Rating Rationale
May 14, 2018 | Mumbai
Mahindra and Mahindra Financial Services Limited
Ratings Reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.20643 Crore
Long Term Rating CRISIL AA+/Stable (Reaffirmed)
Short Term Rating CRISIL A1+ (Reaffirmed)
 
Non-Convertible Debentures Aggregating Rs.592.1 Crore CRISIL AA+/Stable (Reaffirmed)
Subordinated Debt Programme Aggregating Rs.738.8 Crore  CRISIL AA+/Stable (Reaffirmed)
Fixed Deposit Programme FAAA/Stable (Reaffirmed) 
Rs.8500 Crore Commercial Paper Programme  CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL ratings on the bank facilities and debt instruments of Mahindra and Mahindra Financial Services Limited (Mahindra Finance) at 'CRISIL AA+/FAAA/Stable/CRISIL A1+' continues to reflect the company's majority ownership by, and strategic importance to, the parent, Mahindra & Mahindra Ltd (M&M; rated 'CRISIL AAA/Stable/CRISIL A1+').

The ratings are also underpinned by a strong position in the utility vehicle (UV) and tractor financing business in rural and semi-urban areas, adequate capitalisation, and stable resource profile. These strengths are partially offset by modest asset quality.

Analytical Approach

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). This is because all these entities have strong operational and financial integration, common promoters and senior management, and a shared brand name. 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
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. 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 has declined to around 45% of overall disbursements in fiscal 2018 from 75% in 2008. Nevertheless, 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 1284 branches across 27 states and 4 Union Territories as on March 31, 2018, 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 16.1% and 22.0% respectively, as on March 31, 2018 (12.8% and 17.2% respectively as on March 31, 2017). Networth was sizeable at Rs 9303 crore and gearing at 4.3 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. As a result of transition to 90+days-past-due (dpd) for classification of non-performing assets (NPAs), the networth coverage for net NPAs increased to 4.7 times as on March 31, 2018, as compared to 4.0 times (on a 120+dpd basis) as on March 31, 2017. Even on a like-to-like (120+dpd) basis, the networth coverage for NPAs increased to 5.8 times as of March 31, 2018.

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 declined to 8.1% for the fiscal ending on March 31, 2018 from 8.9% 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 increased to 9.3% as on March 31, 2018 (9.9% as on March 31, 2017).  The company transitioned to 90+dpd NPA recognition as on September 30, 2017 versus 120+dpd NPA recognition until June 30, 2017.

While all the asset segments have witnessed higher delinquencies, the LCV, tractor and three-wheeler portfolio have been impacted the most. Stress on asset quality and accelerated provisions have resulted in increased provisioning cost (based on managed assets) at 2.4% as of March 31, 2018 (3.0% as of March 31, 2017; 2.7% as of March 31, 2016). Consequently, profitability has been affected, with low return on managed assets (RoMA) of 1.8% as of March 31, 2018 (0.9% as of March 31, 2017; 1.7% as of March 31, 2016). The company is increasingly focusing on collection and recovery efforts; on a static-pool basis, final credit loss in the loan portfolio is expected low, indicating delayed, but ultimate collections.
Outlook: Stable

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. The outlook may be revised to 'Positive' in case of significant and sustained improvement in the standalone credit risk profile across cycles. The outlook may be revised to 'Negative' in case of substantial weakening of asset quality and earnings, or a diminution in support from M&M. A change in the ratings or rating outlook to 'Negative' on the debt instruments and bank facilities of M&M will also result in a corresponding revision in the ratings or rating outlook on Mahindra Finance's debt instruments and bank facilities.

About the Company

Mahindra Finance, a non-banking financial company (NBFC), was incorporated in 1991. M&M, the majority shareholder, held 51.2% in Mahindra Finance as on March 31, 2018. Mahindra Finance ranks among the larger NBFCs in India with total assets under management of Rs 55,101 crore as on March 31, 2018 (Rs 46,776 crore as on March 31, 2017). 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.

On a consolidated basis, total income and net profit were Rs 8533 crore and Rs 1,051 crore, respectively, for fiscal 2018, against Rs 7146 crore and Rs 530 crore, respectively, for fiscal 2017.

