GRUH FINANCE LIMITED Rating Action Short term rating [ICRA]A1+/Reaffirmed Medium term rating MAAA(stable)/Reaffirmed Long term rating [ICRA]AAA (stable)/reaffirmed Total Facilities Rated Refer to Annexure Sector Non-Banking Finance Rating Methodology Housing Companies Website www.icra.in Finance Company Profile (GRUH) is an established housing finance company with a loan portfolio of Rs.11,543 crore as on June 30, 2016. HDFC Limited (HDFC) is the largest shareholder in GRUH with a stake of 58.59% as on June 30, 2016. While GRUH operates as an independent entity, HDFC s shareholding and presence on its Board of Directors, translates into strong management and strategic support for the company. The company s corporate office is located in Ahmedabad, Gujarat and it had a distribution network of 179 retail offices across ten states as on June 30, 2016. GRUH reported a net profit of Rs. 243.6 crore on an asset base of Rs. 11,443 crore in FY2016 against a net profit of Rs. 203.8 crore on an asset base of Rs. 9,181 crore in FY2015. The company reported a net profit of Rs. 60.2 crore in Q1FY2017 as compared to a net profit of Rs. 50.3 crore in Q1FY2016. GRUH reported gross NPAs of 0.56%, net NPAs of 0.27% and a regulatory capital adequacy of 16.73% as on June 30, 2016. Key Financial Indicators FY2014 FY2015 FY2016 Equity Capital 36 73 73 Net Worth 607 711 835 Total Portfolio 7,009 8,915 11,115 Total Assets 7,243 9,182 11,443 Total Income 846 1,060 1,275 Net Interest Income 269 343 420 Profit Before Tax (PBT) 244 301 362 Profit After Tax (PAT) 177 204 244 Yield on Average Earning Assets 12.75% 12.49% 11.94% Cost of avg. interest bearing funds 9.48% 9.19% 8.69% Net Interest Margins / ATA 4.16% 4.15% 4.04% Operating Expenses / ATA 0.82% 0.76% 0.78% Provisions & Write offs / ATA 0.03% 0.19% 0.21% PAT / ATA 2.76% 2.48% 2.36% PAT / Average Net worth 32.23% 30.91% 31.49% Total Debt / Net Worth 10.70 11.61 12.36 Capital / Risk weighted Assets 16.37% 15.36% 17.82% Gross NPAs % 0.27% 0.28% 0.32% Amounts in Rs. crore ICRA Credit Perspective September 2016
Key Rating Considerations Credit Strengths Demonstrated track record of healthy growth, profitability, and good asset quality notwithstanding the risky borrower profile Strong parentage, imparting overall strategic supervision and support in terms of funding and capital Good growth opportunities in the affordable housing segment with the Government of India s focus on Housing for All by 2022 Sound franchise and brand image in rural parts of western India (Gujarat and Maharashtra), which helps in expanding the home loan portfolio and mobilising deposits Flexibility to raise funds at competitive rates compared to other NBFCs operating in the segment Credit Challenges Moderate economic capitalisation indicators, given that the pace of growth is higher than internal capitalisation; however ability to recapitalize remains high in light of the strong parentage and good market standing Relatively high ALM gaps; however, adequate un-availed bank lines and cash balances result in a comfortable liquidity profile Ability to maintain asset quality in light of the relatively high share of lending to self-employed borrowers with volatile income streams Being an HFC, lacks diversity in portfolio and earnings, in order to comply with regulatory requirements Key rating sensitivities HDFC s majority shareholding in GRUH supports the rating substantially. Any change or dilution in the shareholding pattern could impact the rating Ability to maintain asset quality in the self-employed borrower segment which is more vulnerable to economic cycles than the salaried class of borrowers. Rating Rationale The reaffirmation of ratings factors in the company s strong franchise and brand image in the western part of India, especially in Gujarat and Maharashtra; its steady growth in business volumes (27% CAGR in disbursements over the last four years), healthy profitability (average ROE of 32% over the last four years) and good asset quality through business cycles (gross NPAs of 0.56% as on June 30, 2016) despite lending to the lower income segment. The ratings also factor in GRUH s strong