Detailed Rationale

CRISIL has assigned its ‘CRISIL  AA-/Stable’ rating to the Rs 150 crore Tier II Bonds of TVS Credit Services Limited (TVS Credit; part of the Chennai-based TVS Motor group). The rating on the company’s existing debt instruments has been reaffirmed at ‘CRISIL AA-/CRISIL A+/Stable/CRISIL A1+'.

 

The ratings continue to factor in the high strategic importance of TVS Credit to TVS Motor Company Ltd (TVS Motor; the flagship company of TVS Motor group) as a key financing arm supporting the latter's vehicle sales.

 

After a weak first quarter which also saw closure of dealerships due to lockdown restrictions, TVS Motor’s two-wheeler sales, especially motorcycles has benefited from the healthy rural demand buoyed by good Kharif harvest, higher Rabi acreage, preference for own vehicles by consumers and better exports. Yet, motorcycle sale volumes (domestic and exports) were down 11% in the first ten months of fiscal 2021, compared with the corresponding period of fiscal 2020. Mopeds too benefited from better rural sentiments, however the impact of first quarter has resulted in 6% volume decline till January 2021. The impact on scooter segment however was higher given its dependence on urban markets; for the ten months ended January 2021, TVS Motor’s scooter volumes (domestic and exports) declined by 22%. Operating profitability is expected to be moderately impacted in fiscal 2021, due to lower overall sales, and not withstanding cost reduction measures.

 

TVS Motor’s financial risk profile is expected to remain adequate, despite the challenging business environment. The company is expected to prune its capital spend in fiscal 2021 owing to lower sales, and continue with working capital optimization measures, thereby keeping debt levels under control. Its overseas subsidiary based in Indonesia is also expected to perform better in fiscal 2021, though its real estate division (which accounts for low share of revenues) will face challenges, as construction work has been impacted due to the covid-19 outbreak, and demand is expected to remain subdued. Moderate investments to support growth at TVS Credit are expected to continue over the medium term.

 

TVS-group companies have also recently filed a composite scheme of amalgamation and arrangement with the National Company Law Tribunal as part of a group restructuring exercise to segregate and consolidate holdings among promoters. The arrangement is expected to enable removal of cross-holdings among various promoter members in different TVS group companies, and is unlikely to material impact ongoing operations.

 

The ratings on TVS Credit also factors in the company’s increasing scale of operations and strong process orientation. These strengths are partially offset by average, though improving, earnings and exposure to risks related to the inherently weak credit risk profiles of borrowers.

 

The rating on the perpetual bonds also reflects the adequate buffer maintained by TVS Credit over the regulatory capital adequacy requirements, and high financial flexibility enjoyed on account of being a subsidiary of TVS Motor. TVS Credit has maintained a cushion of 2-4% over the regulatory minimum capital ratio in the past few years and CRISIL believes that it will continue to maintain adequate cushion (refer to CRISIL publication 'Criteria for rating hybrid instruments of NBFCs and HFCs' for details on CRISIL's approach for rating such instruments).

 

With nationwide lockdown restrictions being lifted steadily in a phased manner, the degree of relaxations vary across regions depending upon the severity of the Covid-19 pandemic. CRISIL believes that intermittent lockdowns and localised restrictions could delay collections returning to normalcy and put pressure on asset quality metrics. 

 

TVS Credit’s ability to manage collections and asset quality given the weak macroeconomic environment is a key monitorable amidst the impact on the underlying borrower cash flows. As part of the measures for containing the pandemic, the Reserve Bank of India (RBI) had allowed a moratorium to borrowers; around 14% of TVS Credit’s portfolio was under moratorium as on August 31, 2020. While the collection efficiency was impacted during the initial months of the moratorium, collections have significantly inched up since then. However, any change in the behaviour of borrowers on payment discipline can affect delinquency levels and will be a key monitorable.

 

TVS Credit has restructured and invoked restructuring on around 5% of its portfolio as on December 31, 2020, under the RBI’s August 2020 Resolution Framework for COVID-19-related Stress  and June 2019 Prudential Framework for Resolution of Stressed Assets .

Analytical Approach

The ratings factor in the expectation of strong support from the parent, TVS Motor. This is because TVS Credit and TVS Motors have extensive business and operational linkages and a common brand. CRISIL believes that TVS Motor will continue to provide support to TVS Credit considering the strategic importance of the entity and shared name and majority shareholding.

Key Rating Drivers & Detailed Description

Strengths:

Strategic importance to, and expectation of strong support from, TVS Motor: As a captive financing arm, TVS Credit remains integral to TVS Motor's plans to increase its market share. TVS Credit finances 20-26% of the parent's sales by volume. TVS Credit operates through TVS Motor's ~1100 strong dealer/3100+ sub-dealer network for sourcing clientele. The synchronised planning and sales efforts highlight the strategic importance of TVS Credit to TVS Motor.

