CREDIT RATING REPORT. Gruh Finance Limited

Transcription

1 CREDIT RATING REPORT Gruh Finance Limited September 016 1

2 Instruments & ratings Non-Convertible Debenture aggregating Rs.13.5 Billion Rs.1.5 Billion Subordinated Debt Issue Fixed Deposit Programme Rs.44.5 Billion Short-Term Debt Programme CRISIL AAA/Stable (Upgraded from 'CRISIL AA+/Positive') CRISIL AAA/Stable (Upgraded from 'CRISIL AA+/Positive') FAAA/Stable (Reaffirmed) CRISIL A1+ (Reaffirmed) Analytical contacts Krishnan Sitaraman Senior Director - CRISIL Ratings Phone: krishnan.sitaraman@crisil.com Suresh Krishnamurthy Director - CRISIL Ratings Phone: suresh.krishnamurthy@crisil.com Customer service helpdesk Timings: 10:00 am to 7:00 pm Toll-free number: To receive a copy of rationale and/or rating report, write to crisilratingdesk@crisil.com For analytical queries, write to ratingsinvestordesk@crisil.com CRISIL Complexity Levels are assigned to various types of financial instruments. The CRISIL Complexity Levels are available on Investors are advised to refer to the CRISIL Complexity Levels for instruments that they propose to invest in. Investors can also call the Customer Service Helpdesk with queries on specific instrument

3 Rating History Date Long-term Fixed deposit Short-term Rating watch/ Outlook September 08, 016 CRISIL AAA FAAA CRISIL A1+ Stable May 03, 016 CRISIL AA+ FAAA CRISIL A1+ Positive November 18, 013 CRISIL AA+ FAAA CRISIL A1+ Stable Analytical approach and adjustments Portfolio performance/networth/ gearing/parent or group support Return on assets (RoA) Analytical treatment CRISIL has used RoA to measure profitability in the absence of a securitised portfolio. Adjusted networth Networth is adjusted for intangible assets and deferred tax assets Weak Assets CRISIL calculates weak assets for housing finance companies (HFCs) by taking the current year s gross non-performing assets (NPAs) as a percentage of gross advances two years ago Support from parent Gruh Finance s strategic importance to, and significant support expected from, the parent Housing Development Finance Corporation Ltd (HDFC; rated CRISIL AAA/FAAA/Stable/CRISIL A1+ ) is factored into the ratings.

4 Rating drivers CRISIL has revised its ratings on the long-term debt instruments of Gruh Finance Ltd (Gruh) to CRISIL AAA/Stable, from 'CRISIL AA+/Positive'. The rating on the company's fixed deposit programme and short-term debt programme have been reaffirmed at 'FAAA/Stable/CRISIL A1+'. The rating upgrade is driven by the demonstrated ability of Gruh to maintain healthy asset quality through economic cycles along with maintaining steady growth in its loan book and strong profitability. This is despite the inherent challenges in lending to relatively riskier low-income group customer segments. Gruh has been able to develop strong risk management systems and processes given the business understanding emanating from a three decade long presence in this segment. The ratings continue to reflect the expectation of continued strong support from its majority owner, HDFC. Gruh is also expected to benefit arising from strong growth potential in the affordable housing segment as the Government of India is offering incentives to promote faster development of the affordable housing segment. Gruh is expected to maintain comfortable profitability over the medium term driven by relatively high net interest margins and continued low credit costs. These rating strengths are partially offset by the company s modest asset liability management (ALM) profile given its high dependence on short-term funds, and geographical concentration. Supporting: Expectation of continued strong support from the company s majority owner, HDFC Healthy asset quality Comfortable earning profile Constraining: Modest asset-liability management (ALM) profile given its high dependence on short-term funds Geographical concentration in operations Outlook: Stable CRISIL believes HDFC will retain its majority shareholding in Gruh, and continue to extend strategic, management, and financial support to the company, over the medium term. Moreover, the company will maintain healthy asset quality and a comfortable earnings profile over this period. Downside Scenario: The outlook may be revised to negative if there is Diminution in support from HDFC, or weakening, in CRISIL's view, of HDFC's credit risk profile. Significant and sustained weakening in Gruh's asset quality or earnings profile 4

