| Shriram City Union Finance Limited | ||||||||
| 'CRISIL AA/Stable' assigned to NCD | ||||||||
| Rating Action | ||||||||
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| 1 crore = 10 million | ||||||||
| Refer to annexure for Details of Instruments & Bank Facilities |
| Detailed Rationale |
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CRISIL has assigned its 'CRISIL AA/Stable' rating to the Rs.600 crore non-convertible debenture of Shriram City Union Finance Limited (SCUF) and has reaffirmed its ratings on the other debt instruments at 'CRISIL AA/Stable/CRISIL A1+'. |
| Analytical Approach |
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For arriving at its ratings on SCUF, CRISIL has combined the business and financial risk profiles of SCUF and its subsidiary, Shriram Housing Finance Ltd (Shriram Housing). This is because of common management and the financial support that the latter receives from Shriram City and the overall Shriram group. The two companies are herein together referred to as Shriram City. |
| Key Rating Drivers & Detailed Description |
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Strengths: * Established Competitive position in SME and two-wheeler segments SCUF has 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 or documentary income proof and the ticket size is small at average of Rs 10 lakh-Rs 15 lakhs. SCUF has also been expanding in SME space beyond its chit fund ecosystem, thus leading to faster growth rate in the segment. This SME portfolio, at Rs 16,841 crore as on December 31, 2019 (Rs 17,749 crore as on March 31, 2019), was one of the highest among retail NBFCs. In the two-wheeler financing segment, the company is among leading players in the sector with a portfolio of Rs 6205 crore as on December 31, 2019 (Rs 5,325 crore as on March 31, 2019). It finances about 90,000 vehicles per month and competes with large players including private sector banks. These two segments account for over 70% of the consolidated loan portfolio. * Healthy capitalisation Shriram City has healthy capitalisation underpinned by sizable absolute net worth (standalone) of around Rs 7,060 crores and a tier 1 and an overall capital adequacy ratio of 25.3% respectively as on December 31, 2019. In addition, Shriram City's gearing (standalone) remains comfortable at 3.1 times as on December 31, 2019 as against 3.5 times as on March 31, 2019 and is expected to remain below 5 times over the next few years on account of expectations of strong accruals to net worth. Further, the net worth to net NPA (calculated per Indian Accounting Standard or Ind-AS) remains adequate at around 4.9 times as on December 31, 2019 thereby providing adequate cushion against inherent asset quality challenges arising from borrower and product profiles. CRISIL's expectation of continued healthy capitalisation of Shriram City factors in the likely support from the Shriram group if required. Shriram City's subsidiary Shriram Housing's capitalisation is also comfortable with a networth (per IndAS) of Rs 480 crores and gearing of 3.5 times as of September 30, 2019 (Rs 466 crores and 3.6 times as on March 31, 2019). Shriram Housing's total capital adequacy ratio (CAR) stood at 32.6% as on September 30, 2019 (29.9% as on March 31, 2019). Overall, the healthy capitalisation is expected to be maintained over the medium term, driven by substantial accruals and expected support from Shriram group, if required. * Healthy earnings profile The company's healthy earnings profile is driven by focus on high yielding product and customer segments. Consequently, profitability has remained above the industry average over the past few years. Shriram City's return on managed assets stood at 3.7% for the nine months ended December 31, 2019 (on standalone basis). Although the cost of borrowing has been increasing over the past couple of quarters which remained broadly stable in the third quarter ended December 31, 2019, earnings have been historically supported by high yield portfolio varying between 14-28% for various portfolios. * Benefits derived from linkages with Shriram group The company benefits from access to the Shriram group's established branch infrastructure, clientele, management, systems and processes, and investor base. The group has been in the financing business for over three decades, with a strong market position in commercial vehicle finance (through Shriram Transport Finance Company Ltd rated 'CRISIL AA+/CRISIL PP-MLD AA+r/FAAA/Stable/CRISIL A1+'), retail finance, and chit fund businesses. Shriram City has expanded its target customer segment beyond its traditional chit ecosystem. Nevertheless, a large portion of its clientele in the small enterprise loan segment comprises the group's existing customers or referrals by its existing customers. This facilitates acquisition of customers with established track records while reducing the cost of origination. Shriram City's management is largely drawn from the Shriram group's other businesses and is experienced in the small-ticket retail-finance segment in the semi-urban and rural areas. The group's brand image with retail investors enables Shriram City to source adequate retail funds to meet its growth requirements. CRISIL believes Shriram City is strategically important to the Shriram group and will continue to