1 Gruh Finance Limited December 2012 INSTRUMENTS RATED RATINGS Rs.17.0 Billion Commercial Paper Programme (Enhanced from Rs.12.0 Billion) Fixed Deposit Programme Date Long- Term * Initial Bank Loan Rating assigned RATING HISTORY Fixed Deposit Short- Term No rating change in the last three years Rating Watch/Outlook CRISIL has revised its rating symbols and definitions with effect from July 11, 2011, to comply with the SEBI circular, Standardisation of Rating Symbols and Definitions. The revised rating symbols carry the prefix, CRISIL. The rating symbols for short-term instruments have been revised to CRISIL A1, CRISIL A2, CRISIL A3, CRISIL A4, and CRISIL D from the earlier P1, P2, P3, P4, and P5, respectively. The revision in the rating symbols and definitions is not to be construed as a change in the ratings. For details on revised rating symbols and definitions, please refer to the document, Revision of Rating Symbols and Definitions, at the link, http://www.crisil.com/ratings/credit-rating-scale.html Rating Drivers Strengths Strong linkages with parent, Housing Development Finance Corporation Ltd (HDFC, rated CRISIL AAA/FAAA/Stable/CRISIL A1+ ) Healthy asset quality Strong earnings profile Adequate capitalisation Weaknesses Modest asset-liability management (ALM) profile Limited market share, and geographic concentration in revenue profile Rating Sensitivity Factors Change in majority shareholding, or degree and type of support from HDFC Change in CRISIL s view on HDFC s credit risk profile Significant improvement in scale of operations Deterioration in earnings or asset quality CRISIL A1+ FAA+/Stable (Reaffirmed) Analytical Contacts at CRISIL: Nagarajan Narasimhan Tel: +91-22-3342 3536 Email:Nagarajan.narasimhan@crisil.c om Rupali Shanker Tel: +91-22-3342 1952 E-mail: rupali.shanker@crisil.com CRISIL Rating Desk: Tel: +91-22-3342 3047/ 3342 3064 Email: CRISILratingdesk@crisil.com Disclaimer: CRISIL has taken due care and caution in compilation of data for this rating rationale, based upon the information provided by the issuer and also upon information obtained from sources it considers reliable. However, CRISIL does not guarantee the accuracy, adequacy or completeness of any information. CRISIL especially states that it has no financial liability whatsoever to the subscribers / users / transmitters / distributors of the rating or the rationale. No part of this rationale may be published / reproduced in any form without CRISIL's prior written approval. A CRISIL rating reflects CRISIL's current opinion on the likelihood of timely payment of the obligations under the rated instrument and does not constitute an audit of the rated entity by CRISIL. A CRISIL rating is not a recommendation to buy, sell or hold the rated instrument; it does not comment on the market price or suitability for a particular investor. All CRISIL ratings are under surveillance. Ratings are revised as and when circumstances so warrant. CRISIL Ratings rating criteria are generally available without charge to the public on the CRISIL public web site, www.crisil.com. For the latest rating information on any instrument of any company rated by CRISIL, please contact CRISIL RATING DESK at CRISILratingdesk@crisil.com, or at (+91 22) 3342 3000-09. CRISIL Complexity Levels are assigned to various types of financial instruments. The CRISIL Complexity Levels are available on www.crisil.com/complexity-levels. Investors are advised to refer to the CRISIL Complexity Levels for instruments that they propose to invest in. Investors can also call the CRISIL Helpline at +91 22 3342 3047 / + 91 22 3342 3064 with queries on specific instruments.