5 Classification: EXTERNAL Recent developments and performance update As on June 30, 016, loan book increased to Rs billion (Rs billion as on March 31, 016 and Rs 93.3 billion as on June 30, 015), representing a year-on-year growth of 4%, driven by high growth in the self-employed individuals segment. Gross NPA and Net NPA remained below industry average at 0.56% and 0.7% as on June 30, 016 (0.3% and 0.09% as on March 31, 016). Weak assets (two-year lagged gross NPAs), was at 0.87% as on June 30, 016 (0.5% as on March 31, 016). Resource profile is diversified with National Housing Board (NHB) financing and bank loans forming 39% and 38%, respectively of the borrowings as on March 31, 016. Fixed deposits and non-convertible debentures (NCDs) form remaining 14% and 9%, respectively. Average cost of borrowing declined to 8.75% for FY16 from 9.4% in FY15. Tier-I and overall capital adequacy ratios were 16.1% and 17.8%, respectively, as on March 31, 016 (13.9% and 15.4%, respectively, as on March 31, 015). Networth was Rs 8.35 billion as on March 31, 016 (Rs 7.1 billion as on March 31, 015). However, gearing, at 1.3 times as on March 31, 016 (11.5 times as on March 31, 015), remained higher than the industry average. Further, as on June 30, 016, the gearing remained high at 1.1 times. Profitability levels are higher than industry average as the RoA was.4% for FY16, which is similar to that of FY15. Profitability is driven by relatively high interest yields (1.4% in FY16) and efficient treasury management resulting in healthy interest spreads vis-à-vis its peers. Return on networth remains healthy at 3.1% in FY16 compared to 31.0% in FY15. For the first quarter ended June 30, 016, the RoA of the company was.1% (annualised) which is at a similar level to that of previous fiscal. About the company Gruh (formerly, Gujarat Rural Housing Corporation Ltd) was set up in 1986 by HDFC and the Aga Khan Fund for Economic Development, with the objective of providing an institutional structure to rural housing finance. Gruh primarily extends housing loans to individuals in rural and semi-urban areas to relatively low-income group market segment for multiple purposes, ranging from house construction to renovation. The company has a distinct target market segment, which complements HDFC s market. Shareholding pattern as on June 30, 016 Shareholder particulars % 1 Promoter and promoter group HDFC Public Mutual Funds 4.6 Foreign Portfolio investors Others 3.6 Total

6 Key credit factors Industry risk profile Housing Financing Companies (HFCs) - Performance to hold steady Growth in the HFC industry with outstanding advances estimated at Rs 6.8 trillion as on March 31, 016 reduced marginally to around 0.3% in fiscal 016, from 1.% the previous fiscal. Growth may slow down even further, to around 19.0% in fiscal 017 (refer to Chart 1). The slowdown is primarily on account of intensified competition in individual home loans, and subdued growth in the developer finance segment. Growth in loans against property may remain healthy, though lower than in the past. Growth in individual home loans will be driven primarily by Tier-II and -III cities, with affordability in the metros continuing to be low. Competition in individual home loans is expected to remain intense. On account of lower demand from the corporate segment, and lower risk weights and strong asset quality in home loans, banks have been increasing focus on the housing finance segment. As a result, for the first time in several years, growth in the banks home loans outpaced those of HFCs in fiscal 016; the trend should continue in fiscal 017 as well (refer to Chart ). Among HFCs, the mid-sized HFCs 1 continue to grow at twice the pace of the large HFCs. Chart 1: Overall advances growth slows down for HFCs Chart : Banks outpace HFCs on growth in home loans Asset quality remains comfortable for HFCs, with gross NPAs estimated at 0.7% as on March 016 and only a marginal increase expected by March 017 (refer to Chart 3). Asset quality in individual home loans should remain steady, as also reflected in the performance of CRISIL-rated mortgage-backed security (MBS) pools. However, with seasoning in the portfolios of rapidly-growing HFCs, many of which are focused on the selfemployed customers, there could be an increase in delinquencies in that segment. Asset quality in the nonindividual segment will also be closely monitored, given the pressure on real estate developers. Though the performance of the large and mid-sized HFCs continues to be similar on gross NPAs, there is still a marked 1 Advances between billion as on March 31, 016 Advances above 400 billion as on March 31, 016 6

