TEXT-Fitch affirmed Mahindra & Mahindra Finance at 'Fitch AA+(ind)'/ stable

Mon Sep 10, 2012 7:38am EDT

(The following statement was released by the rating agency)

Sept 10 - Fitch Ratings has affirmed India-based Mahindra & Mahindra Financial Services Limited's (MMFSL) National Long-Term Rating at 'Fitch AA+(ind)'. The Outlook is Stable. A list of additional rating actions is provided at the end of this commentary.

The ratings factor in the credit strength of MMFSL's parent (Mahindra & Mahindra Limited (M&M)) to financially support MMFSL on a timely basis. Fitch views MMFSL as core to the operations of M&M as it is by far the largest financer of M&M vehicles and finances about 26% of M&M's sales (about 49% of its FY12 total financing). It has a good rural penetration and provides finance to customers with weak credit profiles, making it crucial for M&M's largely rural and semi-urban products (tractors, pick-up vans). Although MMFSL's proportion of financing non-M&M products is increasing, Fitch expects it would remain vital for M&M to generate a substantial proportion of incremental revenue. MMFSL is 56%-owned by M&M, shares the parent's name and also has other significant operational linkages with its parent.

Negative rating action could arise if the proportion of M&M's revenue from MMFSL disbursements declines materially due to M&M's faster expansion in urban and high-end products with increased participation from other financiers in its sales. The ratings would also be negatively affected if MMFSL's increasing debt levels impact M&M's ability to support MMFSL or if M&M's shareholding in MMFSL declines below 51%. An upgrade of MMFSL's ratings is contingent upon material improvements in M&M's credit profile.

MMFSL's asset quality is modest reflecting its riskier customer segment. The average credit costs for the company (FY08-FY12: 2.7% of earning assets) have remained high. Its gross non-performing loans (NPLs) on a 150 days overdue basis, though reduced (Q1FY12: 4.9%, Q1FY13: 4.0%), remain the highest among peers and rise further on a 90 dpd basis. While MMFSL's credit costs have been declining in recent years supported by tightened disbursal and collection mechanisms (FY12: 1%, FY11: 1.3%), Fitch believes the same can also be attributed to stronger cash flows in the rural economy. The expected stress in the rural economy, along with a large unseasoned portfolio (from rapid loan growth in recent years), is likely to put pressure on MMFSL's credit costs.

Capitalisation levels are above average; Q1FY13: Tier 1 capital: 14.7%; core equity Tier 1 ratio (adjusted for 50% of total credit enhancements on bilateral assignments): 12.7%, and leverage (debt/equity: 5x). However, this is considered necessary given its riskier asset profile. With the expected profitability pressures and somewhat high loan growth target, the company would require capital infusions to maintain comfortable capitalisation.

Funding is comfortable with well-matched assets liability tenures. The company has raised considerable longer tenure funding from capital markets with added diversity by mobilising sizeable retail deposits. Funding from banks is reasonably diversified.

Profitability is supported by high net interest margins (NIMs: 8.8% in FY12). Nevertheless, any higher stress on the company's asset quality resulting in increased credit costs can impact its profitability.

MMFSL is a non-banking finance company, and M&M is a leading Indian automobile company. Besides financing M&M's vehicles, MMFSL is also the holding company of the group's other financial services forays, including rural housing finance.

MMFSL's ratings:

- INR4.7bn lower tier II subordinated debt: affirmed at National Long-Term 'Fitch AA+(ind)'

- INR3.2bn non-convertible debentures: affirmed at National Long-Term 'Fitch AA+(ind)'

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