benefit from its linkages with the group, given its focus on providing financial services to under-banked segments. Weaknesses: * Exposure to inherent asset quality-related challenges arising from lending to borrowers with modest credit profile The company's retail financing business remains susceptible to inherent challenges related to asset quality arising from lending to borrowers with modest credit profile and relatively under-banked customers, despite having in place good credit appraisal and monitoring practices. Primarily the focus is on offering small enterprise financing to self-employed customers in semi-urban and rural areas. The non-regular income pattern and lack of financial flexibility of these borrowers cause higher delinquencies. However, owing to good origination, underwriting and monitoring practices coupled with strong understanding of the SME borrowers, the 90+ days past due (dpd) gross non-performing loans (GNPA) remained ranged bound over last few years. The GNPA, as per ECL stage-3 recognition, stood at 8.51% as on December 31, 2019, marginal improvement over 8.91% as on March 31, 2019. Nevertheless, despite this, the credit costs of the company have remained below 4% historically, which stood at 2.5% (annualised) during nine months ended December 31, 2019, reflecting upon the ability of the company to recover post the 90+ slippage of a customer. * High geographical concentration in lending portfolio The company is focusing on offering small enterprise financing to customers beyond the chit fund clientele and is expanding in hitherto untapped geographies; Although the segment of borrowers has some credit history, this is an untested market for Shriram City. In view of this, CRISIL believes that asset quality performance, mainly in the small enterprise financing segment, remains susceptible and will remain a key monitorable over the medium term. While the company remains concentrated in the three states of South India namely Andhra Pradesh, Telangana and Tamil Nadu, it is working on expanding into newer geographies with the share of Northern and Western parts of the country together constituting 44% of standalone AUM as on December 31, 2019. |
| Liquidity Strong |
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CRISIL's analysis of Shriram City's asset liability maturity profile as of December 31, 2019 shows cumulative positive mismatches uptill the one year bucket. The company continues to receive funding from banks through term loans and securitization/direct assignment. The aggregate of such sanctions in the third quarter of fiscal 2020 was Rs 3,009 crore & funds raised by way of Retail Fixed Deposits was Rs 535 crore. |
| Outlook: Stable |
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CRISIL believes that Shriram City will continue to maintain its competitive position in the key business segments of SME and two-wheeler financing, with sustained growth and deeper penetration of existing customer base, geography, and product offering, while expanding the newer customer base and geography cautiously. CRISIL also believes healthy capitalisation and strong earnings profile will be maintained, which will help mitigate inherent asset quality-related challenges. The outlook may be revised to 'Positive' if there is a sustained improvement in asset quality metrics along with increase in market position. Conversely, the outlook may be revised to 'Negative' in case of significant deterioration in asset quality and consequent decline in earnings profile. |
| Rating Sensitivity factors |
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Upward factors * Reduction and sustainability in standalone gross NPA below 5% * Increase in scale of operations while maintaining profitability (ROMA) at the current or higher levels Downward factors: * Increase in steady state gearing of above 6 times * Sharp increase in credit costs and NPA metrics in the medium term |
| About the Company |
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Incorporated in 1986, Shriram City is a part of Shriram group of companies. It is registered with RBI as a systemically important, deposit taking, non-banking finance company (NBFC-SI-D). It predominantly operates in the retail financing segment with a focus on small enterprise loans (53% of consolidated AUM as on December 31, 2019), two wheeler financing (20%), gold loans (9%) and others (including housing, auto and personal loans) together forming 18% of AUM. Its assets under management (including housing portfolio) stood at Rs 31,646 crore as of December 31, 2019 of which the standalone AUM stood at Rs 29,546 crore, while the housing portfolio under Shriram Housing stood at Rs 2100 crore. The company has pan India presence with 947 branches as on December 31, 2019, of which 56% are situated in South India. |
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Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
| Annexure - Details of Instrument(s) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| 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. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Links to related criteria |
| Rating Criteria for Finance Companies |
| CRISILs Criteria for Consolidation |
| CRISILs Criteria for rating short term debt |
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