| Mahindra and Mahindra Financial Services Limited | ||||||||||
| Ratings Reaffirmed | ||||||||||
| Rating Action | ||||||||||
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| 1 crore = 10 million | ||||||||||
| Refer to annexure for Details of Instruments & Bank Facilities |
| Detailed Rationale |
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CRISIL has reaffirmed its ratings on the debt programmes and bank facilities of Mahindra and Mahindra Financial Services Limited (Mahindra Finance) at 'CRISIL AA+/FAAA/Stable/CRISIL A1+'. |
| Analytical Approach |
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For arriving at the ratings, CRISIL has combined the business and financial risk profiles of Mahindra Finance and its key subsidiaries, Mahindra Rural Housing Finance Ltd (MRHFL) and Mahindra Insurance Brokers Ltd (MIBL). CRISIL has also factored in the strong support the company is likely to receive from its parent, Mahindra and Mahindra Limited, on an ongoing basis and in times of distress. While MRHFL is in the rural housing finance segment, a fund-based business, MIBL is in insurance broking, a fee-based business. |
| Key Rating Drivers & Detailed Description |
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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. M&M participated in the recently concluded rights issue post which its stake went up from 51.2% to 52.2%. M&M is expected to 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. The company remains of strategic importance to M&M, as the former continues to finance around 32% each of M&M's UV, light commercial vehicle (LCV), and tractor sales. However, financing of M&M vehicles as a proportion of Mahindra Finance's yearly total loan disbursements has reduced over the past few years. As part of its growth strategy, Mahindra Finance has been increasingly financing vehicles of other manufacturers. The proportion of captive finance business stood at 40% of overall disbursements in fiscal 2020 . Further, 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. AUM grew by 6.1% YoY and stood at Rs.64993 crores as on March 31,2020. Main competitors include cooperative and nationalised banks and financing entities in the unorganised sector. Mahindra Finance has considerably strengthened its distribution network: it had 1324 branches across 27 states and 7 Union Territories as on Jun 30, 2020, 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 continues to be adequate with Tier I and overall capital adequacy ratios of 15.3% and 19.6% respectively, as on June 30, 2020 (15.4% and 19.6% respectively as on March 31, 2020). Networth was sizeable at Rs 11532 crore and gearing at 5.2 times as on this date. The company's capital profile is also supported by its demonstrated ability to raise equity capital. In August 2020, the company raised Rs.3,089 crores of equity capital through right issue which resulted in improvement in gearing ratio post completion of Rights Issue. Networth coverage for net NPAs stood at 3.1 times as on June 30, 2020. Indicative Tier ' I capital adequacy after factoring the proceeds of Rights Issue shall be around 20%. 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. As on March 31, 2020, company has a fairly diverse borrowing mix comprising of 27.8% of NCDs,14.9% of securitization,14.8%of fixed deposits and 29.8% of Bank loans and WCDL limit among other instruments. Cost of borrowing remains at healthy levels of 8.4% for fiscal 2020 and are expected to remain better than industry average over the medium term. Weakness: * Modest asset quality impacting profitability: Asset quality weakened from 8.44% in Mar-20 to 9.19% in June-20 led by impact on collection efforts and overall economic slowdown in the wake of the COVID-19 outbreak and nationwide lockdown from 19th March 2020 to 31st May 2020..With significant proportion of loans under moratorium as on June 30, 2020, challenging economic environment and overall slowdown amid the on-going pandemic, asset quality stress could rise further in second half of the year as the moratorium ends on August 31, 2020 and will remain a key monitorable. Nevertheless, the company is increasingly focusing on collection and recovery efforts and CRISIL notes that Mahindra Finance has displayed ability in the past to ultimately recover from these accounts, even post loan maturity date. The overall credit costs have been in the range of 1% to 3% over the past 10 years. The company's track record in the vehicle financing business, understanding of the target customer segment and robust underwriting practices could support the asset quality metrics. Weakening of asset quality and increase in provision coverage ratio impacted profitability, with low annualised return on managed assets (RoMA) of 1.3% and 0.8% in fiscal 2020 and first quarter of fiscal 2021 respectively (2.6% for fiscal 2019). Ability to contain asset quality and credit cost once the moratorium ends will remain a key rating sensitivity factor. However, the company's track record in the vehicle financing business, understanding of the target customer segment and robust underwriting practices could support the asset quality metrics. |
| Liquidity Strong |
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Liquidity position remains comfortable with positive cumulative mismatch in each bucket up to 1 year as on June 30, 2020. Liquidity is further supported with fixed deposits with banks, cash and cash equivalents of Rs 1700 crore and other liquid assets of over Rs 7000 crore as on Jun-20. Company also has ~Rs 1500 crore of unutilised committed bank lines as on Jun-20. The total liquidity is sufficient to repay debt for next 5 months assuming no collections. Moreover, being a part of the M&M group, additional liquidity support will be available to the entity as and when required. |
| Outlook: Stable |
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CRISIL believes Mahindra Finance will benefit from the support it is likely to receive from M&M, given the majority shareholding of, and Mahindra Finance's strategic importance to, its parent. CRISIL also believes the company will maintain its strong market position and adequate capitalisation over the medium term. |
| Rating Sensitivity factors |
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Upward Factors: * Sustainable improvement in asset quality with GNPA improving to under 5% on a sustainable basis with a consequent improvement in earnings profile * Any material increase in the shareholding or group support philosophy of M&M Downside Factors: * Any significant reduction in support to MMFSL or any downward rating action on M&M may result in a corresponding rating action on MMFSL * Deterioration in asset quality and profitability on sustained basis |
| About the Company |
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Mahindra Finance, a non-banking financial company (NBFC), was incorporated in 1991. M&M, the majority shareholder, held 52.2% in Mahindra Finance as on August 31, 2020. Mahindra Finance ranks among the larger NBFCs in India with total assets under management of Rs 63840 crore as on June 30, 2020 (Rs 64993 crore as on March 31, 2020). The company finances consumer purchases of UVs, LCVs, tractors, cars, and other assets. To leverage its extensive branch network and rural clientele, the company has entered the rural housing finance business through subsidiary, MRHFL. MIBL is the insurance broking arm of Mahindra Finance, providing insurance broking services both in the life and non-life segments. |
| Key Financial Indicators - (on a standalone basis) | ||||||||||||||||||||||||||||
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^on average Total Assets
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Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL complexity levels are assigned to various types of financial instruments and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels. |
| Annexure - Details of Instrument(s) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Annexure - Details of Rating Withdrawn | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Annexure - List of entities consolidated | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of various bank facilities | ||||||||||||||||||||||||||||||||||||||||||
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