gruh finance limited rating report gruh finance limited ... housing development finance corporation...

December 2014 www.crisilratings.com CRISIL RATINGS

CREDIT RATING REPORT

Gruh Finance Limited December 2014

INSTRUMENTS RATED

Rs.35.0 Billion Short-Term Debt Programme (Enhanced from Rs.27.0 Billion)

Rs.6.5 Billion Non-convertible Debenture Issue

Rs.1.5 Billion Subordinated Debt Issue

Fixed Deposit Programme

RATING HISTORY

Date Long-Term Fixed

Deposit Short-Term

Rating Watch/Outlook

April 02, 2013 CRISIL AA+ FAAA CRISIL A1+ Stable

Rating Drivers

Strengths

Strong support from 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 geographical concentration in operations

Rating sensitivity factors Changes, if any, in majority shareholding of, or degree and type of

support from, HDFC

Changes in CRISIL’s view on HDFC’s credit risk profile

Significant improvement in scale of operations

Weakening in earnings or asset quality

RATINGS

CRISIL A1+ (Reaffirmed)

CRISIL AA+/Stable (Reaffirmed)

CRISIL AA+/Stable (Reaffirmed)

FAAA/Stable (Reaffirmed)

Analytical Contacts at CRISIL: Pawan Agrawal Phone:+91 22 3342 3301 Email: [email protected] Rupali Shanker Phone:+91 22 3342 1952 Email: [email protected]

Customer Service Helpdesk Timings: 10:00 am to 7:00 pm Toll free number: 1800 267 1301 Email: [email protected]

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 [email protected], or at (+91 22) 3342 3000 - 09.

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Outlook: Stable CRISIL believes that HDFC will retain its majority shareholding in Gruh Finance Ltd (GRUH) and will continue to extend strategic and management support to the company. GRUH is likely to maintain its healthy asset quality and adequate capitalisation over the medium term. The outlook may be revised to ‘Positive’ if GRUH’s market position or ALM profile improves significantly, or if the degree of integration in GRUH’s operations with those of HDFC increases considerably. Conversely, the outlook may be revised to ‘Negative’ if there is significant weakening 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 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. For 2013-14, Gruh reported a net profit of Rs.1.8 billion on a total income (net of interest expense) of Rs.3.0 billion, up from a net profit of Rs.1.5 billion on a total income (net of interest expense) of Rs.2.4 billion for 2012-13. For the half year ended September 30, 2014, Gruh reported a net profit of Rs.0.85 billion on a total income (net of interest expense) of Rs.1.8 billion, as compared with a net profit of Rs.0.68 billion on a total income (net of interest expense) of Rs.1.4 billion for the corresponding period of the previous year.

The ratings reflect GRUH’s following strengths: Strong support from parent, HDFC HDFC is expected to continue to provide strategic, management, and operational 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 58.7 per cent of GRUH’s equity shares as on September 30, 2014. 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, HDFC extends operational 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.



Healthy asset quality Despite GRUH’s above-industry average growth rate in the loan portfolio in the last three years, its asset quality remains healthy, supported by stringent credit appraisal, monitoring systems, and processes. CRISIL believes that GRUH’s continued prudent underwriting norms (in line with that of HDFC), strong risk management systems, and collection mechanism will help it maintain healthy asset quality over the medium term. GRUH’s gross non-performing assets (NPAs) have remained below industry average during the past three years. Its gross NPAs were 0.27 per cent as on March 31, 2014, as against the industry average of 0.75 per cent. The gross NPAs declined from 0.32 per cent as on March 31, 2013. As on September 30, 2014, the gross NPAs were at 0.38 per cent, down from 0.41 per cent as on September 30, 2013. Additionally, GRUH’s weak assets (two-year lagged gross NPAs), at 0.46 per cent as on March 31, 2014 (0.56 per cent as on March 31, 2013), remains significantly lower than the industry average of 1.1 per cent. Despite GRUH’s increasing exposure in the relatively riskier self-employed segment (42 per cent of the advances as on March 31, 2014), the company has maintained strong asset quality. GRUH’s gross NPAs in the self-employed segment were at 0.43 per cent as on March 31, 2014 (0.45 per cent as on March 31, 2013). Furthermore, conservative lending policies have 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 (3.0 per cent of the portfolio as on March 31, 2014). GRUH’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. 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. Currently, around 95 per cent of GRUH’s 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. Strong earnings profile GRUH’s earnings profile remains strong, marked by higher-than-industry average net profitability margin (NPM1) and return on assets (RoA). This is primarily driven by higher interest yields and close-to-industry average borrowing costs, supported by efficient treasury management practices. CRISIL believes that GRUH will maintain a strong earnings profile over the medium term, backed by its ability to charge higher yields to its customers and maintain stable operating efficiency. GRUH’s NPM remained strong at 2.8 per cent in 2013-14, despite declining marginally from 2.9 per cent in the previous year. GRUH’s RoA was 2.66 per cent in 2013-14 (2.84 per cent in 2012-13). The company’s RoA remained higher than that of other mid-sized housing finance companies (estimated industry average RoA of 2.2 per cent in 2013-14). The company’s RoA, however, declined owing to the fall in interest spreads mainly because of the increased competition from banks (leading to lower yields) and higher funding costs because of the continued high interest rate environment. For half-year ended

