Detailed Rationale

CRISIL Ratings’ ratings on the long-term bank facilities and debt instruments of Shriram Housing Finance Ltd (SHFL) continues to be on ‘Rating Watch with Negative Implications’.

 

CRISIL Ratings has also withdrawn its rating on long term principal protected market linked debentures of Rs.200 crore (See ‘Annexure - Details of Rating Withdrawn' for details) in line with its withdrawal policy. CRISIL Ratings has received independent confirmation that these instruments have been fully redeemed.

 

The ratings were placed on Watch following the announcement made by SHFL on May 13, 2024, wherein the board of SHFL’s parent company - Shriram Finance Ltd (SFL) had approved the complete stake sale in SHFL to Mango Crest Investments Ltd (an entity affiliated with Warburg Pincus LLC). The proposed transaction involves a sale and transfer of all equity and convertible instruments held by SFL and Valiant Mauritius Partners, in SHFL, to Warburg Pincus. Warburg Pincus is a global private equity firm, established in 1966 and based out of New York. It had $81 billion of assets under management and investment, and operational teams across 13 offices globally, as on September 30, 2024. Post consummation of the transaction, Warburg Pincus (via Mango Crest Investments Ltd) will hold 99.76% stake in SHFL, for a purchase consideration of Rs 4,630 crore. Furthermore, Warburg Pincus will infuse an additional Rs 1,000 crore as equity in SHFL to support growth. Post the announcement, SHFL has received all the necessary regulatory approvals from the Competition Commission of India (CCI) and Reserve Bank of India (RBI), and the transaction shall be consummated once internal board approvals are received.

 

The current analytical approach for SHFL factors in expectation of strong support from the parent, 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. However, once the transaction is completed, the analytical approach would not factor in expectation of support from SFL and the rating would reflect an assessment by CRISIL Ratings of the credit risk profile of SHFL and benefits, if any, emanating from its ownership by Warburg Pincus. However, CRISIL Rating’s believes that upon resolution of the Watch, the rating is unlikely to change by more than 1-2 notches.

 

CRISIL Ratings will continue to monitor the progress on the transaction and will have discussions with SHFL’s management and Warburg Pincus to understand their strategies and business plan going forward and will resolve the negative watch post completion of the transaction and after getting clarity on the above aspects. Nevertheless, CRISIL Ratings understands that SFL will continue to provide any need-based support to SHFL till the transaction is completed and therefore the existing rating will continue to centrally factor in parent support from SFL.

 

SHFL’s rating also continues to factor in its adequate capitalisation metrics, well diversified resource profile and increasing, yet moderate, scale of operations. Assets under management (AUM) as on September 30, 2024, stood at Rs 15,236 crore, growing at a 4-year CAGR of 53%, supported by a rise in disbursements. However, these strengths are partially offset by inherent vulnerability of asset quality metrics given the customer segment as well as moderate profitability metrics.

Analytical Approach

CRISIL Ratings has evaluated the standalone business and financial risk profiles of SHFL and factored in expectation of strong support from SFL both on an ongoing basis and in the event of distress.

Key Rating Drivers & Detailed Description

Strengths:

Strong support from its parent, SFL

Until the transaction with Warburg Pincus is completed, SHFL is expected to be supported by its existing parent, SFL, given majority shareholding (84.82% stake as on September 30, 2024) and shared brand name.

 

Since its inception, SHFL has received strong support from its parent in the form of equity capital, with the latest infusion coming in March 2024, in the form of compulsory convertible debentures (CCDs) amounting to Rs ~400 crore. Over the years, the subsidiary has also benefited from the shared brand name, management oversight and operational synergies with the Shriram group. This allowed SHFL to quicky ramp up the scale and efficiency of its operations.

 

Adequate capitalisation and well-diversified resource profile

As on September 30, 2024, SHFL’s networth and total capital adequacy ratio (per Ind-AS) stood at Rs 2,039 crore and 25%, respectively, benefiting from periodic capital infusion, against Rs 1,924 crore and 25%, respectively, as on March 31, 2024. The adjusted gearing (including the off-book securitised portfolio) stood at 6.6 times and reported gearing was 5.3 times as on September 30, 2024, as against 6.2 times and 5 times, respectively, as on March 31, 2024. On a steady-state basis, reported gearing is expected to be 5.5-6 times over the medium term, without incorporating any incremental equity infusion.

 

The resource profile of SHFL remains well diversified and primarily consisted of bank borrowings (59% including National Housing Bank [NHB] refinance), debt instruments (20%), pass-through certificate (PTC) transactions (14%) and external commercial borrowings (ECB, 8%) as on September 30, 2024.

