Rating Rationale
July 10, 2020 | Mumbai
Shriram City Union Finance Limited
'CRISIL AA/Negative' assigned to NCD 
 
Rating Action
Rs.250 Crore Non Convertible Debentures CRISIL AA/Negative (Assigned)
Rs.3000 Crore Non Convertible Debentures CRISIL AA/Negative (Reaffirmed)
Rs.600 Crore Non Convertible Debentures CRISIL AA/Negative (Reaffirmed)
Rs.100 Crore Subordinated Debt CRISIL AA/Negative (Reaffirmed)
Rs.3000 Crore Commercial Paper CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has assigned its 'CRISIL AA/Negative' rating to Rs.250 crore non-convertible debentures (NCDs) of Shriram City Union Finance Limited (Shriram City) while reaffirming its ratings on the existing debt instruments at 'CRISIL AA/Negative/CRISIL A1+'.

On April 30, 2020, CRISIL has revised its outlook on the long term debt instruments of Shriram City Union Finance (Shriram City) to 'Negative' from 'Stable'. The outlook revision reflects expected pressure on Shriram City's asset quality due to the nation-wide lockdown and challenging economic environment. The company largely caters to borrowers with modest credit profile and relatively under-banked customers. The non-regular income pattern and lack of financial flexibility of these borrowers may lead to higher delinquencies. CRISIL believes that the company's MSME loan segment (~57% of assets under management) is most vulnerable due to high linkage to economic activity.

The nationwide lockdown (originally till April 14, 2020) declared by the Government of India to contain the spread of the Novel Coronavirus (Covid-19) will have near-term impact on disbursements and collections of Shriram City. The lockdown is now extended till July 2020 in some states and there is high likelihood that eventual lifting of restrictions will be in a phased manner. Any delay in return to normalcy will put further pressure on collections and asset quality metrics.

Historically, the reported GNPA / Gross Stage 3 metrics for Shriram City has remained elevated at 8.5 to 9.4%; as of March 31, 2020, it stood at 7.9%, benefitted by RBI's moratorium policy for Covid-19. However, Shriram City has displayed ability in the past to ultimately recover from these accounts, even post loan maturity date. With the borrower segment for Shriram City comprising primarily of MSMEs, the impact of the lockdown on the core business operations for these borrowers has been high. With a significant impact on the business operations, a large proportion of the customers have opted for moratorium. However, CRISIL understands that the collections of Shriram City have improved on a month-on-month basis till June 2020 as the restrictions are steadily lifted and economic activity has resumed. As and how the lockdown is lifted and the time taken for the borrowers operations to return to normalcy is a key monitorable. Additionally, any change in the fundamental behaviour of the borrower which could result in depletion of the ability of Shriram City to recover is a key monitorable.

The earnings profile is supported by high spreads and pre-provisioning profitability. Despite, the credit costs being high in the past ranging between 2.5%-3.7%, the overall return on managed assets (RoMA) has been comfortable at 2.4%-3.4% in the past five years. However, with the expectation of higher slippages, ability to maintain credit costs inline with historical levels may be a challenge.

Despite expected pressure on earnings profile, CRISIL does not envisage any impact on capitalisation metrics. The company's gearing was comfortable at 3.2 times as on March 31, 2020. CRISIL expects gearing to be maintained as the company will focus more on collections and is not likely to grow the book significantly over the next six months.

On the liability side, the Reserve Bank of India (RBI) announced regulatory measures under 'Covid-19 - Regulatory Package', whereby lenders were permitted to grant moratorium on bank loans. CRISIL understands that as part of the second tranche of moratorium from June to August, Shriram City has not availed any moratorium on repayments.

Herein, CRISIL believes that Shriram City has adequate liquidity, on standalone basis, to manage this period wherein asset-side collections are lower than budgeted and may be uncertain, while liability-side outflows continue as per schedule. As of June 30, 2020, the liquidity cover for Shriram City for payments until August 2020 was adequate. The liquidity profile is expected to be further supported by collections (excluding Gold loan receivables) which have been on an improving trend. In terms of liquidity, Shriram City, as on June 30, 2020, had liquidity of Rs 1646 crore (comprising of cash and equivalents and unutilized CC/WCDL lines). Against the same, they have total debt payments of around Rs 1,200 crore (including CC/WCDL which is typically rolled over) over the next 2 months till August 2020.

Analytical Approach

For arriving at its ratings on Shriram City, CRISIL has combined the business and financial risk profiles of Shriram City 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.