7 Classification: EXTERNAL difference in the two-year lagged GNPAs. This is primarily because the mid-sized HFCs have grown considerably in recent years, and a large proportion of their loan book remains unseasoned. Chart 3: Asset quality to remain comfortable for HFCs Profitability may remain adequate over the medium term, with the HFCs return on assets (RoA) expected at.0-.1% (refer to Chart 4). Despite improvement in the interest rate scenario, RoA may continue to be rangebound on account of the competitive dynamics in the home loan market. Spreads in the individual loan segment may witness some pressure, but this should be partially offset by other segments. Until recently, the mid-sized HFCs did maintain profitability at levels comparable with those of the large HFCs, with higher net interest margins (NIMs) offsetting higher operating expenditure and credit costs. However, with competitive pressures intensifying, and yield differential between large and mid-sized HFCs reducing, the profitability of the mid-sized players has begun to feel the impact and is now around 30 basis points lower than that of the large HFCs. 7

8 Chart 4: Profitability to remain adequate One of the areas than has seen significant action, both in terms of new entrants as well as policy push, is affordable housing. A major chunk of the demand for housing over the next few years may be in this segment, where the financing potential is sizeable. With the Government of India offering incentives such as creditlinked subsidy to customers, and schemes for builders under Affordable Housing in Partnership, under the Pradhan Mantri Awas Yojana, several HFCs, whether part of a larger financial services group or funded by private equity, have entered the segment in recent years. However, the growth experience has been different and has been dependent to a large extent on the capital available and the gearing philosophy, which varies significantly among these entities. Furthermore, asset quality remains to be tested, given the lack of seasoning in most of these entities. Operating costs and credit costs are also high in this segment; therefore, the key differentiators that can determine long-term sustainability and profitability will be the ability to attract capital and borrow at competitive rates. Parent support Strong support from parent, HDFC HDFC is expected to continue to provide strategic, management, and financial support to GRUH. CRISIL believes that HDFC will likely retain its majority ownership in the company over the medium term. However, the extent of HDFC s ownership in, and support to, the company remains a rating sensitivity factor. HDFC owns 58.6% of GRUH s equity shares as on June 30, 016. GRUH derives strong management support from HDFC in formulation of guidelines and policies. HDFC s vice-chairman and chief executive officer, and managing director are GRUH s chairman and non-executive director, respectively. GRUH s managing director is a former HDFC employee. In the past, HDFC has also invested in GRUH s subordinated debt programme and has bought GRUH s securitised portfolio. GRUH s association with HDFC enables bank funding at competitive rates. Additionally, 8