 

Weaknesses:

Inherent vulnerability of asset quality metrics given the customer segment

Of the overall AUM, housing loans and loans against property (LAP) made up 59% and 38%, respectively, as on September 30, 2024, while other offerings included construction finance and corporate loans (3%). Asset quality of SHFL remains vulnerable, given the credit profile of the borrower segment that SHFL caters to under these asset classes.

 

At the end of fiscal 2024, the asset quality profile of SHFL moderated marginally with gross non-performing assets (GNPAs) and net NPA (NNPA) inching up to 1.0% and 0.8%, respectively, as compared to GNPA and NNPA of 0.9% and 0.7%, respectively, as on March 31, 2023. As on September 30, 2024, GNPA and NNPA remained range-bound at 1.2% and 0.9% respectively. In addition, the company had standard gross restructured assets of Rs 71 crore (0.5% of the AUM) as on September 30, 2024. Going forward, the ability of SHFL to control its asset quality while growing its loan book remains a key monitorable.

 

SHFL has put up 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 to bring asset quality stress under control. 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.

 

Nevertheless, the loan portfolio remains susceptible to inherent challenges related to asset quality given the higher susceptibility of self-employed borrowers in the affordable housing segment to economic cycles.

 

Moderate profitability

SHFL, during fiscal 2024, reported profit after tax (PAT) and total income of Rs 217 crore and Rs 1,430 crore, respectively, as against Rs 138 crore and Rs 794 crore, respectively, during fiscal 2023. However, return on managed assets (RoMA) for the entity remained flat at 1.8% during fiscal 2024 as well as during fiscal 2023. Despite improvement in its top-line growth, RoMA remained moderate on account of 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. Secondly, 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.

 

Further, during the six-month period ending September 30, 2024, SHFL reported a PAT and total income of Rs 114 crore and Rs 893 respectively, translating to an annualised RoMA of 1.5%. The decline in net profitability was majorly on account of relatively lower share of non-operating income during the period, as against the rising asset base.

 

Going forward, the ability of SHFL to ensure improvement in profitability metrics while scaling up its lending operations remains a key rating monitorable.

Liquidity: Strong

As of September 30, 2024, SHFL was holding unencumbered liquidity of Rs 480 crore (Rs 430 crore of cash and equivalent and Rs 50 crore of liquid investments excluding government securities). Additionally, it was holding undrawn sanctions of around Rs 571 crore from multiple lenders. Against this, SHFL had total debt payments of ~Rs 667 crore over the next three months from October 2024 to December 2024. The asset liability management (ALM) statement as on September 30, 2024, was comfortable with positive cumulative mismatch across all time buckets (the inflows include existing committed bank lines).

Rating Sensitivity Factors

Upward factors

• Upward revision in the CRISIL Ratings view on SFL’s[1] credit risk profile

 

Downward factors

• Downward revision in the rating of the parent, SFL1, by one or more notches
• Any change in the support philosophy or stance by SFL1 or change in majority shareholding
• Sharp deterioration in the asset quality of SHFL, impacting profitability

 

The rating would be sensitive to change in shareholding upon completion of the Warburg Pincus transaction.

 

¹Till SFL remains the majority shareholder

About the Company

Incorporated in 2010 under the Companies Act 1956, SHFL started its operations in 2011 after obtaining Certificate of Registration from NHB. The company is a majority owned subsidiary of SFL that owns 83.76% of equity shares. Valiant Mauritius Partners FDI Ltd holds 14.76% of the shareholding and the balance 1.48% is held by individuals, as on September 30, 2024.

 

SHFL was incorporated to provide longer tenure home products to Shriram group of customers and use this entity as a means of cross-selling other products within the Shriram group. Currently, the company provides loans for construction or purchase of residential property and loans against property.The company predominantly caters to self-employed borrowers and informed salaried customers in tier II and tier III cities and the focus has been on the lower income segment with a ticket size of under Rs 20 lakh. It currently has 155 branches across 16 states in India.

Key Financial Indicators

As on / For the period ending	Unit	September 30, 2024	March 31, 2024	March 31, 2023	March 31, 2022
Assets under management	Rs crore	15,236	13,762	8,047	5,355
Total income (net of interest expenses)	Rs crore	420	699	401	269
Profit after tax	Rs crore	114	217	138	80
RoMA*	%	1.5**	1.8	1.8	1.6
Gross NPA (included impact of RBI Nov’21 circular)	%	1.2	1.0	0.9	1.7
Adjusted gearing#	Times	6.6	6.2	5.9	4.0

*calculated over average total assets, inclusive of off-book DA and co-lending portfolio;

**annualised

#post adjusting reported borrowings for DA portfolio; reported gearing of 5.3 times as on Sep-24 (5 times as on Mar-24)

Any other information: Not Applicable