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:
* Established Competitive position in SME and two-wheeler segments
Shriram City 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. Shriram City 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 16,653 crore as on March 31, 2020 (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 6,076 crore as on March 31, 2020 (Rs 5,325 crore as on March 31, 2019). It finances about 90,000 vehicles per month (pre-covid) 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 7,208 crores and a tier 1 and an overall capital adequacy ratio of 27.7% respectively as on March 31, 2020.  In addition, Shriram City's gearing (standalone) remains comfortable at 3.2 times as on March 31, 2020 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 6.2 times as on March 31, 2020 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 513 crores and gearing of 3.8 times as of March 31, 2020 (Rs 466 crores and 3.6 times as on March 31, 2019). Shriram Housing's total capital adequacy ratio (CAR) stood at 27.8% as on March 31, 2020 (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 3.2% for the nine months ended March 31, 2020 (on standalone basis). Although the cost of borrowing has been increasing over the past couple of quarters, 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), 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 7.9% as on March 31, 2020, improvement over 8.91% as on March 31, 2019 primarily because of freeze on recognition of NPA, permitted by RBI as per its Covid policy.
 
Nevertheless, despite this, the credit costs of the company have remained below 4% historically, which stood at 2.8% for fiscal 2020, 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 43% of standalone AUM as on March 31, 2020.
Liquidity Strong

CRISIL's analysis of Shriram City's asset liability maturity profile as of March 31, 2020 shows cumulative positive mismatches in the upto 5 year bucket. The company continues to receive funding from banks through term loans and securitization/direct assignment.  The aggregate of such sanctions in the first quarter of fiscal 2021 was Rs 935 crore & funds raised by way of Retail Fixed Deposits was Rs 383 crore.
 
On the liabilities side, Shriram City had availed moratorium for repayment against a particular loan from a bank, under 'Covid-19 - Regulatory Package' announced by the Reserve Bank of India (RBI), whereby lenders were permitted to grant moratorium on bank loans. However, CRISIL understands that as part of the second tranche of moratorium from June to August, Shriram City had not availed any moratorium on repayments.
 
In terms of liquidity, Shriram City, as on June 30, 2020, had liquidity of Rs 1646 crore (comprising of cash and equivalents and unutilized CC/WCDL lines). Against the same, they have total debt payments of around Rs 1,200 crore (including CC/WCDL which is typically rolled over) over the next 2 months till August 2020. The liquidity profile is expected to be further supported by collections which have been on an improving trend over the last 3 months.

Outlook: Negative

CRISIL believes that Shriram City's asset quality is likely to come under pressure due to the nation-wide lockdown and challenging economic environment. The company largely caters to borrowers with modest credit profile and relatively under-banked customers. The non-regular income pattern and lack of financial flexibility of these borrowers may lead to higher delinquencies. CRISIL believes that the company's MSME loan segment (~57% of assets under management) is most vulnerable due to high linkage to economic activity.

Rating Sensitivity factors
Upward factors
* Reduction and sustainability in standalone GNPA below 5%
* Increase in scale of operations while maintaining profitability (ROMA) at the current or higher levels

Downward factors:
* Deterioration in asset quality metrics with GNPA remaining higher than beyond 10% and collection efficiency not reverting to pre-pandemic levels
* Increase in steady state gearing of above 5 times
About the Company

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 March 31, 2020), two wheeler financing (19%), gold loans (10%) and others (including housing, auto and personal loans) together forming 18% of AUM. Its assets under management (including housing portfolio) stood at Rs 31,389 crore as of March 31, 2020 of which the standalone AUM stood at Rs 29,085 crore, while the housing portfolio under Shriram Housing stood at Rs 2,304 crore. The company has pan India presence with 947 branches as on March 31, 2020, of which 57% are situated in South India.

Key Financial Indicators
As on/for the period ending/year ending Unit March 31, 2020 March 31, 2019
Total AUM Rs.Cr 29,085 29,582
Total income (net of interest expenses) Rs.Cr 3,747 3,801
Profit after tax Rs.Cr 1001 989
Gross NPA (ECL Stage-3) % 7.9 8.9
Gearing Times 3.2 3.5
Return on managed assets % 3.2 3.4
*Per IGAAP