Key Financial Indicators (on a standalone basis)
As on / for the period ended March 31 Unit 2018 2017
Total Assets Rs crore 54,368 45,837
Total income Rs crore 7,147 6,174
Profit after tax Rs crore 892 400
Gross NPA % 9.3 9.9
Return on assets % 1.8 0.9
Adjusted gearing Times 4.3 5.5

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
ISIN Name of Instrument Date of Allotment Coupon Rate (%) Maturity Date Issue Size (Rs. Cr) Rating Outstanding with Outlook
INE774D07IU4 Debentures** 3-Jan-13 9.45 20-Dec-17 7.0 CRISIL AA+/Stable
INE774D07IV2 Debentures** 11-Jan-13 9.34 10-Apr-18 18.5 CRISIL AA+/Stable
INE774D07IY6 Debentures** 15-Jan-13 9.40 15-Jan-18 25.0 CRISIL AA+/Stable
INE774D07JA4 Debentures** 7-Feb-13 9.25 7-Feb-18 5.0 CRISIL AA+/Stable
INE774D07JB2 Debentures** 27-Feb-13 9.40 27-Feb-18 10.0 CRISIL AA+/Stable
INE774D07JG1 Debentures** 22-Apr-13 9.25 20-Apr-18 165.0 CRISIL AA+/Stable
INE774D07JK3 Debentures** 25-Apr-13 9.25 25-Apr-18 15.0 CRISIL AA+/Stable
INE774D07JP2 Debentures 8-Oct-13 10.25 8-Oct-18 75 CRISIL AA+/Stable
INE774D07JS6 Debentures 15-Jan-14 9.95 15-Jan-19 10 CRISIL AA+/Stable
INE774D07JT4 Debentures 16-Jan-14 9.95 16-Jan-19 55 CRISIL AA+/Stable
INE774D07JU2 Debentures 17-Jan-14 9.9 17-Jan-19 5 CRISIL AA+/Stable
NA Debentures^ NA NA NA 201.6 CRISIL AA+/Stable
INE774D08JC8 Subordinated Debt 17-Oct-08 11.75 17-Oct-18 9.8 CRISIL AA+/Stable
INE774D08KV6 Subordinated Debt 26-Nov-10 9.8 25-Jan-21 200 CRISIL AA+/Stable
INE774D08KW4 Subordinated Debt 7-Dec-11 10.05 7-Dec-21 0.5 CRISIL AA+/Stable
INE774D08KX2 Subordinated Debt 12-Dec-11 10.5 13-Dec-21 100 CRISIL AA+/Stable
INE774D08KY0 Subordinated Debt 19-Jun-12 10.15 20-Jun-22 20 CRISIL AA+/Stable
INE774D08KZ7 Subordinated Debt 26-Jun-12 10.15 27-Jun-22 5 CRISIL AA+/Stable
INE774D08LA8 Subordinated Debt 19-Oct-12 10.02 19-Oct-22 5 CRISIL AA+/Stable
INE774D08LB6 Subordinated Debt 19-Oct-12 10.02 21-Oct-19 45 CRISIL AA+/Stable
INE774D08LC4 Subordinated Debt 17-Jan-13 9.8 17-Jan-23 40 CRISIL AA+/Stable
INE774D08LE0 Subordinated Debt 23-Apr-13 9.7 23-Apr-20 20 CRISIL AA+/Stable
INE774D08LD2 Subordinated Debt 23-Apr-13 9.7 24-Apr-23 80 CRISIL AA+/Stable
INE774D08LG5 Subordinated Debt 24-May-13 9.5 25-May-20 52.2 CRISIL AA+/Stable
INE774D08LF7 Subordinated Debt 24-May-13 9.5 24-May-23 47.8 CRISIL AA+/Stable
NA Subordinated Debt^ NA NA NA 113.5 CRISIL AA+/Stable
NA Commercial Paper NA NA 7-365 days 8500 CRISIL A1+
NA Term Loan 1 NA NA 31-Dec-18 250 CRISIL AA+/Stable
