Detailed Rationale

CRISIL Ratings has reaffirmed its 'CRISIL AAA/Stable' rating on the long-term bank facilities of Caterpillar Financial Services India Pvt Ltd (CFSIPL).

 

The rating is centrally driven by the strategic importance of the company to its ultimate parent, Caterpillar Inc (rated at 'A/Stable/A1' by S&P Global Ratings), and CRISIL Ratings’ belief that there is a strong moral obligation on the parent to support the Indian subsidiary of the financing arm, both on an ongoing basis and in case of distress. The expectation of support is also based on majority ownership of Caterpillar Inc in CFSIPL, shared brand name, and strong operational linkages.

 

CFSIPL is a wholly owned subsidiary of Caterpillar Financial Services Corporation (Cat Financial), whose ultimate parent is Caterpillar Inc, a leading global manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives. The company principally operates through its three primary segments - construction industries, resource industries, energy and transportation. Cat Financial provides retail and wholesale financing solutions and extended protection products to Cat customers and dealers for the complete line of Caterpillar products. CFSIPL is the captive financier for products offered by Caterpillar Inc in India. While the Indian manufacturing facility of Caterpillar Inc has been operating for over 30 years in the country, CFSIPL commenced operations in July 2019.

 

The assets under management (AUM) of CFSIPL stood at Rs 911 crore as on September 30, 2024, Rs 870 crore as on March 31, 2024, and Rs 996 crore as on March 31, 2023. The asset quality, represented by gross non-performing assets (GNPAs), stood at 4.6% and 5.4% as on September 30, 2024, and March 31, 2024, respectively. Overall collection efficiency has been 104-111% during fiscal 2024.

 

Resource profile continues to be supported by the company’s ability to leverage global banking relationships given its status as a Caterpillar group subsidiary.

 
The rating also factors in CFSIPL's current capital position and the expectation of CRISIL Ratings that it will remain comfortable to support the planned scale of operations. The company's capital position is further supported by the niche market position that CFSIPL is expected to hold in the construction and mining equipment financing segment of India as the captive financier for Caterpillar products sold in the country. These strengths are partially offset by the limited track record of operations of the company.

Analytical Approach

CRISIL Ratings has evaluated the standalone business, financial and management risk profiles of CFSIPL. CRISIL Ratings has also factored in its strategic importance to its ultimate parent, Caterpillar Inc, and CRISIL Ratings’ belief that there is strong moral obligation on Caterpillar Inc. to support the Indian subsidiary of the financing arm, both on an ongoing basis and in the event of distress.

Key Rating Drivers & Detailed Description

Strengths:

• Strategic importance to, and expectation of strong support from ultimate parent - Caterpillar Inc: CFSIPL is an indirectly held wholly owned subsidiary of Caterpillar Inc, held jointly by Cat Financial (99%) and Caterpillar International Services Corporation (1%). The company, which started operations in July 2019, was set up to provide a one-stop solution for customised financial services to the customers who purchase products of Caterpillar Inc in India. After infusing Rs 70 crore at the time of inception, the parent infused Rs 231 crore as additional equity into CFSIPL in fiscal 2021. Over the medium term, CRISIL Ratings believes CFSIPL will continue to receive capital support from its parent, if required.

 

The parent exercises a high degree of operational and management control over CFSIPL, as seen in the stringent reporting structure within the company and the group. Caterpillar Inc views India as a high-potential market and believes that setting up CFSIPL will bolster sales of its products by extending financial facility to the buyers. The company’s risk management systems, practices and policies are expected to be in line with global standards, similar to that for other global subsidiaries of Caterpillar Inc.

On the resources side, CFSIPL benefits from its status of being a Caterpillar group entity owing to which has been able to build global and domestic banking linkages. At present, the company has unutilised bank lines from a few global banks and is in the process of diversifying its resource base.

 

CFSIPL will remain a strategically important unit of Caterpillar Inc. and, CRISIL Ratings believes that the ownership, shared brand name, and strong operational integration lead to a high moral obligation on Caterpillar Inc. to support CFSIPL on an on-going basis and in the event of distress.

 

• Comfortable capitalisation: In relation to its scale and nature of operations, the company's capital position is comfortable and is expected to remain so over the medium term. Reported networth was Rs 279 crore, and gearing was comfortable at 2.3 times, as on March 31, 2024. As per its philosophy, the company intends to maintain adequate cushion over regulatory capital adequacy ratio and single / group borrower limits prescribed by Reserve Bank of India and thus, to operate at optimal gearing levels.

Weakness:

• Relatively small player in the overall finance market, with limited track record of operations: CFSIPL’s acts as a captive financier to Caterpillar (India). The company is a relatively modest player in the construction and mining equipment financing segment in India. Having launched operations only in July 2019, its AUM stood at Rs 911 crore as on September 30, 2024, driven by sales volumes of Caterpillar products in India.

 

Given the limited track record, internal systems, practices and positions are yet to be tested for scale. Also, GNPAs remained elevated at 4.6% as on September 30, 2024, and 5.4% as on March 31, 2024. While average collection efficiency has remained comfortable in the range of 104-111% during fiscal 2024, asset quality metrics remain susceptible to economic risks. Hence, the ability to maintain asset quality as operations ramp up would be demonstrated only in the long term.

 

Earnings profile also remained constrained amid elevated credit costs and muted growth. While CFSIPL turned profitable in fiscal 2022, elevated credit costs have played on the earnings profile in fiscal 2023 and fiscal 2024 with the company incurring losses.

Liquidity: Superior

CFSIPL's liquidity position remains strong with adequate coverage of its liquidity balance as on September 30, 2024, over the scheduled outflows for the succeeding 3 months. Additional comfort is drawn by the expectation of on-going support from Caterpillar Inc. The company has a few sanctioned term loans against which the utilization remains low. The company’s liquidity profile is expected to remain strong, supported by its association with Caterpillar Inc. group through which it can leverage global banking relations and short notice funds.

Outlook: Stable

CFSIPL is expected to remain strategically important to, and receive on-going support from, its ultimate parent - Caterpillar Inc. Given the criticality of CFSIPL to the group, CRISIL Ratings believes there is a strong moral obligation on Caterpillar Inc. to support the operations of the company on an on-going basis. In the medium to long term, CFSIPL is expected to maintain comfortable capital position and benefits from its niche market position as the captive financier of Caterpillar products in India. However, in the course of growth - the ability of the company to maintain asset quality and profitability remains to be demonstrated.

Rating sensitivity factors

Downward factors

• Downward revision in S&P Global's rating on Caterpillar Inc. by 2 or more notches or if there is a significant diminution in the stake held by, or any change in CRISIL Ratings' belief on the support expected from Caterpillar Inc.
• Significant and continued deterioration in asset quality implicating earnings profile

About the Company

A wholly owned subsidiary of Caterpillar Inc, CFSIPL is jointly held by Caterpillar Financial Services Corporation (99%) and Caterpillar International Services Corporation (1%). Headquartered in Bengaluru, CFSIPL was set up to support customers in India by offering a one-stop solution for customised financial services for a range of Caterpillar Inc products. The captive financier for Caterpillar Inc in India, CPSIPL commenced operations in July 2019. The Bengaluru office is the 41st Cat Financial location globally.

Any other information: Not Applicable