Rating Rationale

Strengths:
* Majority ownership by, and strategic importance to M&M
The ratings factor in the financial and operational linkages that Mahindra Finance has with M&M. While M&M currently holds a majority stake of 51.2%, there is a possibility of the stake reducing to below 51% in future when Mahindra Finance taps equity capital markets to support growth without M&M's participation in the same. Nevertheless, M&M will remain the largest shareholder and maintain controlling interest in Mahindra Finance over the medium term, given the latter's critical role in facilitating M&M's sales. In December 2017, the company raised Rs 2111 crore of equity capital (Rs 1056 crore through QIP and another Rs 1055 crore from M&M), resulting in M&M maintaining its stake at current levels.

The company remains of strategic importance to M&M, as the former continues to finance around 30-35% each of M&M's UV, light commercial vehicle (LCV), and tractor sales and the proportion of captive finance business stood at 41% of overall disbursements in fiscal 2019. M&M's majority ownership of Mahindra Finance, shared brand, and strong linkages between the two imply a moral obligation on M&M's part to support Mahindra Finance in case of distress.

* Strong and established market position in rural and semi-urban areas, particularly in UV and tractor financing business
Mahindra Finance's market position in the UV and tractor financing segments remains strong, given the operational linkages with M&M, which enables Mahindra Finance to access the parent's widespread dealer network. Main competitors include cooperative and nationalised banks and financing entities in the unorganised sector. Mahindra Finance has considerably strengthened its distribution network: it had 1334 branches across 28 states and 5 Union Territories as on Jun 30, 2019, with a large number of branches in semi-urban and rural areas, where it enjoys a strong market share. To leverage its existing presence in these geographies, Mahindra Finance entered rural housing finance through MRHFL.

* Adequate capitalisation and stable resource profile:
Capitalisation continue to be adequate with Tier I and overall capital adequacy ratios of 14.9% and 19.4% respectively, as on June 30, 2019 (15.5% and 20.3% respectively as on March 31, 2018). Networth was sizeable at Rs 10974 crore and gearing at 5.0 times as on this date. The company's capital profile is also supported by its demonstrated ability to raise equity capital. In December 2017, the company raised Rs 2111 crore of equity capital (Rs 1056 crore through QIP and another Rs 1055 crore from M&M), resulting in M&M maintaining its stake.

A stable and diversified resource profile and substantial unutilised bank limit provide significant financial flexibility to raise resources at competitive costs to meet increasing funding requirement. Average cost of borrowing inched up to 8.9% for fiscal 2019 from 8.3% for the previous fiscal. Borrowing costs are expected to remain better than industry average over the medium term.

Weakness:
* Modest asset quality impacting profitability:
The gross NPA ratio as per IND AS increased to 7.4% as on June 30, 2019 (5.9% and 9.0% as on March 31, 2019 and March 31, 2018 respectively). GNPAs are slightly higher in CV and tractor segment. Networth coverage for net NPAs stood at 2.8 times as on June 30, 2019, as compared to 3.3 times as on March 31, 2018.