parentage, with HDFC Limited (rated [ICRA]AAA (stable), MAAA (stable), and [ICRA]A1+) holding a 58% stake in the company, its good financial flexibility and strong ability to raise capital. GRUH has recorded a steady growth of 27% CAGR in disbursements during FY2012-FY2016, and had a portfolio outstanding of Rs. 11,543 crore as on June 30, 2016. The company s portfolio comprises primarily of housing loans (92.3% as on June 30, 2016) with a small proportion of non-housing loans (3.6%) and builder loans (4.1%). GRUH focuses largely on the small ticket affordable housing segment, with average ticket size of around Rs. 9 lakh. Its borrower segment is largely constituted by the economically weaker sections and lower middle income categories. A majority of the company s portfolio (around 65% as on June 30, 2016) is towards salaried borrowers and business professionals with tax returns. Although its borrower segment is vulnerable to economic shocks, the company has a long track record and in-depth understanding of this segment, as reflected in its comfortable asset quality (gross NPA% of 0.56% as on June 30, 2016). A large proportion of GRUH s target segment would be eligible for subsidies under the Pradhan Mantri Awas Yojana, and therefore the growth opportunities for the company in this segment remain good. The company s operations are largely concentrated in Gujarat and Maharashtra, which together accounted for around 71% of its portfolio as on March 31, 2016. At the same time, in order to improve the diversity, the company has forayed into other states, and expects to reduce the geographic concentration going forward. Going forward, ICRA expects the company to continue to expand its portfolio while maintaining good asset quality, profitability and prudent capitalization levels. ICRA Rating Services Page 2
GRUH enjoys adequate financial flexibility with access to diverse funding sources and adequate un-availed bank lines and cash balances to manage asset liability mismatches. However, GRUH s reliance on short-term funds while resulting in lower cost of funds results in relatively higher ALM gaps. ICRA takes comfort from the management s stated policy of maintaining adequate un-availed bank lines and cash balances to manage mismatches. GRUH also carries an interest rate risk in a declining interest rate scenario, with 68% of its borrowings as on June 30, 2016 being at fixed rates vis-à-vis only 8.5% of its assets. However, the risk is mitigated to an extent by the reset clauses in its fixed rate liabilities, the relatively short tenure of such liabilities as compared to the assets and their relatively competitive rates of interest. The company s regulatory capital adequacy (16.73% as on June 30, 2016) is supported by the relatively lower risk weights prescribed by the National Housing Bank for smaller ticket loans, which constitute a large proportion of GRUH s portfolio. However, the company s gearing at 12.4 times as on March 31, 2016 is relatively high, notwithstanding its ability to raise equity and the high level of support from the parent. ICRA Rating Services Page 3
Update on Business and Financial Profile Stable shareholding pattern with strong parental support from HDFC GRUH is a subsidiary of HDFC, which held an equity stake of 58.59% in it as of June 30, 2016. While GRUH continues to operate as an independent entity, the high parental shareholding translates into strong management and strategic inputs from HDFC. Moreover, HDFC s top management has a significant presence on GRUH s Board of Directors. The CEO and Vice Chairman of HDFC continue to be the Non-Executive Chairman of GRUH. The ratings draw significant support from HDFC s ownership of GRUH. HDFC is the largest housing finance company (HFC) in India with highest-credit-quality ratings outstanding of [ICRA]AAA, MAAA, and [ICRA]A1+ from ICRA. Steady growth in business volumes in existing geographies while new branches take time to scale up; salaried lending constitutes majority of the borrowers GRUH reported a 25% increase in its portfolio from Rs. 8,915 as on March 31, 2015 to Rs. 11,115 crore as on March 31, 2016. Further as