2 Outlook: Stable CRISIL believes that HDFC will retain its majority shareholding in Gruh Finance Ltd (GRUH) and will continue to extend financial and management support to the company. GRUH is likely to maintain its comfortable capital adequacy and healthy asset quality levels over the medium term. The outlook may be revised to Positive in case of significant improvement in GRUH s market position or ALM profile, or if there is considerable increase in the degree of integration of the company s operations with that of HDFC. Conversely, the outlook may be revised to Negative if there is significant deterioration in GRUH s asset quality, or a substantial decline in its earnings profile. A reduction in the extent of support from HDFC, or a change in CRISIL s view on HDFC may also result in the outlook being revised to Negative. Rationale GRUH (formerly, Gujarat Rural Housing Corporation Ltd) was set up in 1986. The company was established by HDFC and the Aga Khan Fund for Economic Development, to provide an institutional structure to rural housing finance. GRUH primarily extends housing loans to individuals in rural and semi-urban areas, which is relatively lower-income market segment. The company has a distinct target market segment, which complements HDFC s market. In 2011-12 (refers to financial year, April 1 to March 31), GRUH reported a net profit of Rs.1.2 billion on a total income of Rs.5.1 billion, compared with a net profit of Rs.920 million on a total income of Rs.3.6 billion for in 2010-11. For the half year ended September 30, 2012, GRUH reported a net profit of Rs.540 million on a total income of Rs.3.05 billion, compared with a net profit of Rs.410 million on a total income of Rs.2.36 billion for the half year ended September 30, 2011. The rating is driven by GRUH s following strengths: Strong linkages with parent, HDFC HDFC owns 60.4 per cent of GRUH s equity shares and provides equity support to the company. HDFC also extends GRUH operational and management support. In the past, HDFC invested in GRUH s subordinated debt programme and bought GRUH s securitised portfolio. GRUH s association with HDFC enables bank funding at competitive rates. The company s operating policy, sanctioning norms, and loan schemes are modelled on those of HDFC. GRUH also enjoys strong management support from HDFC, for instance, with respect to formulation of guidelines and policies. HDFC s vice-chairman and chief executive officer, and the managing director, are GRUH s chairman and non-executive director, respectively. GRUH s managing director is a former HDFC employee. Although GRUH operates in the same industry as its parent, the company operates in a niche segment, and caters to the lower-income group in rural and semi-urban areas, which is distinct from HDFC s target segment; therefore, the companies are not direct competitors. GRUH also cross-sells HDFC products, such as insurance. Currently, GRUH is a referral agent for HDFC Standard Life Insurance Company Ltd. However, the quantum of business generated as an agent remains small. CRISIL believes GRUH will continue to receive required support from its parent, to achieve profitable growth. Furthermore, HDFC will likely retain its majority ownership in the company over the medium term; HDFC s ownership in the company, however, remains a rating sensitivity factor.
3 Healthy asset quality GRUH s asset quality is healthy, with low gross non-performing assets (NPAs) of 0.60 per cent as on September 30, 2012, compared to 1.11 per cent as on September 30, 2011. Weak assets (two-year lagged gross NPAs) also continue to remain low and have declined to 1.02 per cent as on September 30, 2012, from 1.79 per cent as on September 30, 2011. The company s robust asset quality is marked by its rigorous credit underwriting standards, strong risk management systems, and efficient recovery mechanism. GRUH also benefits from adoption of HDFC s credit and risk management practices, and strong adherence to underwriting standards. GRUH has conservative loan eligibility norms. The maximum loan to cost ratio (LCR) continues to be 75 per cent (in line with the industry) and the average LCR is at 60 per cent. The asset coverage for the loan is enhanced due to adoption of the cost stipulated by the sub-registrar, which is lower than the market value, for LCR calculations. Despite GRUH s increasing exposure in the relatively risk-prone selfemployed segment, the company has maintained strong asset quality. The segment had 39 per cent share of advances as on March 31, 2012, compared to 37 per cent as on March 31, 2011. Furthermore, conservative lending policies have helped the company minimise risks in the builder loan segment; there has been no delinquency in its portfolio for past five years, though the segment has always been a small proportion of its portfolio (4.33 per cent as on March 31, 2012). Large exposures (above Rs.50 million) are only sanctioned to builders with an established track record of more than five years. Currently, around 96 per cent of GRUH s outstanding loan portfolio has been sanctioned to individuals, which therefore reduces risks related to customer concentration. CRISIL believes, continued prudent underwriting norms (in line with HDFC), strong risk management systems, and a good collection mechanism will help GRUH sustain its healthy asset quality over the medium term. Strong earnings profile GRUH s strong earnings profile is marked by a robust net profitability margin (NPM 1 ) and return on assets (RoA). The company s NPM and RoA are supported by higher interest spreads, low cost of borrowings, ability to pass on increasing interest rates to borrowers, and efficient treasury management. The NPM continued to remain strong at 3.2 per cent in 2011-12 (3.3 per cent 2010-11) (refer to Table 1 below); whereas return on average assets improved to 3.0 per cent in 2011-12, from 2.9 per cent in 2010-11. These ratios have been consistently higher than other housing finance companies (HFCs). GRUH has an established presence in remote semi-urban and rural areas, where competition is relatively lower, enabling GRUH to generate above-average yields. The lower cost of borrowings is on account of higher share of short term borrowings. GRUH raises significant short-term debt through commercial papers (CPs) that carry low interest rates, which help to reduce overall interest cost. Additionally, given that more than 98 per cent of GRUH s outstanding loan portfolio carries floating interest rate, the company passes on any increase in borrowing costs to its customers. GRUH s policy of maintaining a full cover for its NPAs reduces the impact of adverse asset quality movement on future earnings. Furthermore, operating expenses continue to remain low at around one per cent of average funds deployed during the year. Given the company s ability to maintain low interest and operating cost, CRISIL believes GRUH S earnings profile will continue to remain strong over the medium term. 1 CRISIL uses NPM as its measure of core profitability. NPM is defined as (Yield on funds deployed) (Borrowing costs) (Operating expense ratio) + (Fee income levels).
