Key Rating Drivers & Detailed Description
Strengths:
* Majority ownership by, and strategic importance to, M&M
The ratings factor in the strategic, financial and operational linkages between Mahindra Finance and M&M. The parent participated in the rights issue in August 2020 following which its stake went up to 52.2% from 51.2%. M&M is expected to remain the largest shareholder and maintain controlling interest in Mahindra Finance over the medium term, as the company is of strategic importance to M&M.
Mahindra Finance continues to finance around 30% each of M&M’s UV and light commercial vehicle (LCV) sales. Market share in tractors was impacted during the Covid-19 pandemic and has now increased. 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 captive finance business accounted for 46% of the overall loan book in fiscal 2022. Furthermore, M&M’s majority ownership of Mahindra Finance, shared brand and strong linkages 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 the UV and tractor financing businesses
Mahindra Finance’s market position in the UV and tractor financing segments remains strong, owing to the operational linkages with M&M, which enables the company to access the parent’s widespread dealer network. The company finances consumer purchases of auto/UVs (31% of gross business assets as on September 30, 2022), commercial vehicles (CV)/commercial equipments (CEs) (11%), tractors (14%), cars (20%) and other assets. The company has plans to diversify and increase its non-vehicle portfolio over the medium term. It has recently started offering products such as small and medium enterprise (SME) loans, loan against property (LAP), leasing and digital lending. The scalability of this portfolio remains a monitorable.
Disbursements remained subdued in fiscal 2021 and the first half of fiscal 2022 as the company adopted a cautious approach owing to challenging business environment. Consequently, overall gross business assets of Mahindra Finance remained flat at Rs 64,961 crore as on March 31, 2022. However, disbursements have picked up and stood at Rs 21,296 crore in the first half of fiscal 2023 (106% year-on-year growth); gross loan assets witnessed 14% growth in the first half of fiscal 2023 and stood at Rs 73,817 crore as on September 30, 2022.
The company has considerably strengthened its distribution network: it had 1,386 branches across 27 states and 7 Union Territories as on September 30, 2022, with a large number of branches in semi-urban and rural areas, where it enjoys 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, as reflected in tier I and overall capital adequacy ratios of 20.5% and 23.8% respectively, as on September 30, 2022 (24.3% and 27.8%, respectively, as on March 31, 2022). Networth was sizeable at Rs 15,746 crore and gearing at 4.3 times as on September 30, 2022 (Rs 15,628 crore and 3.6 times, respectively, as on March 31, 2022). 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 crore of equity capital through rights issue, which resulted in improvement in gearing. Networth coverage for net non-performing assets (NPAs) stood at 7.6 times as on September 30, 2022.
Stable and diversified resource profile and substantial unutilised bank limits provide significant financial flexibility to raise resources at competitive costs to meet increasing funding requirement. As on September 30, 2022, the company had a fairly diverse borrowing mix consisting of 27% of NCDs, 11.6% of securitisation, 9.9% of fixed deposits and 36.4% of bank borrowings. Cost of borrowing was healthy at 6.6% in the first half of fiscal 2023 (6.5% in fiscal 2022) and is expected to remain better than industry average over the medium term.
Weakness
* Modest asset quality
Mahindra Finance’s asset quality is modest despite showing improvement in recent times. Gross stage 3 assets stood at 6.7% as on September 30, 2022, as against 7.66% as on March 31, 2022, and 8.96% as on March 31, 2021. The improvement in asset quality was driven by reduction in gross stage 3 assets across all asset classes. Furthermore, the outstanding restructured portfolio stood at Rs 3,003 crore (4.1% of the overall portfolio) as on September 30, 2022.
The company is increasingly focusing on collection and recovery efforts and CRISIL Ratings notes that Mahindra Finance has shown ability to ultimately recover from delinquent accounts even post loan maturity date. Overall ultimate credit loss has been in the range of 2% 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 may support the asset quality metrics. The company's ability to manage collections and asset quality going forward will be a key monitorable. The impact of the revised norms of the Reserve Bank of India (RBI) on asset classification as part of the circular released on November 12, 2021, and further extended upto September 30, 2022, as per RBI circular dated February 15, 2022, will need to be monitored closely.
Weakening of asset quality and increase in provision coverage ratio impacted profitability in fiscal 2021 (0.4% return on managed assets [RoMA]) and in the first quarter of fiscal 2022 (-8.2% RoMA annualised). Thereafter, the company has witnessed quarter-on-quarter improvement in profitability as reflected in RoMA of 1.3% in fiscal 2022 (reported profit of Rs 989 crore). The increase in profitability is partly supported by reversal in provisioning cost. The company further reported PAT of Rs 671 crore (annualised RoMA of 1.7%) in the first half of fiscal 2023. Ability to contain asset quality and credit cost will remain a key rating sensitivity factor.