on June 30, 2016 the portfolio grew to Rs. 11,543 crore as compared to Rs. 9,329 crore as on June 30, 2015 (growth of ~24%). The company s portfolio growth in FY2016 was higher than the HFC industry growth of about 19%; however, it was considerably lower than the 36% growth achieved by smaller HFCs. The growth was muted in Q1FY2017 but is expected to see some pick up in H2FY2017 during the festive season with an overall portfolio growth of 20-25% expected in FY2017. The overall portfolio mix remained stable in FY2016 with housing loans forming 92% of the loan book as on March 31, 2016. Within the self employed segment, the company has been lending based on assessed income; this segment accounted for 32% of the portfolio as on March 31, 2016 (35% as on March 31, 2015). Going forward, the company s key focus areas would be economically weaker section (EWS) and low middle income (LMI) segments. The proportion of assessed income loans is likely to remain at similar level but would be redistributed in favour of states where the new projects are coming up. The company restricted its exposure in the builder loan book owing to the stress in the sector and consequently the builder book has remained largely stable at 4% of the total portfolio as on March 31, 2016. The company takes builder exposures selectively and restricts the ticket sizes to 10% of its loan assets. The company is likely to benefit from the Pradhan Mantri Awas Yojana for affordable home segment and the plans of various state governments to increase supply in the LMI and Middle Income Group (MIG) segments. Although the risks inherent to the self ICRA Rating Services Page 4
employed and low income segments are high, the company s past track record and strong internal processes of the company impart comfort. GRUH operated across 10 states with a network of 179 branches as on March 31, 2016. The company opened 25 branches in FY2016. Gujarat (36% of portfolio as on March 31, 2016) and Maharashtra (35% of portfolio as on March 31, 2016) together constituted a majority of the company s loan book. GRUH has a good brand image in these two states and is able to expand faster; however, going forward the company expects to increase its disbursements in Jharkhand, Uttar Pradesh, Chhattisgarh, Rajasthan, Madhya Pradesh, Karnataka and Tamil Nadu. Table 1: Key Portfolio Characteristics Mar-14 Mar-15 Mar-16 Average Ticket Size (in Rs. lakh) 9.28 9.77 8.86 Average Original Tenure (in years) 14.7 15.2 15.5 Average Loan Coverage Ratio (LCR) 69% 69% 70% Average Fixed Obligation to Income Ratio 34% 34% 34% % of floating rate loans 99% 97% 92% % of portfolio at more than 80% LCR 6% 5% 6% % of portfolio at greater than 20 years residual maturity 28% 18% 13% GRUH sources retail business through GRUH referral associates (GRA). GRAs are responsible for sourcing business and collecting preliminary documents, while GRUH retains control over the credit, legal and technical appraisals. GRUH has a largely semi-urban branch network and hence its lending rates are higher than those of leading HFCs in metropolitan cities. With its increased focus on the affordable housing segment, the average ticket size has declined to ~Rs. 8.86 lakh. Operating environment likely to remain favourable The affordable housing segment for HFCs has grown at a fast pace. As per ICRA s estimates, the total loan book of the all players in the segment stood at Rs. 95,700 crore as on March 31, 2016 indicating a growth of 28% during FY2016. In ICRA s opinion, opportunities for growth are high for the affordable housing segment given the current low penetration levels and the government thrust. Overall, ICRA believes that the segment offers good growth potential and could report reasonable returns over the long-term. The Real Estate (Regulation and Development) Act, 2016 (RERaD Act) came into force in May 2016. The basic objective of the RERaD Act is to protect the interests of consumers and investors by improving transparency and accountability in the sector. In ICRA s view, the Act is a step in the right direction and is likely to restore the confidence of buyers and investors in the sector over the long term. In FY2016, multiple regulatory changes were announced, including lowering of risk weights (further from 50%) for housing loans and revision in interest rate and the on-lending cap under the Rural Housing Fund and Urban Housing Fund, which are likely to support growth in the low ticket affordable housing segment going forward. ICRA Rating Services Page 5