4 Adequate capitalisation GRUH has adequate capitalisation, supported by its healthy asset quality, healthy accruals to net worth, and flexibility to raise additional capital if required. The company had an adequate net worth of Rs.3.9 billion and a moderate gearing of 9.9 times as on March 31, 2012. Its Tier-I capital adequacy ratio (CAR) was also adequate at 13.3 per cent as on March 31, 2012 (13 per cent as on March 31, 2011) as against the minimum regulatory requirement of 12 per cent. The company s provisions for contingencies (including for standard assets and NPAs) at Rs.395 million exceeds weak assets (two-year lagged). CRISIL believes GRUH will maintain adequate capitalisation and sustain a stable growth rate over the medium term. The above-mentioned rating strengths are partially offset by GRUH s following weaknesses: Modest ALM profile GRUH S ALM profile is modest due to mismatches in short-term buckets of up to one year, due to relatively higher share of short-term borrowings than other HFCs. The company resorts to short-term debt to benefit from lower interest rates for short term loans as compared to rates for long-term loans. GRUH s liquidity profile could come under pressure during times of tight liquidity due to its high reliance on short-term funding. Although, the company has managed ALM mismatches thus far, and during the global economic crisis in 2008-09, refinancing short-term debt in weak liquidity conditions could constrain the company s liquidity. However, the risk is partly mitigated by the availability of unutilised bank lines and refinances limits from National Housing Bank amounting to Rs.1.1 billion as on March 31, 2012. Furthermore, the company has a policy of maintaining liquidity equal to two months of planned disbursements and obligations during this period. However, CRISIL believes that permanent reliance on short term borrowings for a significant part of the resources carries an inherent liquidity risk. Limited market share, and geographic concentration in revenue profile GRUH is a small HFC with a market share of 0.5 per cent (including the banks home loan portfolio) and outstanding loan portfolio of Rs.40.8 billion as on March 2012, compared to Rs.31.8 billion as on March 31, 2011; the loan book was Rs.46.7 billion as on September 30, 2012. GRUH operates primarily in the rural and semi-urban areas of Gujarat and Maharashtra; these two states accounted for 76 per cent of outstanding loans as on March 31, 2012, and 80 per cent of disbursements in 2011-12. Therefore, the company is exposed to risks related to geographic concentration. CRISIL believes GRUH s asset portfolio will continue to be subject to high geographic concentration over the medium term due to long incubation period required to establish in a new geography.
5 Business Profile Market position Chart 1: Trend in Disbursement Growth in disbursements was moderated significantly in 2011-12 compared to the previous year given the larger base and also due to the rising rate of interest during 2011-12. However during the half year ended September 30, 2012 GRUH increased disbursements significantly to Rs.9.6 billion at 48 per cent growth over corresponding period in the previous year. Chart 2: Trend in Portfolio Outstanding Portfolio outstanding as on September 30, 2012 increased to Rs.46.7 billion from Rs.35.4 billion as on September 30, 2011. Builder loans (non-individual loans) continue to have a small share (4.3 per cent of portfolio outstanding as on March 31, 2012), which is expected to continue.
6 Chart 3: Geographical concentration Per cent 100 90 80 70 60 50 40 30 20 10 0 17 24 25 25 24 48 42 42 41 43 35 34 33 34 33 2008 2009 2010 2011 2012 For the year ended March 31, Others Gujarat Maharashtra Geographic concentration in Maharashtra and Gujarat has increased to 76 per cent as on March 31, 2012, as compared with 75 per cent as on March 31, 2009. Chart 4: Occupation wise loan outstanding - Individual borrowers 100% 80% 60% 22% 27% 34% 30% 10% 8% 2% 6% 6% 5% 4% 4% 40% 20% 0% 62% 60% 60% 60% 2009 2010 2011 2012 Salaried Professionals Businessman - Formal Income Assessed income Chart 5: Occupation wise loan disbursements - Individual borrowers 100% 80% 60% 40% 20% 0% 32% 37% 15% 18% 8% 7% 10% 3% 4% 3% 3% 3% 54% 57% 74% 72% 2009 2010 2011 2012 Salaried Professionals Businessman - Formal Income Assessed income
7 Asset quality Chart 6: Asset Quality Geographically, Karnataka and Madhya Pradesh have higher gross NPAs at 1.5 per cent and 1.7 per cent respectively as on March 31, 2012; this is much higher compared to the overall gross NPA of 0.52 per cent as on that date. However, these states account for a mere 5.8 per cent and 11.1 per cent respectively, of gross advances. Resources GRUH has a stable and moderately diversified resource base. The share of retail borrowings has increased to 12 per cent as on March 31, 2012, from 9 per cent a year earlier. The company has established relations with over 25 banks, and has access to short term funding from mutual funds and insurance companies. It also has an option of securitisation with HDFC, which further supports its resource profile. Chart 7: Borrowing Cost Interest cost, has increased to 9.1 per cent in 2011-12, compared to 7.6 per cent, the previous year. However, given that around 98 per cent of its loans carry a floating rate interest, the increased cost can largely be passed on to its customers.