NA Term Loan 2 NA NA 9-Mar-19 250 CRISIL AA+/Stable
NA Term Loan 3 NA NA 27-Dec-18 300 CRISIL AA+/Stable
NA Term Loan 4 NA NA 28-Mar-19 300 CRISIL AA+/Stable
NA Term Loan 5 NA NA 29-Mar-20 500 CRISIL AA+/Stable
NA Term Loan 6 NA NA 31-Dec-18 500 CRISIL AA+/Stable
NA Term Loan 7 NA NA 30-Mar-20 500 CRISIL AA+/Stable
NA Term Loan 8 NA NA 31-Mar-22 250 CRISIL AA+/Stable
NA Term Loan 9 NA NA 27-Mar-21 500 CRISIL AA+/Stable
NA Term Loan 10 NA NA 10-Jan-21 250 CRISIL AA+/Stable
NA Term Loan 11 NA NA 18-Dec-19 275 CRISIL AA+/Stable
NA Term Loan 12 NA NA 28-Feb-20 350 CRISIL AA+/Stable
NA Term Loan 13 NA NA 30-Jun-20 100 CRISIL AA+/Stable
NA Term Loan 14 NA NA 31-Dec-20 100 CRISIL AA+/Stable
NA Term Loan 15 NA NA 27-Mar-21 400 CRISIL AA+/Stable
NA Term Loan 16 NA NA 29-Dec-18 500 CRISIL AA+/Stable
NA Term Loan 17 NA NA 27-Nov-18 500 CRISIL AA+/Stable
NA Term Loan 18 NA NA 31-Mar-20 150 CRISIL AA+/Stable
NA Term Loan 19 NA NA 27-Dec-18 200 CRISIL AA+/Stable
NA Term Loan 20^ NA NA NA 100 CRISIL AA+/Stable
NA Term Loan 21 NA NA 28-Feb-19 400 CRISIL AA+/Stable
NA Term Loan 22 NA NA 28-Feb-21 500 CRISIL AA+/Stable
NA Term Loan 23 NA NA 30-Dec-18 500 CRISIL AA+/Stable
NA Term Loan 24 NA NA 2-Aug-18 100 CRISIL AA+/Stable
NA Term Loan 25 NA NA 31-Dec-18 500 CRISIL AA+/Stable
NA Term Loan 26 NA NA 12-Jun-21 500 CRISIL AA+/Stable
NA Term Loan 27 NA NA 26-Mar-20 500 CRISIL AA+/Stable
NA Term Loan 28 NA NA 29-Aug-20 100 CRISIL AA+/Stable
NA Term Loan 29 NA NA 31-Aug-21 100 CRISIL AA+/Stable
NA Term Loan 30 NA NA 31-Aug-19 150 CRISIL AA+/Stable
NA Term Loan 31 NA NA 29-Dec-21 150 CRISIL AA+/Stable
NA Term Loan 32 NA NA 28-Mar-21 160 CRISIL AA+/Stable
NA Term Loan 33 NA NA 10-Dec-22 750 CRISIL AA+/Stable
NA Term Loan 34 NA NA 28-Feb-21 50 CRISIL AA+/Stable
NA Term Loan 35 NA NA 27-Feb-22 100 CRISIL AA+/Stable
NA Term Loan 36 NA NA 27-Feb-20 161.7 CRISIL AA+/Stable
NA Term Loan 37 NA NA 31-Dec-18 250 CRISIL AA+/Stable
NA Term Loan 38 NA NA 29-Sep-18 250 CRISIL AA+/Stable
NA Term Loan 39 NA NA 30-Jan-20 275 CRISIL AA+/Stable
NA Term Loan 40 NA NA 16-Mar-21 300 CRISIL AA+/Stable
NA Term Loan 41 NA NA 22-Mar-23 1000 CRISIL AA+/Stable
NA Cash Credit NA NA NA 1852 CRISIL AA+/Stable
NA Short Term Bank Facility NA NA NA 1450 CRISIL A1+
NA Proposed Long term Bank loan Facility NA NA NA 4269.26 CRISIL AA+/Stable
NA Fixed Deposits NA NA NA 0 FAAA/Stable
^Not yet issued/availed
**CRISIL is awaiting independent confirmation of redemption before withdrawing ratings on these facility