9 Rs '00 Crores Rs '00 Crores Classification: EXTERNAL HDFC extends support to GRUH, as its operating policy, sanctioning norms, and loan schemes are formulated with inputs from HDFC. GRUH is focused on a niche segment primarily the low-income groups in rural and semi-urban areas as distinct from HDFC s target segment; GRUH and HDFC are, therefore, not direct competitors, despite operating in the same industry. GRUH also cross-sells HDFC products, such as insurance; the company is a referral agent for HDFC Standard Life Insurance Company Ltd. However, the quantum of agency business remains small. The extent of HDFC s ownership in, and support to, Gruh will be a rating sensitivity factor. Business risk profile Higher-than-industry average loan growth, to capitalize on strong growth place in affordable housing Chart 5: Trend in Disbursements Chart 6: Trend in portfolio outstanding Salaried Construction finance Business- formal income Assessed income Professionals Salaried Construction finance Business- formal income Assessed income Professionals Gruh has maintained a higher-than-industry-average loan growth over the past several years. Its loan book increased to Rs billion as on March 31, 016, registering a compound annual growth rate (CAGR) of 8% against industry average of around 0% between and Loan disbursement also grew at a strong CAGR of 7% over the same period. Gruh has more than three decades of experience in the affordable housing segment and is therefore expected to benefit from strong growth potential in the affordable housing segment. A major chunk of the demand for housing over the next few years may be in this segment, where the financing potential is sizeable. Government of India is also offering incentives such as credit-linked subsidy to customers, and schemes for builders under Affordable Housing in Partnership, under the Pradhan Mantri Awas Yojana. Further, state Governments such as Maharashtra, Gujarat, Madhya Pradesh and Rajasthan are more active than other states in promoting the affordable housing segment. Gruh has created a strong competitive position in affordable housing finance segment. Its assets under management have grown at a compound annual growth rate of around 9% over the past five years. The company has requisite expertise, reach and risk management systems to cater to this 9

10 per cent segment which will translate to a strong growth potential for the company in this segment. CRISIL believes Gruh, being a leading player, will benefit from the expected growth potential in the affordable housing finance segment and maintain healthy growth over the medium term. However, the company continues to be a relatively small player in the housing finance market which is primarily dominated by banks and few large HFCs. Gruh faces stiff competition from these banks and other housing companies. Gruh operates primarily in the rural and semi-urban areas of Gujarat and Maharashtra; these two states accounted for 70% of outstanding loans as on March 31, 016. Therefore, the company is exposed to risks related to geographical concentration. However, operations have been expanded across other states including Rajasthan, Madhya Pradesh, Tamil Nadu, Karnataka, Chhattisgarh, Uttar Pradesh, Jharkhand and Bihar to support growth and diversification. Hence, risks related to geographic concentration are likely to decline gradually over the medium term. Healthy asset quality supported by its strong risk management systems and processes Chart 7: Trend in NPAs and weak assets Mar-1 Mar-13 Mar-14 Mar-15 Mar-16 Gross NPA year Lagged Gross NPA Net NPA Gruh s has demonstrated its ability to maintain healthy asset quality over the business cycles as the gross nonperforming assets (NPAs) have remained lower than the industry average, over the past few years. Its gross NPAs were 0.3% as on March 31, 016, as against the industry average of 0.7%. Additionally, weak assets (two-year lagged gross NPAs), at 0.51% as on March 31, 016, remains significantly lower than the industry average of around 1.0%. Asset quality has remained healthy, despite above-industry average growth in the loan portfolio over the past five years. Further, the company has high exposure to relatively riskier self-employed segment (comprising 10

