The revision in the long-term rating outlook factors in the steady improvement in asset quality and profitability indicators of the company. While the improvement, to an extent, is on account of the revival in the commercial vehicle demand cycle, ICRA takes cognisance of the initiatives taken by CIFCL to strengthen its risk management, loan origination and collection systems, which will also help it reduce volatility in credit metrics across business cycles.
The ratings continue to factor in the company’s established track record in the company’s vehicle finance (VF) business, its experienced management team, and the demonstrated financial and management support from the Murugappa group. The ratings also take into account the company’s past track record of growing its scale of operations profitably and its ability to access diversified wholesale funding sources These credit strengths are however partly offset by CIFCL’s limited earnings diversity, the rise in delinquencies in the company’s home equity (HE) portfolio, and the increasing competitive pressures in both vehicle financing and home equity segments. CIFCL has a moderate capital structure (managed gearing at 6.9 times as on March 31, 2016); ICRA expects the gearing to increase further in the near term, with the planned portfolio growth as internal generation is likely to be lower than the envisaged growth. ICRA also takes cognisance of the company’s plans to scale-up its housing loan portfolio sharply over the medium term.
CIFCL currently recognises NPAs at 120+ dpd and it has already made additional provisions for the transition to 90+dpd NPA recognition norm, and for higher standard asset provision requirement going forward. The company’s 90+dpd reduced from 4.8% as on March 31, 2015 to 4.3% as on March 31, 2016 driven mainly by the revival in the commercial vehicle demand cycle, and sustained collection efforts by the company. Demand for medium and heavy commercial vehicles has been on an improving trend from H2FY2015, while the light commercial vehicles–the key focus segment of CIFCL started showing signs of recovery from H2FY2016. Improvement in demand along with favourable diesel prices resulted in improved cashflows and operational viability for transport operators. While the asset quality in vehicle financing improved and 90+dpd reduced from about 5.9% as on March 31, 2015 to about 4.4% as on March 31, 2016, the 90+dpd in HE business increased quite sharply from 2.4% to about 4.2% as on March 31, 2016. Nevertheless, ICRA takes comfort from the adequate collateral cover (about 90% of the HE portfolio is backed by self-occupied residential property) with average loan to value being around 50-55%. ICRA also takes note of the initiatives taken by CIFCL to strengthen its risk management and collection systems, which is likely to support asset quality indicators going forward.
The company’s capitalisation profile is comfortable with managed tier-I at 12.7% (managed core capital at 11.2%). ICRA expects CIFCL to require around Rs.300-500 crore of equity over the next three years, to meet its portfolio growth targets while maintaining a managed gearing of around 7.0 times. ICRA expects the company to be able to raise the capital, as demonstrated in the past.
During FY2016, CIFCL’s net interest margin increased from 5.7% in FY2015 to 6.4% as cost of funds moderated and business volumes improved. The operating expenses remained largely stable at about 2.1% and credit costs remained high at about 1.4% (1.2% in FY2015). Consequently, the company’s net profitability improved from about 1.6% in FY2015 to 1.9% in FY2016 and its return on average networth improved from about 15.8% in FY2015 to 16.6% in FY2016. CIFCL’s ability to improve its internal generation rate (14% for FY2016) by expanding its margins in a competitive business environment, through better operating efficiencies and controlling credit costs would be crucial going forward.
CIFCL’s funding and liquidity profile continues to remain comfortable owing to its established relationships with various institutional lenders. Nearly 46% of CIFCL’s borrowings are from banks as on March 31, 2016, followed by debentures, subordinated and perpetual debt and commercial paper which accounted for 18%, 10% and 10% respectively; portfolio sell-downs constituted the remaining 16%.
From a rating perspective, CIFCL’s ability to improve its collections and recoveries in the home equity business would be a key rating monitorable in the near to medium term. The company’s ability to maintain a good risk adjusted capital structure (managed gearing about 6.7-7.0 times) and, to grow optimally without diluting its asset quality especially in the new businesses (housing loans, agri loans and SME loans)would be crucial in the medium to long term.