Annexure - Rating History for last 3 Years
  Current 2018 (History) 2017  2016  2015  Start of 2015
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  8500.00  CRISIL A1+  01-03-18  CRISIL A1+  20-11-17  CRISIL A1+  24-08-16  CRISIL A1+  25-11-15  CRISIL A1+  CRISIL A1+ 
            04-10-17  CRISIL A1+  12-05-16  CRISIL A1+  22-06-15  CRISIL A1+   
            25-07-17  CRISIL A1+  20-01-16  CRISIL A1+  13-02-15  CRISIL A1+   
            22-05-17  CRISIL A1+      28-01-15  CRISIL A1+   
            13-04-17  CRISIL A1+           
            18-01-17  CRISIL A1+           
Fixed Deposits  FD  0.00  FAAA/Stable  01-03-18  FAAA/Stable  20-11-17  FAAA/Stable  24-08-16  FAAA/Stable  25-11-15  FAAA/Stable  FAAA/Stable 
            04-10-17  FAAA/Stable  12-05-16  FAAA/Stable  22-06-15  FAAA/Stable   
            25-07-17  FAAA/Stable  20-01-16  FAAA/Stable  13-02-15  FAAA/Stable   
            22-05-17  FAAA/Stable      28-01-15  FAAA/Stable   
            13-04-17  FAAA/Stable           
            18-01-17  FAAA/Stable           
Non Convertible Debentures  LT  723.50
31-03-18 
CRISIL AA+/Stable  01-03-18  CRISIL AA+/Stable  20-11-17  CRISIL AA+/Stable  24-08-16  CRISIL AA+/Stable  25-11-15  CRISIL AA+/Stable  CRISIL AA+/Stable 
            04-10-17  CRISIL AA+/Stable  12-05-16  CRISIL AA+/Stable  22-06-15  CRISIL AA+/Stable   
            25-07-17  CRISIL AA+/Stable  20-01-16  CRISIL AA+/Stable  13-02-15  CRISIL AA+/Stable   
            22-05-17  CRISIL AA+/Stable      28-01-15  CRISIL AA+/Stable   
            13-04-17  CRISIL AA+/Stable           
            18-01-17  CRISIL AA+/Stable           
Subordinated Debt  LT  625.30
31-03-18 
CRISIL AA+/Stable  01-03-18  CRISIL AA+/Stable  20-11-17  CRISIL AA+/Stable  24-08-16  CRISIL AA+/Stable  25-11-15  CRISIL AA+/Stable  CRISIL AA+/Stable 
            04-10-17  CRISIL AA+/Stable  12-05-16  CRISIL AA+/Stable  22-06-15  CRISIL AA+/Stable   
            25-07-17  CRISIL AA+/Stable  20-01-16  CRISIL AA+/Stable  13-02-15  CRISIL AA+/Stable   
            22-05-17  CRISIL AA+/Stable      28-01-15  CRISIL AA+/Stable   
            13-04-17  CRISIL AA+/Stable           
            18-01-17  CRISIL AA+/Stable           
Fund-based Bank Facilities  LT/ST  20643.00  CRISIL AA+/Stable/ CRISIL A1+  01-03-18  CRISIL AA+/Stable/ CRISIL A1+  20-11-17  CRISIL AA+/Stable/ CRISIL A1+  24-08-16  CRISIL AA+/Stable/ CRISIL A1+  25-11-15  CRISIL AA+/Stable/ CRISIL A1+  CRISIL AA+/Stable/ CRISIL A1+ 
            04-10-17  CRISIL AA+/Stable/ CRISIL A1+  12-05-16  CRISIL AA+/Stable/ CRISIL A1+  22-06-15  CRISIL AA+/Stable/ CRISIL A1+   
            25-07-17  CRISIL AA+/Stable/ CRISIL A1+  20-01-16  CRISIL AA+/Stable/ CRISIL A1+  13-02-15  CRISIL AA+/Stable/ CRISIL A1+   
            22-05-17  CRISIL AA+/Stable/ CRISIL A1+      28-01-15  CRISIL AA+/Stable/ CRISIL A1+   
            13-04-17  CRISIL AA+/Stable/ CRISIL A1+           
            18-01-17  CRISIL AA+/Stable/ CRISIL A1+           
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Cash Credit 1852 CRISIL AA+/Stable Cash Credit 1852 CRISIL AA+/Stable
Long Term Bank Facility 13071.74 CRISIL AA+/Stable Long Term Bank Facility 12035 CRISIL AA+/Stable
Proposed Long Term Bank Loan Facility 4269.26 CRISIL AA+/Stable Proposed Long Term Bank Loan Facility 5356 CRISIL AA+/Stable
Short Term Bank Facility 1450 CRISIL A1+ Short Term Bank Facility 1400 CRISIL A1+
Total 20643 -- Total 20643 --
Links to related criteria
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating Criteria for Finance Companies
CRISILs Criteria for rating short term debt
Criteria for Notching up Stand Alone Ratings of Companies based on Parent Support

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