8 Financial Profile: Capital adequacy Chart 8: Trend in Net Worth and Capital Adequacy The CAR, as on March 31, 2012, has marginally increased vis-à-vis March 31, 2011 on account of higher accruals. Earnings Chart 9: Trend in PAT & ROA The RoA for GRUH continues to be higher than that of larger HFCs such as HDFC, due to the company s ability to keep borrowing costs at par with the larger HFCs and charge higher yields on its advances on account of the customer segment that it caters to.
9 Table 1: Net Profitability Margin For the year ended 2011-12 (in percentage) 2010-11 2009-10 2008-09 Yield on Average Funds Deployed 12.9 11.6 11.3 12.5 Borrowing Cost 9.1 7.6 7.9 10.0 Spread 3.7 4.0 3.4 2.5 Operating Expenses/Average Funds Deployed 1.0 1.1 1.0 0.9 Core fee income/average Funds Deployed 0.4 0.5 0.5 0.3 Net Profitability Margin 3.1 3.3 2.9 1.9 Credit Cost -0.1 0.0 0.1 0.1 Net Profitability Margin 3.2 3.3 2.9 1.8 The spreads have decreased in 2011-12 due to GRUH s inability to completely pass on higher borrowing costs. Liquidity and ALM GRUH s high reliance on short-term borrowings has resulted in a relatively higher ALM mismatch, as against that of other HFCs. The company contracted short-term debt to take advantage of the significant pricing differential between short- and long-term loans. GRUH has consistently run mismatches in less than one year buckets. The cumulative negative mismatch as a percentage of cumulative outflows up to one year bucket remained in the range of 15 per cent to 38 per cent during 2012-13. GRUH s liquidity through unutilised NHB limits, unutilised bank lines, and fixed deposits with banks of Rs.13.05 billion as on September 30, 2012, adequately covered the cumulative negative mismatches in the up to one-year maturity bucket. Furthermore, strong parent linkage and the option of securitisation with HDFC enhance GRUH S financial flexibility.
10 Key Financials Year Ended March 31 2012 2011 2010 2009 Equity Capital Rs. Billion 0.4 0.4 0.3 0.3 Net worth (reported) Rs. Billion 3.9 3.2 2.6 2.2 Disbursement Rs. Billion 14.9 12.1 7.8 6.6 Housing Loans outstanding Rs. Billion 40.8 31.8 24.5 20.9 Investments Rs. Billion 0.2 0.4 0.3 0.1 Total Funds Deployed Rs. Billion 42.9 33.5 26.2 25.9 Total Income Rs. Billion 5.1 3.6 3.1 2.9 Reported PAT Rs. Billion 1.2 0.9 0.7 0.5 PAT/Average Total Assets % 3.0 2.9 2.6 2.2 PAT/Average Reported Net Worth % 34.2 31.4 28.4 24.5 Total Debt/Reported Net Worth % 9.9 9.3 8.8 10.2 Gross NPA % 0.5 0.8 1.1 0.9 Key Financials for the period ended September 30, 2012 For the period ended September 30, 2012 2011 Disbursement Rs. Billion 9.6 6.5 Loan outstanding Rs. Billion 46.7 35.4 Total Income Rs. Billion 3.0 2.4 Interest expense Rs. Billion 1.9 1.4 Operating expense Rs. Billion 0.3 0.4 Reported PAT Rs. Billion 0.5 0.4 Total Expense/Total Income % 11.2 15.3 Gross NPA % 0.6 1.1 CRISIL Limited CRISIL House, Central Avenue, Hiranandani Business Park, Powai, Mumbai 400076. Tel: + 91 (22) 3342 3000 09 Fax: + 91 (22) 3342 3001 CRISIL rating actions are updated online on www.crisil.com