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).



September 30, 2014 RoA (annualised) stood at 2.2per cent compared which is similar to the same period in pervious year. GRUH has an established presence in remote semi-urban and rural areas, where competition is relatively lower, enabling GRUH to generate above-average yields. Additionally, given that more than 98 per cent of GRUH’s outstanding loan portfolio carries floating interest rates, the company can pass on the bulk of increases in borrowing costs to its customers. 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. GRUH’s operating expenses also remain low and are continuously declining in the last four years, albeit marginally. GRUH’s operating expenses declined to 0.88 per cent of the average funds deployed in 2013-14, from 1.09 per cent in 2010-11. GRUH also has robust asset quality, and hence, its credit costs are expected to remain low. GRUH’s policy of maintaining significantly high provision to cover NPAs also reduces the impact of adverse asset quality movements on its future earnings. Adequate capitalisation GRUH has adequate capitalisation in relation to the scale of its current business and growth plans, underpinned by healthy accruals to net worth and flexibility to raise additional capital, if required. CRISIL believes that GRUH will maintain adequate capitalisation, supported by healthy accruals to net worth, and a stable growth rate in loan portfolio over the medium term. The company’s strong net worth coverage for asset-side risks also supports its capitalisation. The company had an adequate net worth of Rs.5.9 billion as on March 31, 2014 (Rs.4.7 billion as on March 31, 2013). Its Tier-I capital adequacy ratio (CAR) was also adequate at 14.7 per cent as on March 31, 2014 (12.9 per cent as on March 31, 2013) against the minimum regulatory requirement of 6 per cent. GRUH’s capitalisation is strongly supported by healthy accruals – its three-year average return on equity (2011-12 to 2013-14) was around 33 per cent. As on September 30, 2014, the Tier-I and overall CAR remained comfortable at 15.2 per cent and 16.7 percent respectively. The company’s adequate capitalisation is also supported by its healthy coverage for NPAs: its gross NPAs are fully provided for. However, GRUH had a higher-than-industry average gearing of 10.6 times as on March 31, 2014 (10.0 times as on March 31, 2013). Gearing remained at high level of 10.4 times as on September 30, 2014 (10.2 times as on September 30, 2013). The company’s gearing, nevertheless, remaineds within the permissible regulatory limit.

The above-mentioned strengths are partially offset by GRUH’s following weaknesses: Modest ALM profile GRUH’S ALM profile is modest due to relatively high negative cumulative mismatches in short-term buckets of up to one year, primarily because its share of short-term borrowings is higher than that of other housing finance companies (HFCs). CRISIL believes that permanent reliance on short-term borrowings for a significant part of the resources carries inherent liquidity risks. GRUH’s ability to continue to manage ALM and liquidity in tight liquidity conditions remains a key monitorable. The company resorts to short-term debt to benefit from relatively lower interest rates for short-term loans as compared to rates for long-term loans. Hence, GRUH has an aggressive ALM profile and has relatively high negative cumulative mismatches of around 35 per cent in the up to one year maturity bucket. GRUH’s liquidity 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, including during the global economic crisis in 2008-09, reflecting its good treasury management practices and good