The increased government thrust on the housing sector is highlighted by the Housing for All mission launched in 2015 under the Pradhan Mantri Awas Yojana. On the supply side, the GoI proposes to encourage public-private partnerships in building homes in the affordable segment while on the demand side, it proposes to make credit available at cheaper rates to the weaker sections and low income groups. These schemes are a positive for the housing finance sector and have the potential to make the sub Rs. 10 lakh segment attractive for lenders. If the schemes are implemented successfully, the new segment could account for 22-37% of the overall housing credit in a medium term. While the market potential is high at over Rs 4-8 trillion by 2022, ICRA notes that the credit risk is also high. Asset quality indicators remain comfortable Table 2: Asset Quality Indicators FY2014 FY2015 FY2016 Q1FY2017 Gross NPA 18.87 25.05 35.55 64.70 Provisions 19.64 25.05 25.17 33.90 Net NPA 0.00 0.00 10.38 30.80 Net worth 607.24 711.49 835.30 895.53 Operating Profits 246.64 316.21 383.45 89.56 Gross Advances 7009.04 8915.35 11,114.55 11,543.53 Net Advances 6989.40 8890.29 11,079.00 11,478.83 Gross NPA % 0.27% 0.28% 0.32% 0.56% Net NPA % 0.00% 0.00% 0.09% 0.27% Net NPA/ Net worth 0.00% 0.00% 1.24% 3.44% Net NPA/ Operating Profits 0.00% 0.00% 2.71% 34.39% Amount in Rs. crore The company s gross NPAs increased marginally to 0.56% as on June 30, 2017 (0.32% as on March 31, 2016) from 0.28% as on March 31, 2015 while net NPAs increased to 0.27% as on June 30, 2016 (0.09% as on March 31, 2016) from Nil as on March 31, 2015. With the additional provisioning requirement on the standard assets, the company has reduced the quantum of provisions provided for NPAs in excess of the NHB requirement. Although the company s asset quality has not deteriorated significantly, given the relatively high exposure to the self-employed segment where income streams are more vulnerable to economic cycles, ICRA expects a higher stress on the company s asset quality going forward. Moderate economic capitalization; strong recapitalization ability supported by good market standing and strong parentage Table 3: Capital Adequacy Indicators Mar-14 Mar-15 Mar-16 Jun-16 Tier I % 14.70% 13.89% 16.13% 15.10% Tier II % 1.66% 1.47% 1.69% 1.63% CAR % 16.37% 15.36% 17.82% 16.73% Gearing 10.6 11.6 12.4 12.1 Net worth/ Total Advances 8.7% 8.0% 7.5% 7.8% GRUH s economic capitalisation levels were moderate with its gearing at a relatively high level of 12.4 times as on March 31, 2016 and 12.1 times as on June 30, 2016. Nevertheless, GRUH s ability to raise equity remains very strong owing to its parent s strong credit profile and high level of commitment to the company, and its own good market standing. ICRA s estimates that the company would need external capital of Rs. 70-220 crore over the next three years, to growth at a CAGR of 20-25%, while maintaining the current capitalization levels. The following table gives the capital requirements under various scenarios of growth and internal capital generation. ICRA Rating Services Page 6
Internal Capital Generation ICRA Credit Perspective Growth - 20% 23% 25% 27% 30% 35% 10.00% 133 182 217 254 313 422 12.00% 107 154 188 224 282 388 14.00% 80 126 159 194 250 354 16.00% 53 98 130 164 219 321 18.00% 27 70 101 134 188 287 20.00% - 42 72 105 157 253 22.00% - 14 43 75 125 219 24.00% - - 14 45 94 186 Amount in Rs. crore Assumptions: Gearing at 12 times The company s CRAR improved to 17.82% as on March 31, 2016 (16.73% as on June 30, 2016) as compared to 15.36% as on March 31, 2015. Further, GRUH has sufficient headroom available to raise Tier II bonds in order to maintain adequate capitalisation levels. At the current rate of internal accrual of