11 Classification: EXTERNAL professionals, and customers with formal business income, and assessed income); at around 41% of the advances as on March 31, 016. Asset quality is supported by stringent credit appraisal, monitoring systems, and processes, which helps the company to mitigate inherent challenges arising from lending to riskier lowincome customer segments. Furthermore, conservative lending policies have also helped Gruh minimise risks in the builder loan segment; as there has been no delinquency in its portfolio for the past five years, though the segment has always been a small proportion of its portfolio (3.9% of the portfolio as on March 31, 016). Gruh has benefitted from its linkages with the parent, and has put in place strong risk management systems as reflected in the rigorous strong credit underwriting standards and efficient credit monitoring, and recovery mechanisms. It has conservative loan eligibility norms. Currently, around 95% of the outstanding loan portfolio has been sanctioned to individuals, which, therefore, reduces risks related to customer concentration (due to low average ticket-size loans). Large exposures (above Rs 50 million) are primarily sanctioned to builders with an established track record of more than five years. CRISIL believes Gruh s strong risk management systems, prudent underwriting norms, and collection mechanism will enable it to maintain healthy asset quality over the medium term. Diversified resource profile and competitive borrowing costs Chart 8: Borrowing mix and cost of borrowing 100% 80% 60% 40% 0% 0% 9.9% 1.0% 9.3% 9.6% 9.% 8.8% % % % Bonds and Debentures Banks Fixed deposits CPs NHB Cost of borrowing (yearly average- RHS) Resource base is stable and adequately diversified. The company has established relations with over 5 banks, and access to short-term funding from mutual funds and insurance companies. NHB financing, bank loans and NCDs form 39% 38%, and 9%, of the borrowings as on March 31, 016, respectively. Gruh also focuses on raising retail deposits (around 14% as on March 31, 016), which provides stability to its resource profile. It raises fixed deposits with renewal rate of more than 50%. Further, Gruh regularly accesses the short-term debt market, to take opportunistic advantage between short-term and long-term interest rates. In addition, the 11

12 Rs. Billion company also has an option of securitisation with HDFC, which further supports its resource profile. Average cost of borrowing declined to 8.8% for FY16 from 9.% in FY15 and remains lower than industry average. Financial Risk Profile: Adequate capitalisation Chart 9: Trend in Net Worth and Capital Adequacy % 16.4% 15.4% 14.6% 14.0% As on March 31, 18% 17% 16% 15% 14% 13% 1% Networth (LHS) CAR (RHS) Capitalisation is adequate in relation to current business and growth plans, underpinned by healthy accrual to net worth and flexibility to raise additional capital, if required. The company had an adequate tangible net worth of Rs 8.35 billion as on March 31, 016 (Rs.7.1 billion as on March 31, 015). Tier I and overall capital adequacy ratios increased to 16.1% and 17.8%, respectively, as on March 31, 016 (13.9% and 15.4%, respectively, as on March 31, 015) on account of reduction in risk weights for the housing loan.. Capitalisation is supported by healthy accretion to networth (return on equity exceeding 30% over the past three years), flexibility to raise additional capital if required, and robust asset quality. A significantly high provision cover for NPAs provides strong cushion against asset-side risks. However, Gruh has a higher-than-industry average gearing of 1.3 times as on March 31, 016 (11.5 times as on March 31, 015) and remains a key monitorable. CRISIL believes that Gruh will maintain adequate capitalisation, supported by healthy accruals to net worth, flexibility to raise capital and strong net worth coverage for asset-side risks. 1

13 Rs. Billion Classification: EXTERNAL Comfortable earning profile, due to high spreads and low credit costs Chart 10: Trend in PAT and ROA 3.0%.8%.7%.4%.4% As on March 31, PAT (LHS) ROA (RHS) 3.5% 3.0%.5%.0% 1.5% 1.0% 0.5% 0.0% Earnings profile remains comfortable, marked by higher-than-industry average return on assets (RoA). This is primarily driven by higher interest yields and lower than industry average borrowing costs, supported by efficient treasury management practices. Gruh s RoA has remained above or close to % on a consistent basis, which is higher than that of some large housing finance companies. RoA at.4% in remained higher than that of peers (industry average RoA of.1% in ). The company s RoA, however, has declined from high levels three years back due to pressure on interest yields. Increased competition, primarily from banks, is lowering interest yields in the industry. GRUH s net profitability margin (NPM) in fiscal 016 remains higher than industry average at.86%, despite declining from 3.0% in fiscal 015. Decline in yields has been partially compensated by lower interest costs in fiscal 016, resulting in marginal decline in spreads. Table 1: Trend in Net Profitability Margin (In per cent) For the year ended Yield on Average Funds Deployed Borrowing Cost Spread Operating Expenses/Average Funds Deployed Core fee income/average Funds Deployed Net Profitability Margin Strong focus on the affordable housing segment helps generate above-average yields. Furthermore, Gruh raises significant short-term debt through commercial paper that carries relatively low interest rates and help reduce overall interest cost compared to the industry average. 13

