% stake held by Valiant Mauritius Partners FDI Limited in SHFL to Mango Crest Investment Ltd (an affiliate of Warburg Pincus).
On May 23, 2024, CRISIL Ratings had placed its long-term rating on SHFL on ‘Watch with Negative Implications’ following the announcement by SFL to sell its entire stake in SHFL to Mango Crest Investments Ltd. On December 11, 2024, following receipt of necessary approvals, SFL announced completion of the stake sale for a consideration of Rs 3,929 crore. Resultantly, SHFL now ceases to be a subsidiary of SFL.
Warburg Pincus is a global private equity firm, set up in 1966 and based in New York. It has $86 billion worth assets under management (AUM) and investment and operational teams across 13 offices globally, with more than 230 companies in their active portfolio. Warburg Pincus has invested in more than 1,000 companies across its private equity, real estate and capital solutions strategies.
With the change in shareholding, CRISIL Ratings has now evaluated the standalone credit risk profile of SHFL.
The rating reflects the strengthened capital position of SHFL, with Warburg Pincus having infused primary capital of Rs 1,200 crore upon consummation of transaction. With this, networth have increased to more than Rs 3,200 crore with gearing of 3.3 times, from Rs 2,039 crore and 5.3 times, respectively, as on September 30, 2024.
The rating also factors in the company’s improving market position in affordable housing, supported by its pan-India presence and wide branch network, as well as SHFL’s experienced and stable senior management. However, these strengths are partially offset by the inherent vulnerability of asset quality given the segment of operations and the company’s moderate earnings profile, though it is expected to improve going ahead. |
Analytical Approach CRISIL Ratings has evaluated the standalone business and financial risk profiles of SHFL.
Prior to the stake sale by SFL, the rating also factored in the expectation of strong support from SFL, both on an ongoing basis and in the event of distress, given the majority ownership and high strategic importance, shared brand name and managerial control. |
Key Rating Drivers & Detailed Description Strengths: Strengthened capital profile The capital profile of SHFL has been strengthened by the fresh equity infusion of Rs 1,200 crore by Warburg Pincus upon consummation of the transaction. With completion of the stake sale, networth of the company increased to more than Rs 3,200 crore with on-book gearing of 3.3 times, from networth of Rs 2,039 crore and gearing of 5.3 times as on September 30, 2024. Warburg Pincus holds 98.39% of total stake in SHFL. SHFL’s total capital adequacy ratio has also improved to ~35% post consummation of the transaction from 25% as on September 30, 2024. CRISIL Ratings understands that gearing will remain within 4.0-4.5 times on a steady-state basis.
Improving market position, supported by a pan-India presence and wide branch network SHFL’s AUM grew at a five-year compound annual growth rate of 49%; AUM reached Rs 13,762 crore as on March 31, 2024, from Rs 1,848 crore as on March 31, 2019. AUM further grew to Rs 15,236 crore as on September 30, 2024, registering an annualised growth rate of 21.4%. Of the overall AUM as on September 30, 2024, housing loans and loans against property (LAPs) made up 59% and 38%, respectively, while construction finance and corporate loans constituted 3%.
Growth has been supported by the company’s pan-India presence through 155 branches across 16 states. SHFL has a geographically well-diversified portfolio with the southern region contributing ~36%, west region ~34%, north ~28% and east ~2% of the loan book as on September 30, 2024. No single state contributed over 18% of the overall loan book. Further, SHFL operates across multiple sub-segments of affordable housing finance, offering loans with ticket sizes ranging from Rs 15 lakh to Rs 100 lakh. However, 77% of total retail customers have ticket size below Rs 25 lakhs.
SHFL continues to focus on increasing the share of LAPs in its loan portfolio and penetration into deeper geographies as a part of its strategy. With SHFL catering majorly to the self-employed (77% of AUM as of September 2024) and salaried (23%) borrower segments and 100% of its loan book being retail in nature, borrower concentration risk stands low.
Experienced and stable senior management SHFL benefits from a strong senior management team with significant experience in financing, having previously worked in reputed banks and non-banking financial companies (NBFCs).
SHFL will continue to be headed by MD & CEO, Mr Ravi Subramanian, who has over three decades of industry experience; he has been associated with the Shriram group since 2010. Mr GS Agarwal, chief financial officer, also has over three decades of experience, having previously worked in some of the leading NBFCs. The rest of the senior leadership is also stable, having been associated with entity for at least five years. These senior management personnel have been in the industry for more than two decades each and have extensive experience in their functional areas.
SHFL also benefits from its experienced board. With Warburg Pincus becoming the majority shareholder, representatives from Warburg Pincus have also joined SHFL’s board along with new independent directors who have been industry veterans. Experience of the board and senior management should aid SHFL as it scales up its portfolio.