around 18%, the company would be able to grow at the current growth rate of around 25%-30% without requiring significant external capital infusion. Diverse borrowing profile; relatively higher share of fixed rate borrowings leading to some interest rate risk Table 4: Borrowing Mix of GRUH Mar-14 % share Mar-15 % share Mar-16 % share Bank Borrowings 1,915 30% 2,700 33% 3,931 38% NCD 81 1% 650 8% 847 8% Subordinated NCD 35 1% 35 0% 35 0% NHB Refinancing 2,947 46% 2,777 34% 3,959 39% Fixed Deposits 1,003 16% 1,292 16% 1,462 14% Commercial Paper 455 7% 750 9% 0 0% HDFC LOC KFW 12 0% 11 0% 10 0% Total 6,447 100% 8,216 100% 10,244 100% Cost of Funds 9.48% 9.19% 8.69% Gearing (times) 10.6 11.6 12.4 Amount in Rs. crore GRUH continues to have a diversified borrowing mix and a competitive cost of funds, supported by the relatively lower rate of refinance from NHB (constituting 39% of the total borrowings as on March 31, 2016). The company has gradually been reducing its dependence on NHB refinance and increasing the share of bank funding in the overall borrowing mix. As on June 30, 2016, 92% of GRUH s portfolio was priced at floating rates of interest and 68% its total borrowings were at fixed rate of interest. Thus, in a scenario of softening interest rates, the company s spreads would be under pressure. However, given the competitive borrowing rates (<10%) and relatively short residual tenures of the company s loans, ICRA does not expect the impact to be significant. Short term mismatches in liquidity profile; unutilized bank lines provide comfort Similar to all housing finance companies, given the long term nature of its assets and the limited availability of long-term funds, GRUH has mismatches in its asset liability profile. ICRA takes note of GRUH s reliance on short-term funds (~26% of the total borrowings as on June 30, 2016), which while helping the company in keeping the overall cost of funds competitive, also results in relatively higher ALM gaps. Nevertheless, the company intends to increase the proportion of longer tenure non-convertible debentures in its borrowing ICRA Rating Services Page 7
profile going forward. As per ICRA s estimate, the current unutilised bank/nhb sanctions in hand, the company would be able to meet the incremental disbursements for next three months, however would need additional funds either through bank borrowings or debt market in order to grow at the same pace for the balance part of the year. Nevertheless, ICRA expects the company s liquidity position to remain comfortable given its access to a diverse base of funding sources, adequate un-availed bank lines and cash balances and its good financial flexibility. Sustained financial performance; although incremental spreads likely to be under pressure For the financial year ended March 31, 2016, GRUH reported a PAT of Rs. 244 crore over an asset base of Rs. 11,443 crore against a PAT of Rs. 204 crore over an asset base of Rs. 9,182 crore for the previous fiscal, registering a growth of ~20% in net profits. While the NII for GRUH increased by ~23% in FY2016, the impact was partially offset by the increase in operating expenses as well as higher credit costs and higher tax rates and consequently the net profits grew by 20% in the period under review. The company s yields and cost of funds declined in FY2016 and consequently the lending spreads remained largely stable. Its net interest margins (NIMs) registered a decline of 11 bps to stand at 4.04% in FY2016 owing to moderation of yields. The fall in NIMs and a marginal increase in credit costs on account of standard asset provisioning led to a 12 bps decline in the company s profitability in FY2016. ICRA expects the growth in the company s loan book to remain healthy; however, there could be some pressure on profitability going forward with incremental loans being on-boarded at finer spreads. Overall, ICRA expects the company to maintain an incremental spread of around 2.8%-3.0% in FY2017, and incremental return on net worth of around 22-24%, provided that its credit costs remain steady. ICRA Rating Services Page 8
