Detailed Rationale

CRISIL Ratings has reaffirmed its 'CRISIL A1+' rating on the Rs 210 crore commercial paper programme of CNH Industrial Capital (India) Pvt Ltd (CNHI Capital).

 

The rating centrally factors in the strategic importance of the company to its ultimate parent, CNH Industrial N.V. (CNH Industrial; rated 'BBB/Stable/A-2' by S&P Global) and the parent’s strong moral obligation to support the Indian subsidiary, both on an ongoing basis and in the event of distress. The expectation of strong support is also based on CNH Industrial’s 100% ultimate ownership in CNHI Capital, through its wholly owned subsidiary, CNH Industrial India Private Ltd (CNHI India), which manufactures and sells tractors and other agricultural equipment in India. The rating is also driven by comfortable capitalisation. However, these rating strengths are partially offset by CNHI Capital being a relatively smaller player with limited track record of operations and modest asset quality and earnings profile.

 

With nationwide lockdown restrictions being lifted steadily in a phased manner, the degree of relaxations vary across regions and depends on the severity of the Covid-19 pandemic. Intermittent lockdowns and localised restrictions could delay the return of collections to normalcy and put pressure on asset quality metrics. CNHI Capital’s ability to manage asset quality and collections will remain a key monitorable. As part of the measures for containing the pandemic, the Reserve Bank of India (RBI) had allowed lenders to grant moratorium to borrowers. Around 16% of CNHI Capital‘s loan book have availed the moratorium. CNHI capital doesn’t have any restructured book under the one-time restructuring scheme as of December 31, 2020.

 

CRISIL Ratings understands that CNHI Capital has not opted for any moratorium from lenders and continues to service the debt as per schedule.

Analytical Approach

The rating on CNHI Capital is based on S&P's counterparty credit rating on CNH Industrial. This is because ratings on Indian affiliates of global financial institutions (GFIs) by CRISIL Ratings centrally factor in strong expectation of support from their ultimate parents. The rating framework for such affiliates considers the following factors: CRISIL Ratings’ assessment of the global operating environment and its impact on the credit risk profiles of GFIs; ratings of S&P on GFIs; CRISIL Ratings’ translation of S&P ratings on the parents into CRISIL Ratings’ rating scale; and the standalone credit quality of the Indian operations.

Key Rating Drivers & Detailed Description

Strengths:

* Strong support of CNH Industrial

CNHI Capital is strategically important to CNH Industrial, given the role the former plays in strengthening the market share of the group’s two major business segments conducted through two subsidiary companies in India, namely, CNH Industrial (India) Pvt Ltd for tractor & agricultural equipment and Case New Holland Construction Equipment (India) Pvt Ltd (Case NHC) for construction equipment business. Moreover, the group has made a cumulative investment of Rs 363.7 crore in CNHI Capital (Rs 67 crore has been infused in May 2020). Further capital may also be infused to support growth in the future, as and when required.

 

The risk management policies, systems and processes of CNHI Capital are in line with those followed globally by CNH Industrial. The operations are closely integrated with those of other CNH Industrial businesses in India, as well as globally. Furthermore, the Indian group treasury team responsible for funding and liquidity management at CNHI Capital, works closely with the global treasury team in planning and managing funding requirement. Benefits from the global relationships of CNH Industrial with foreign banks operating in India also support the business. CNHI Capital’s senior management team has significant experience in the financial services industry. Its board of directors has representation from other business verticals of CNHI Industrial group. Furthermore, the Indian parent (CNHI India) has provided a credit line of Rs 500 crore to CNHI Capital.

 

The ownership, shared brand and strong operational integration leads to strong support from CNH Industrial. Therefore, the extent of ownership and support extended by the parent, remains a key credit sensitivity factor.

 

* Comfortable capitalisation

Networth was Rs 371.7 crore and capital adequacy ratio was 22.2% as on December 31, 2020. The parent has infused Rs 363.7 crore in CNHI Capital so far, including Rs 67 crore infused in May 2020. Although gearing was 3.35 times as on December 31, 2020, it is expected to increase, over the medium term, to steady-state levels of 4-5 times as the entity scales its portfolio.

 

Weakness:

* Limited track record of operations

CNHI Capital commenced operations in April 2018. It is a relatively small player with a modest loan portfolio of Rs 1,585 crore as on December 31, 2020 (Rs 1,177 crore as on March 31, 2020). While the current size of the company’s operations is small, it is expected to scale up its portfolio to around Rs 2,000 crore in the short to medium term. Being a captive player, its growth trajectory is intrinsically linked to the market positions of CNHI India and Case NHC in the Indian market.