relationships with its bankers, refinancing short-term debt in weak liquidity conditions could constrain the company’s liquidity. Nevertheless, GRUH’s liquidity through unutilised National Housing Board (NHB) limits and bank lines, and fixed deposits with banks of Rs.9.4 billion as on March 31, 2014, adequately covered the negative cumulative mismatches in the maturity bucket of up to one year. Limited market share and geographical concentration in operations GRUH is a small player in the housing finance market (including banks’ housing loan portfolio) and operates primarily in the rural and semi-urban areas of Gujarat and Maharashtra. CRISIL, therefore, believes that GRUH’s asset portfolio will continue to be subject to high geographical concentration over the medium term. GRUH has a market share of less than 1.0 per cent, despite above-industry growth over the past several years. The company’s outstanding loan portfolio grew by 29 per cent to Rs.70.1 billion as on March 2014, from Rs.54.4 billion as on March 31, 2013. Furthermore, GRUH operates primarily in the rural and semi-urban areas of Gujarat and Maharashtra; these two states accounted for 73 per cent of outstanding loans as on March 31, 2014 and 77 per cent of disbursements in 2013-14, respectively. Therefore, the company is exposed to risks related to geographical concentration. While GRUH continues to expand, albeit at a gradual pace, in other geographies such as Rajasthan, Karnataka, Tamil Nadu, Madhya Pradesh, and Chhattisgarh, Gujarat and Maharashtra will continue to account for a significant proportion of the loan book over the medium term due to long incubation period required to establish in a new geography.

Business Profile Market position Chart 1: Trend in Portfolio outstanding Chart 2: Trend in disbursements

GRUH has maintained a higher-than-industry-average growth over the past several years. Its loan book increased to Rs.70.1 billion as on March 31, 2014, registering a four-year compound annual growth rate (CAGR) of 30 per cent against industry average of 26 per cent between 2010-11 and 2013-14. Loan disbursement also grew at a strong CAGR of 35 per cent over the same period. However, the disbursement growth slowed down to 18.5 per cent in 2013-14 from 46.2 per cent in the previous year



because of the increased competition from banks and decline in the new home sales due to uncertain macroeconomic environment. For the half–year ended September 30, 2014, the loan book increased to Rs.79.1 billion (representing a year-on-year growth of 29 per cent), driven by high growth in the self-employed individuals segment. Over the medium term, loan disbursement is expected to grow at 25 per cent per annum mainly driven by strong growth in the affordable housing segment. GRUH’s growth has been primarily driven by the individual home loan segment, mainly to salaried and assessed income customers. As on March 31, 2014, salaried individuals and assessed income individual customers constituted 57 per cent and 34 per cent, respectively, of the housing loan book. The remaining comprised businessmen with formal income (6 per cent) and professionals (3 per cent). Over the past two decades, GRUH has established a strong presence in the semi-urban/rural markets of Gujarat and Maharashtra, which together account for around 73 per cent of the loan book. However, the company has also diversified its operations into Karnataka, Tamil Nadu, Rajasthan, Chhattisgarh, and Madhya Pradesh to reduce geographical concentration in its portfolio. In 2014-15, GRUH plans to set up branches in other neighbouring states. Builder loan segment forms only 3 per cent of the loan book at March 31, 2014; and this segment will continue to remain at similar levels over the medium term due to relatively riskier nature of the customer profile of the segment. Asset quality GRUH has maintained healthy asset quality as reflected in the continuously declining gross NPAs over the last four years. Its weak assets (2-year lagged gross NPAs) also remain significantly lower than the industry average. GRUH has performed well in the relatively riskier self-employed category (comprising professionals, and customers with formal business income, and assessed income) wherein gross NPAs have been below 1 per cent over the last three years. In the relatively safer salaried segment, gross NPAs declined to 0.16 per cent as on March 31, 2014, from 0.26 per cent as on March 31, 2013. GRUH’s strong risk management systems and processes, rigorous credit underwriting standards, and efficient collection mechanisms help it maintain healthy asset quality. For the half-year ended September 30, 2014, asset quality remains comfortable, with gross NPAs at 0.38 per cent.



Chart 3: Trend in NPAs and weak assets

Resources GRUH has a stable and adequately diversified resource base. The company has established relations with over 25 banks, and access to short-term funding from mutual funds and insurance companies. The higher share of NHB borrowings (comprising 47 per cent of the total borrowings in 2013-14) helps GRUH maintain lower interest cost as these borrowings are at lower rates than bank borrowings. The company also benefits from the relatively better-tenure-matching opportunities from such borrowings. It also has an option of securitisation with HDFC, which further supports its resource profile. GRUH also focuses on raising retail deposits (around 16 per cent as on March 31, 2014), which provides stability to its resource profile. GRUH regularly accesses the short-term debt market (to take opportunistic advantage between short-term and long-term interest rates. The short-term debt constitutes around 35 per cent of the total borrowings on a steady state basis. Interest cost (on a yearly average basis) increased to 9.7 per cent in 2013-14 compared to 9.2 per cent in the previous year, in line with the increase in the general interest rates during 2013-14. The average cost of borrowing (annualised) for the half year ended September 30, 2014 was at 9.4 per cent.



