Moody’s Investors Service has assigned a ‘Baa3’ local and foreign currency issuer rating to Hero FinCorp Limited with a stable outlook suggesting that the Pawan Munjal-led non-banking financial company may raise debt funds through bonds.
Moody’s ‘Baa3’ rating rationale for Hero FinCorp, which has a standalone assessment of ‘Ba3’, a speculative grade, assumes a high likelihood of support from Hero MotoCorp, India’s largest two-wheeler company, which also has a direct stake of 41% in the NBFC.
The ratings agency, in an official release, said that Hero FinCorp’s profitability, although modest when compared with the other Indian NBFCs, is gradually improving as it grows in scale. “Return on average managed assets reached 1.6% in the fiscal year ending March 2019 (fiscal 2019), up from 1.2% in fiscal 2018," the Moody’s report pointed out.
It said that while Hero FinCorp has made significant investments in building its pan-India footprint, its capitalization remains strong. “Tangible common equity to total managed assets stood at 17.7% at the end of March 2019, and was supported by frequent capital infusions from key shareholders," the report quoted underlining Hero FinCorp’s plan to raise Rs21 billion in new capital this fiscal from new and existing shareholders.
Hero FinCorp’s promoter group, which includes Hero MotoCorp, other Hero Group entities and individuals linked to the Munjal family, owned 79.9% stake at the end of March 2019. The promoter group, Moody’s report stressed, has consistently infused equity capital in Hero FinCorp along with purchasing shares from the non-promoter shareholders. Notably, Otter Limited and Credit Suisse own a 13% stake in the company.
The NBFC, however, continues to operate with a modest scale and has a limited track record in lending to retail and small and medium enterprises (SMEs) in India. Moody’s reports points out that lending to Hero FinCorp’s target customer segment, which is retail and SMEs in rural India, is fundamentally risky and cyclical and ‘asset performance will reflect this.’
As a result, it says, the company’s asset quality has weakened since it started expanding its business in 2013, with its gross non-performing loans (NPL) ratio rising to 4.5% in end FY19 from 1.6% in end FY16. Moody's estimates that Hero FinCorp’s entry into a number of new lending segments could be one of the several factors behind the weakening of asset quality.
Meanwhile, its ba3 standalone credit profile is built on its stable funding and liquidity duly supported by its strong parent and stable solvency metrics, including profitability and capitalization.
Hero FinCorp has presence across retail segments including financing of two-wheelers, personal loans, loans against property to SME operators, and loans to mid-sized Indian corporates. Within the two-wheeler segment, it only finances vehicles manufactured by Hero MotoCorp.