Detailed Rationale

CRISIL Ratings has reaffirmed its 'CRISIL AAA/Stable' rating on the bank loan facilities of Caterpillar Financial Services India Private Limited (CFSIPL).

 

 The rating is centrally driven by CFSIPL's strategic importance to its ultimate parent, Caterpillar Inc. (rated at 'A/ Stable/ A1' by S&P Global Ratings [S&P Global]) 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. The expectation of support is also based on majority ownership of Caterpillar Inc. in CFSIPL, the 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. Caterpillar Inc. is 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 and Energy & 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. While the Indian manufacturing facility of Caterpillar Inc. has been operating for over 30 years in the country, CFSIPL commenced operations only in July 2019.

 

Over fiscal 2022, CFSIPL's Assets under Management (AUM) grew to Rs 960 crore as on March 31, 2022 with gross non-performing assets (GNPA) of 4.8%. Collection efficiency for the month of March 2022 was 104%. The company has restructured ~Rs 50 crore worth of portfolio over fiscal 2021 and 2022 under the RBI Covid Relief Program & Natural Calamity Relief Program.

 

The resource profile of the company remains supported by CFSIPL's ability to leverage global banking relationships given its status of being a Caterpillar group subsidiary.

 
The rating also factors in CFSIPL's current capital position, and CRISIL Ratings’ expectation 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.

 

The above strengths are partially offset by limited track record of operations of the company.

Analytical Approach

For arriving at the rating, CRISIL Ratings has evaluated the standalone business, financial and management risk profile of CFSIPL. Further, CRISIL Ratings has 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 indirect wholly owned subsidiary of Caterpillar Inc.- held jointly by Caterpillar Financial Services Corporation (99%) and Caterpillar International Services Corporation (1%). Having started operations in July 2019, CFSIPL was set up to provide a one stop solution for customized 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 - which was in line with CRISIL Ratings' earlier expectation and was already factored into the rating. Over the medium term, CRISIL Ratings believes CFSIPL will continue to receive capital support from its parent if required.

There is high degree of operational and management control exercised by the parent company over CFSIPL which is evidenced in the stringent reporting structure within the company and the group. Caterpillar Inc. views India to be a high potential market for its products and it believes that establishment of CFSIPL in the country would bolster the sales of its products - by extending financial facility to the buyers. CFSIPL's risk management systems, practices and policies are expected to be in line with global standards, similar to that for other subsidiaries of Caterpillar Inc. across the globe.

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. Presently, the company has working capital lines from 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 capitalization

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 as on March 31, 2022 was Rs 303 crore, and gearing was comfortable at 2.1 times. 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.

Niche market position as the captive financier for Caterpillar Inc. in India

CFSIPL was set up to extend financial services to the customers of Caterpillar Inc. As a captive financier to Caterpillar (India), it is expected to hold a niche position in the construction and mining equipment financing segment of India. Over the first three years of its operations, CFSIPL’s AUM grew to Rs 960 crore by the end of March 31, 2022. , driven by sales volumes of Caterpillar products in India and, this correlation is expected to remain high in the long run. With gradual recovery in demand for construction equipment, CRISIL Ratings expects CFSIPL to sustain its growth levels.

Weaknesses:
Limited track record of operations

Having launched operations only in July 2019, the company's track record is limited to three years and thus, the internal systems, practices and positions are yet to be tested for scale. More so, in the aftermath of Covid-19 outbreak – GNPAs elevated to 4.8% as of March 31, 2022 from sub 2% level previously. The AUM has registered a healthy growth in fiscal 2022 which makes the portfolio unseasoned and its asset quality, untested in the normal course of business.

Liquidity: Superior

CFSIPL's liquidity position remains strong with adequate coverage of its liquidity balance as on June 30, 2022 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. 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 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 benefit 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 two 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

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

Any other information: Not applicable