 

The company provides loans and financial services to customers and dealers for purchase of tractor and construction equipment. As on December 31, 2020, wholesale dealer financing comprised 22% of the total book and the balance was in the form of retail financing. On a steady-state basis, the company is expected to maintain its retail portfolio at 70-75% over the medium term.

 

* Modest asset quality and earnings profile

Given the nascent stage of operations, CNHI Capital had delinquencies with gross non-performing assets (GNPAs) of 5.4% as on March 31, 2020 (GNPAs of 0.47% as on March 31, 2019). The GNPA has increased in March 20 due to the lockdown. However, 90+ days past due (dpd) as on December 31, 2020, was 4.1% on account of better collection efficiency and  relatively less  impact on agriculture sector. CNHI Capital has strong focus on underwriting and risk management practices, which are similar to those followed globally.

 

The company reported net loss of Rs 4.2 crore in fiscal year ended March 2020, since it is in the nascent stage of operations and has been spending on setting up the requisite infrastructure essential for a financial services firm, including system and processes for underwriting and collection. However, the management expects the company to breakeven in fiscal 2021. Thereafter, the earnings profile is expected to improve gradually, going forward. Nevertheless, the impact of seasoning on the portfolio will be visible only over the medium term. Hence, the ability to manage asset quality and profitability while ramping up scale of operations will be a key monitorable.

Liquidity: Strong

The liquidity profile of CNHI Capital is strong with positive cumulative mismatches across all Asset-Liability Management buckets. CNHI Capital had total debt repayment of Rs 487.64 crore as on December 31, 2020 over next three months, against which it had Rs 22.2 crore of cash and bank balance and unutilised bank lines of Rs 484.46 crore on the same date. The debt repayment will be further supported by collections during this period.  

Rating Sensitivity factors

Downward factors

* Downward revision in the rating of its ultimate parent, CNH Industrial, by S&P by two or more notches or decline in support from CNH Industrial by way of reduction in majority ownership or in the strategic importance of the parent to CNHI Capital

* Significant weakening of asset quality and earnings profile of CNHI Capital on a continuous basis

About the Company

CNHI Capital is a wholly owned subsidiary of CNHI India, which in turn, is indirectly wholly owned by CNH Industrial. CNHI Capital was incorporated in October 2017 and obtained its non-deposit-taking non-banking financial corporation (NBFC) license from RBI on April 02, 2018, to function as a captive financier. The NBFC finances to dealers and customers of CNHI India and Case NHC’s construction equipment business. CNHI India has been present in India since 1992 and is primarily involved in manufacturing agricultural equipment, such as tractors and farm mechanisation solutions, such as pneumatic planters, boom sprayers, mowers, rotavators, balers and rakes with strong profitable record. Case NHC has been present in India since 1998 and manufactures construction equipment, including compactors and loader backhoe with a strong profitable track record.

 

CNHI Capital reported net loss of Rs 4.2 crore and total income of Rs 138 crore in fiscal 2020.

 

CNH Industrial, based in Europe, is a leading manufacturer of agricultural and construction equipment, and trucks, commercial vehicles and specialty vehicles. It has strong brands, such as IVECO for trucks and Case IH and New Holland for agricultural and construction equipment, respectively. Furthermore, it offers engines, transmissions and axles not only for its own equipment and vehicles, but also for marine and power generation. It also provides financing solutions through its captive finance subsidiaries. CNH Industrial had a consolidated net income of USD 5 million (Rs 36.78 crore[1]) on net sales of USD 17.5 billion (Rs 1.28 lakh crore1) for the nine months ended September 30, 2020.

 

1Exchange rate as on September 30, 2020, 1USD = 73.5696 INR

 

Key Financial Indicators

As on/for the year ended March 31	Units	2020	2019
Total assets	Rs crore	1,310	866
Total income	Rs crore	138	50
Profit after tax (PAT)	Rs crore	-4.2	-6.1
GNPAs	%	5.4	0.5
Adjusted gearing	Times	3.5	1.4
Return on assets	%	-0.4	-1.3

*As per INDAS

Any other information: Not applicable

 

Annexure - Details of Instrument(s)

ISIN	Name of Instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue Size (Rs crore)	Complexity Levels	Rating Assigned with Outlook
NA	Commercial paper programme	NA	NA	7-365 days	210	Simple	CRISIL A1+