(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
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.
- INR4.7bn lower tier II subordinated debt: affirmed at National Long-Term
- INR3.2bn non-convertible debentures: affirmed at National Long-Term 'Fitch