Weaknesses: Inherent vulnerability of asset quality given the customer segment Asset quality of SHFL remains vulnerable, given the credit risk profile of the borrower segment that SHFL caters to. Within the affordable housing segment itself, self-employed borrowers are inherently more susceptible to economic cycles and 77% of SHFL’s portfolio comprises self-employed borrowers, as on September 30, 2024.
Reported asset quality metrics of SHFL remained largely rangebound with gross non-performing assets (GNPAs) and net NPA (NNPA) at 1.0% and 0.8% respectively, as on March 31, 2024, as compared to 0.9% and 0.7%, respectively, a year ago and 1.2% and 0.9% as on September 30, 2024. However, given the high growth rates, 2-year lagged NPAs are higher at 2.6% and 2.5% as on September 30, 2024 and March 31, 2024, respectively. In addition, the company had standard gross restructured assets of Rs 71 crore (0.5% of the AUM) as on September 30, 2024.
Nevertheless, SHFL has put in place adequate systems and processes, and has employed an experienced team to manage risks in the business, especially in the self-employed segments. The company has also increased its focus on underwriting practices and has heightened its collection efforts. It continues to focus on the self-employed sector by targeting borrowers having a bureau score of more than 700. As on September 30, 2024, ~83% of SHFL’s portfolio had a bureau score of over 700.
Going forward, the ability of SHFL to control its asset quality while growing its loan book at a healthy pace remains a key monitorable.
Modest profitability, albeit expected improvement going ahead SHFL’s profitability metrics have been relatively lower compared to other affordable housing financiers. Return on managed assets (RoMA) for the entity remained flat at 1.8% in fiscal 2024 compared to the previous years. Profitability has been moderate, led by elevated operating expenses, which (as a percentage of average managed assets) rose to 3.2% during fiscal 2024, a 30 basis points (bps) rise when compared to that in fiscal 2023. The rise in operating expenses is attributed to increase in the number of employee headcount and branches in line with the management’s growth plan. Credit costs for SHFL, which albeit remaining under control, witnessed marginal moderation as it rose to 0.3% during fiscal 2024 (0.1% in fiscal 2023). Nevertheless, the impact of rise in operating expenses and credit costs was partially offset by rise in share of income from direct-assignment (off-book) transactions executed during fiscal 2024. RoMA declined to 1.5% in the first half of the current fiscal, aided by decline in net interest margin during the period, as against the rising asset base.
Nevertheless, the earnings profile of SHFL is expected to improve going ahead as it will benefit from reduction in leverage, which should improve the margin. Previously, the company operated at gearing levels of above 6 times; on a steady-state basis, leverage is expected to remain within 4.0-4.5 times.
Further, post consummation of transaction, interest rate has also come down by 20-35 bps for some of the borrowing. Further, as the portfolio continues to scale up, operating leverage will also support profitability. SHFL’s ability to improve its profitability from current levels will remain a key monitorable. |
Liquidity: Strong As on November 30, 2024, SHFL was holding unencumbered liquidity of Rs 1,326 crore in the form of cash and cash equivalents and unutilised working capital limit of Rs 622 crore, excluding government securities and unutilised term loans of Rs 550 crore. Against this, SHFL had total debt repayment due of Rs 1,167 crore over the next three months from December 2024 to February 2025 (including Rs 355 crore of commercial papers, which are due for roll over). The asset liability management statement as on September 30, 2024, was comfortable with positive cumulative mismatch across all time buckets (the inflows and outflows include existing committed bank lines). |
Outlook: Stable CRISIL Rating expects SHFL to continue to maintain healthy capitalisation metrics. However, steady improvement in earnings profile and ability to maintain asset quality while scaling up operations will remain monitorable. |
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About the Company Incorporated in 2010 under the Companies Act 1956, SHFL started its operations in 2011 after obtaining Certificate of Registration from National Housing Bank. The board of SHFL’s earlier parent company SFL had approved the complete stake sale in SHFL to Mango Crest Investments Ltd (an entity affiliated with Warburg Pincus LLC). Post the consummation of the transaction, the company is owned by Mango Crest Investment Ltd, with 98.39% shareholding as on December 12, 2024.
SHFL was established to provide longer tenure home products to the Shriram group of customers and use this entity as a means of cross-selling other products within the Shriram group. The company provides loans for construction or purchase of residential property and LAPs. The company predominantly caters to self-employed borrowers and informed salaried customers in Tier II and III cities and the focus has been on the lower income segment. It has 155 branches across 16 states in India. |
Key Financial Indicators
*calculated over average total assets, inclusive of off-book direct assignment (DA) and co-lending portfolio #post adjusting reported borrowing for DA portfolio; reported gearing of 5.3 times as of September 2024 (5 times as of March 2024) |
Any other information: Not Applicable |
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Annexure - Details of Instrument(s)
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