Annexure Annexure 1: Details of Instruments/Facilities rated by ICRA Instrument/Facility Amount (Rs. Cr) Rating outstanding (September 2016) Short Term Debt Programme 4,450.00 [ICRA]AAA (stable) Subordinate Debt Programme 150.00 [ICRA]AAA (stable) Long Term Debt Programme 1,850.00 [ICRA]A1+ Fixed Deposit Programme - MAAA (stable) Annexure 2: Fact Sheet Name of the Company Registered/Corporate Office Status Housing Finance Company Paid-up share capital (June 30, 2016) Rs. 72.74 crore Net Worth (June 30, 2016) Rs. 895.53 crore Auditors M/s Sorab S. Engineer & Co. No of branches (June 30, 2016) 179 Capital Adequacy Ratio (June 30, 2016) 16.73% (Tier I: 15.10%) GRUH Netaji Marg, Near Mithakhali Six Roads, Ellisbridge, Ahmedabad 380 006 Annexure 3: Shareholding Pattern as on March 31, 2016 Sr. No Name of Shareholder % of shares held 1 Promoter Group 58.59% 2 FII 12.91% 3 DII 4.56% 4 Others 23.94% Total 100.00% ICRA Rating Services Page 9
Annexure 4: Update on Financial Performance of Mar-14 Mar-15 Mar-16 PROFIT AND LOSS ACCOUNT Interest Income (Net of Business Origination Costs and incl. processing fees) 806 1,011 1,216 Interest Expenses (including Preference Dividend) 544 678 807 Net Interest Income 263 334 409 Non-Interest Income 33 39 47 Operating Income 296 373 456 Operating expenses 49 56 73 Operating Profits 247 316 383 Provisions including NPA provisions 2 15 21 Profit Before Tax (PBT) 244 301 362 Tax 68 97 118 Profit After Tax (PAT) 177 204 244 Equity dividend 63 87 101 Accretion to reserves 113 116 143 SUMMARY ASSETS Net Hire Purchase/ Loan/ Lease Assets 7,009 8,915 11,115 Investments 53 80 143 Cash & Bank Balances 83 95 86 Advance Tax paid 10 10 30 Other Current Assets 60 67 55 Net Fixed Assets 11 14 15 Deferred Tax Assets 17 0 0 Total Assets 7,243 9,182 11,443 Off-balance sheet receivables 0 0 0 Total Managed Assets 7,243 9,182 11,443 SUMMARY LIABILITIES Equity Share Capital 36 73 73 Reserves 571 639 763 Net Worth 607 712 836 Total Borrowings (including Preference Shares) 6,447 8,216 10,244 Interest Accrued but not due 50 51 90 Provisions for Tax 0 0 0 Other Current Liabilities & Provisions 139 184 214 Deferred Tax Liability 0 19 59 Total Liabilities 7,243 9,182 11,443 Amounts in Rs. crore ICRA Rating Services Page 10
KEY FINANCIAL RATIOS Mar-14 Mar-15 Mar-16 OPERATING RATIOS Yield on Average Loans (Net of BO Costs) 12.7% 12.6% 12.0% Yield on Average Investments 17.5% 9.0% 10.1% Yield on Average Earning Assets (Net of BO Costs) 12.7% 12.5% 11.9% Cost of Average Interest Bearing Funds 9.5% 9.2% 8.7% Lending Spreads 3.2% 3.4% 3.3% Gross Interest Spread 3.3% 3.3% 3.3% PROFITABILITY RATIOS Interest Earned / Average Assets 12.6% 12.4% 11.9% Interest Expenses / Average Assets 8.5% 8.3% 7.8% Net Interest Margin / Average Assets 4.2% 4.1% 4.0% Fee based Income / Average Assets 0.5% 0.5% 0.5% Operating Expenses / Average Assets 0.8% 0.8% 0.8% Operating Profit / Average Assets 3.8% 3.9% 3.7% Provisions / Average Assets 0.0% 0.0% 0.0% Profit Before Tax (before extraordinary items) / Average Assets 3.8% 3.7% 3.5% Tax / Profit Before Tax 27.6% 32.3% 32.7% Profit After Tax / Average Assets 2.8% 2.5% 2.4% Equity Dividend / Profit After Tax 35.9% 42.9% 41.3% Profit After Tax / Average Net worth 32.2% 30.9% 31.5% EFFICIENCY RATIOS Fee Based Income / Operating Expenses 59.1% 58.9% 56.2% Operating Cost / Operating Income 16.5% 15.1% 16.0% CAPITALISATION RATIOS Net Worth / Total Assets 8.4% 7.7% 7.3% Total Debt / Net worth 10.70 11.61 12.36 Net NPA / Net worth 0.0% 0.0% 1.2% Capital to Risk Weighted Assets Ratio 16.4% 15.4% 17.8% Tier I Capital to Risk Weighted Assets Ratio 14.7% 13.9% 16.1% ASSET QUALITY Gross NPA / Gross Advances 0.27% 0.28% 0.32% Net NPA / Net Advances 0.00% 0.00% 0.09% Amounts in Rs. crore ICRA Rating Services Page 11
Contact Details Analyst Contacts Karthik Srinivasan +91-22-6114 3444 karthiks@icraindia.com Supreeta Nijjar Mohit Gupta Akshay Kumar Jain +91-124-4545 324 +91-22-6114 3449 +91-22-6114 3430 supreetan@icraindia.com mohit.gupta@icraindia.com akshay.jain@icraindia.com Relationship Contact L Shiv Kumar +91-22-6114 3406 shivakumar@icraindia.com ICRA Rating Services Page 12
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