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.
Annexure - Details of Instrument(s)
ISIN Name of the instrument Date of issuance Coupon rate (%) Maturity Date Complexity of instrument Issue Size (Rs. Crore) Rating assigned  
with Outlook
INE722A07968 Debenture 25-Sep-2019  - 25-Sep-21 Simple 29.67 CRISIL AA/Negative
INE722A07976 Debenture 25-Sep-2019 - 25-Sep-21 Simple 5.40 CRISIL AA/Negative
INE722A07984 Debenture 25-Sep-2019 9.70% 25-Sep-22 Simple 15.83 CRISIL AA/Negative
INE722A07992 Debenture 25-Sep-2019 9.30% 25-Sep-22 Simple 13.24 CRISIL AA/Negative
INE722A07AA8 Debenture 25-Sep-2019 - 25-Sep-22 Simple 8.23 CRISIL AA/Negative
INE722A07AB6 Debenture 25-Sep-2019 9.85% 25-Sep-24 Simple 52.27 CRISIL AA/Negative
INE722A07AC4 Debenture 25-Sep-2019 9.45% 25-Sep-24 Simple 11.06 CRISIL AA/Negative
INE722A07AD2 Debenture 25-Sep-2019 - 25-Sep-24 Simple 5.64 CRISIL AA/Negative
INE722A07893 Debenture 30-Apr-2019 - 30-Apr-21 Simple 24.83 CRISIL AA/Negative
INE722A07901 Debenture 30-Apr-2019 6.65 30-Apr-22 Simple 64.9 CRISIL AA/Negative
INE722A07919 Debenture 30-Apr-2019 9.26 30-Apr-22 Simple 40.84 CRISIL AA/Negative
INE722A07927 Debenture 30-Apr-2019 - 30-Apr-22 Simple 24.62 CRISIL AA/Negative
INE722A07935 Debenture 30-Apr-2019 9.75 30-Apr-24 Simple 66.15 CRISIL AA/Negative
INE722A07943 Debenture 30-Apr-2019 9.35 30-Apr-24 Simple 35.06 CRISIL AA/Negative
INE722A07950 Debenture 30-Apr-2019 - 30-Apr-24 Simple 20.94 CRISIL AA/Negative
INE722A07885 Debenture 30-Apr-2019 9.55 09-May-21 Simple 389.59 CRISIL AA/Negative
INE722A07AH3 Debenture 05-Mar-2020 9.70 05-Mar-22 Simple 550 CRISIL AA/Negative
INE722A07AG5 Debenture 05-Mar-2020 9.25 05-Mar-22 Simple 25 CRISIL AA/Negative
NA Debentures* NA NA NA Simple 250 CRISIL AA/Negative
NA Debentures* NA NA NA Simple 25 CRISIL AA/Negative
NA Debentures* NA NA NA Simple 2191.73 CRISIL AA/Negative
NA Subordinated Debt* NA NA NA Complex 100 CRISIL AA/Negative
NA Commercial Paper NA NA 7-365 days Simple 3000 CRISIL A1+
*Yet to be issued
 
Annexure - List of entities consolidated
Entity consolidated Extent of consolidation Rationale for consolidation
Shriram Housing Finance Limited Full Consolidation Subsidiary
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  3000.00  CRISIL A1+  30-04-20  CRISIL A1+  09-09-19  CRISIL A1+    --    --  -- 
        27-02-20  CRISIL A1+               
Fixed Deposits  FD    --    --    --  27-07-18  Withdrawn  02-11-17  FAA/Positive  FAA/Positive 
                    31-10-17  FAA/Positive   
                    11-07-17  FAA/Positive   
Non Convertible Debentures  LT  3850.00
10-07-20 		 CRISIL AA/Negative  30-04-20  CRISIL AA/Negative  09-09-19  CRISIL AA/Stable  04-12-18  CRISIL AA/Stable  02-11-17  CRISIL AA-/Positive  CRISIL AA-/Positive 
        27-02-20  CRISIL AA/Stable      27-07-18  Withdrawn  31-10-17  CRISIL AA-/Positive   
                    11-07-17  CRISIL AA-/Positive   
Short Term Debt  ST    --    --    --  27-07-18  Withdrawn  02-11-17  CRISIL A1+  CRISIL A1+ 
                    31-10-17  CRISIL A1+   
                    11-07-17  CRISIL A1+   
Subordinated Debt  LT  100.00
10-07-20 		 CRISIL AA/Negative  30-04-20  CRISIL AA/Negative  09-09-19  CRISIL AA/Stable  04-12-18  CRISIL AA/Stable  02-11-17  CRISIL AA-/Positive  CRISIL AA-/Positive 
        27-02-20  CRISIL AA/Stable      27-07-18  CRISIL AA/Stable  31-10-17  CRISIL AA-/Positive   
                    11-07-17  CRISIL AA-/Positive   
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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