14 Gruh also has robust asset quality, thus supporting its profitability. Its credit costs are expected to remain low (0.% of average assets in FY16) over the medium term. Gruh s policy of maintaining significantly high provision to cover NPAs also reduces the impact of adverse asset quality movements on its future earnings. Gruh s operating expenses also remain low and have declined from earlier high levels. Its operating expenses at 0.87% of the average assets in FY16, declined from the level of 1.09% in FY11. CRISIL believes that while the company s profitability may moderate driven by intense competition from banks and other HFCs, profitability is expected to remain better than that of its peers over the medium term supported by healthy interest spreads and low credit costs. Modest ALM profile Gruh resorts to short-term debt to benefit from relatively lower interest rates for short-term loans as compared to rates for long-term loans. As a result, the company runs negative cumulative mismatches in short-term buckets of up to one year. While the company has positive cumulative mismatches in the upto one year maturity bucket as on March 31, 016, this may not sustain at all points in time. However, Gruh s liquidity through unutilised National Housing Board (NHB) limits and bank lines, and fixed deposits with banks of Rs 1. billion as on March 31, 016, adequately covered the negative cumulative mismatches in the maturity bucket of up to one year. Further, the company has efficiently managed ALM mismatches thus far, across interest rate cycles, and during stretched liquidity situations in the market, reflecting its good treasury management practices and good relationships with its bankers. Ability to manage asset-liability mismatches and liquidity in tight liquidity conditions remains a key monitorable. Base case assumptions for AUM growth 3%-5% Gearing 1 to 13 times RoA.3%-.5% 14

15 Classification: EXTERNAL Management Assessment: Organisation structure Name Mr. Sudhin Choksey Mr. Kamlesh Shah Mr. Hitesh Agarwal Mr. Amit Chokshi Mr. Suresh Iyer Mr. Marcus Lobo Mr. Jayesh Gangwani Mr. Venu G Menon Designation Managing Director Executive Director Chief Financial Officer General Manager -Project Finance & Legal General Manager -Operations Company Secretary Chief Manager Head Resources Experienced management with strong risk management practices Gruh has a professional and experienced senior management team having more than two decades of experience in the housing finance industry. Despite the company s higher-than-industry average growth rate, the management has put in place strong risk management practices. Further, the management has a strong focus on maintaining healthy profitability level. This is also reflected in the company s lower-than-industry average gross NPA levels and higher the industry average RoA levels. 15

16 Financial Summary As on / for the period ended March Equity Capital Rs Billion Net Worth (Reported) Rs Billion Borrowings Rs Billion Disbursement Rs Billion Housing Loans Outstanding Rs Billion Total Assets Rs Billion Interest Income Rs Billion Interest Expense Rs Billion Total Income (Net of Interest Expenses) Rs Billion Operating Expense Rs Billion Reported PAT Rs Billion Ratio PAT/Average Total Assets % PAT/Average Reported Net Worth % Tier-I Capital Adequacy Ratio % Overall Capital Adequacy Ratio % Total Debt/Reported Net Worth Times Gross NPA % Brief Financials for the Quarter ended June 30, Particulars Loan Outstanding Rs Billion Disbursements Rs Billion Interest Income Rs Billion Interest expense Rs Billion. 1.9 Total Income (Net of Interest) Rs Billion Operating Expense (Including Depreciation) Rs Billion Provision for Contingencies and Write-offs Rs Billion Reported PAT Rs Billion Ratios PAT/Average Total Assets %.1.1 Gross NPA % Total Debt/Net worth Times Overall CAR %

17 Classification: EXTERNAL Criteria Details Links to related criteria Rating Criteria for Finance Companies Criteria for Notching up Stand Alone Ratings of Companies based on Parent Support Criteria for rating Short-Term Debt (including Commercial Paper) 17

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