Chart 4: Borrowing mix and cost of borrowing

Financial Profile: Capital adequacy Given the scale of its operations, GRUH is adequately capitalised with Tier-I CAR, at 14.7 per cent as on March 31, 2014. The company’s Tier-I CAR increased from 12.9 per cent as on March 31, 2013, primarily because of the change in risk weights on certain segments of commercial real estate. GRUH’s capitalisation is marked by higher-than-industry-average gearing of 10.6 times as on March 31, 2014 compared to 10.0 times as on March 31, 2013. Nevertheless, the gearing remains within the permissible regulatory limit of around 16 times. GRUH’s net worth coverage of net NPAs remain strong, given the company’s policy of maintaining high provisions for gross NPAs. Chart 5: Trend in Net Worth and Capital Adequacy



Earnings GRUH’s RoA, at 2.7 per cent in 2013-14, remained higher than that of most large HFCs, due to the company’s ability to charge higher yield on its advances, and keep borrowing costs at par with the larger HFCs. GRUH’s net profitability margin (post provisioning) declined to 2.79 per cent in 2013-14 from 2.90 per cent in 2012-13 primarily due to marginal decline in the interest spreads. However, the NPM remains higher than the industry average. For the half-year ended September 30, 2014, the RoA (annualised) stood at 2.2 per cent, similar to that for the corresponding period of the previous year. Table 1: Trend in Net Profitability Margin (In per cent)

For the year ended 2013-14 2012-13 2011-12 2010-11

Yield on Average Funds Deployed 12.84 12.63 13.03 11.83

Borrowing Cost 9.67 9.23 9.21 7.60

Spread 3.16 3.40 3.82 4.23

Operating Expenses/Average Funds Deployed 0.88 0.95 1.04 1.09

Core fee income/Average Funds Deployed 0.53 0.46 0.54 0.47

Net Profitability Margin 2.83 2.91 3.31 3.61

Credit Cost 0.03 0.01 -0.09 0.05

Net Profitability Margin 2.79 2.90 3.40 3.56

Chart 6: Trend in PAT & ROA



Liquidity and ALM GRUH’s high reliance on short-term borrowings has resulted in relatively higher ALM mismatches than is the case with other HFCs. The company contracts short-term debt to take advantage of the significant pricing differential between short- and long-term loans. GRUH has consistently run mismatches in buckets of less than a year. The cumulative negative mismatch as a percentage of cumulative outflows of up to one year bucket has remained between 15 and 60 per cent during the first half of 2014-15. Nevertheless, GRUH’s liquidity through unutilised NHB limits, unutilised bank lines, and fixed deposits with banks of Rs.12.3 billion as on September 30, 2014, 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.

Key Financials

Year Ended March 31 2014 2013 2012 2011 2010

Equity Capital Rs. Billion 0.4 0.4 0.4 0.4 0.3

Net Worth (Reported) Rs. Billion 6.1 4.9 3.9 3.2 2.6

Disbursement Rs. Billion 25.8 21.7 14.9 12.1 7.8

Housing Loans Outstanding Rs. Billion 70.0 54.4 40.8 31.8 24.5

Investments Rs. Billion 0.5 0.7 0.2 0.4 0.3

Total Funds Deployed Rs. Billion 71.5 55.2 42.7 31.8 25.1

Total Income Rs. Billion 8.5 6.5 5.1 3.6 3.1

Reported PAT Rs. Billion 1.8 1.5 1.2 0.9 0.7

PAT/Average Total Assets % 2.7 2.8 3.0 2.9 2.6

PAT/Average Reported Net Worth % 32.2 33.3 34.2 31.4 28.4

Tier-I Capital Adequacy Ratio % 14.7 12.9 13.3 13.0 15.6

Tier-II Capital Adequacy Ratio % 1.7 1.7 0.7 0.3 1.0

Overall Capital Adequacy Ratio % 16.4 14.6 14.0 13.3 16.6

Total Debt/Reported Net Worth % 10.6 10.0 9.9 9.3 8.8

Gross NPA % 0.3 0.3 0.5 0.8 1.1



Key financials for the half-year ended on September 30

Particulars

2014 2013

Loan Outstanding Rs Billion 79.1 61.4

Interest Income Rs Billion 5.0 3.9

Interest Expense Rs Billion 3.2 2.5

Total Income (Net of Interest) Rs Billion 1.8 1.4

Operating Expense (Including Depreciation) Rs Billion 0.3 0.3

Provision for Contingencies and Write-offs Rs Billion 0.2 0.1

Reported PAT Rs Billion 0.9 0.7

PAT/Average Total Assets % 2.2 2.2

Gross NPA % 0.4 0.4

Total Debt/Net Worth times 10.4 10.2

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

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