 

TVS Motor is India's third-largest two-wheeler (including mopeds) manufacturer and second-largest exporter of motorcycles. It will continue to benefit from its strong market position and proposed launches in different two-wheeler segments. TVS Motor’s two-wheeler (motorcycles and scooters) volume decline of 21.0% for the first nine months of fiscal 2021 has been lower than industry, where volumes have declined by 22.5% for the same period. Its domestic two-wheeler (motorcycles and scooters) market share has remained flattish at between 10-11% over the past 21 months. TVS Motors’ business risk profile also benefits from the technological tie-up with BMW Motorrad for manufacturing two wheelers and also expansion in export markets (Central America and Sri Lanka).

 

The recent acquisition of the British motorcycle brand ‘Norton’ and associated assets from Norton Motorcycles Holdings Limited and Norton Motorcycles (UK) Limited amongst others, will help TVS Motor diversify its offerings in the premium segment in European and Indian markets. Albeit, volumes are not expected to be meaningful in the near term.

 

Operating profitability will moderate in current fiscal due to volume decline and lower capacity utililsation as well as hardening input prices; however, higher realisations (due to higher cost of BS VI vehicles) will provide some relief. Margin impact will also be limited by the turnaround of its Indonesian subsidiary since the second half of fiscal 2020.

 

TVS Credit continues to receive strong financial, operational, and management support from TVS Motor. The total shareholding (direct and indirect) of TVS Motor in TVS Credit Services Ltd stood at 84.82 as on December 31, 2020. The parent has infused Rs 642 crore of capital since fiscal 2012. Traditionally, the capital infusions were through the intermediary holding company, TVS Motor Services Ltd (TVSMS), in the form of non-cumulative redeemable preference shares. However, since fiscal 2017, TVS Motor has infused equity capital (totaling to Rs 355 crore) directly into TVS Credit. This includes Rs 45 crore equity capital infused in fiscal 2020 (another Rs 45 crore was infused by TVS Motor Foundation) and Rs 50 crore in fiscal 2021. This regular support has resulted in adequate capitalisation, with TVS Credit having a networth of Rs 1440 crore and reported gearing of 7.0 times as on December 31, 2020.

 

TVS Motor also provides managerial support. Its chairman and three directors are on the board of TVS Credit and several senior management personnel have been with the TVS group for several years. These factors and the shared brand name reflect robust linkages between TVS Motor and TVS Credit, and imply a strong moral obligation on the part of TVS Motor to support TVS Credit.

 

Improving scale of operations: The scale of operations has improved significantly over the past few fiscals. AUM stood at Rs 10,790 crore as on December 31, 2020 (Rs 9,215 crore as on March 31, 2020). In the last five years till fiscal 2020, the AUM has grown at a compounded annual growth rate (CAGR) of 29%. Venturing into products like tractor and used car financing, and more recently into consumer durables and used commercial vehicle has also enhanced product diversity. Contribution of two-wheeler loans, while remaining the largest, has gradually declined and stood at 39% as on December 31, 2020 compared to 51% as on March 31, 2016. With increased focus on diversity, the contribution of two-wheeler loans is expected to decline further. The company has also expanded its presence to 21 states, which has resulted in reduction in its portfolio concentration in South India over years.

 

Strong process orientation: The company makes significant investments in people, processes, and systems to ensure strong origination, underwriting, and collection processes. Borrowers are categorised into multiple risk brackets based on their origination characteristics and repayment patterns to focus collection efforts on accounts that show higher propensity for delays. Furthermore, senior management members have worked with TVS Motor's dealers closely, establishing relationships and enabling better co-ordination in terms of origination and collections for two-wheeler loans. Strong systems and processes are expected to enable TVS Credit to maintain sound asset quality. The gross stage 3 assets (GS3) with and without considering Supreme Court order was 2.75% and 4.37%, respectively, as on December 31, 2020. Efficacy of these processes and controls as the company builds up scale and diversifies into newer product segments, and asset quality in light of current difficult macro environment will remain monitorable.

 

Weakness:

Average, though improving earnings profile: While the returns were on an improving trend till fiscal 2019, the profitability in the recent few quarters has been impacted on account of high provisioning costs. The company reported a profit after tax (PAT) of Rs 151 crore for fiscal 2020 and Rs 34 crore for the nine months ended December 31, 2020. Credit cost was 2.9% for fiscal 2020 and 3.4% for 9MFY21, compared to 2.2% for fiscal 2019.

 

Core profitability continues to be supported by a high net interest margin, which in turn is bolstered by a large presence in high yielding segments and competitive cost of funds. However, given the small ticket size, and large distribution and collection infrastructure, operating costs are high as reflected in the operating expense ratio of average total assets of 8.6% for fiscal 2020. Further, any significant deterioration in asset quality leading to negatively impacting profitability will be monitored over near to medium term.

 

Exposure to risks related to the inherently weak credit risk profiles of borrowers: The borrowers in most of the operational segments have inherently weak credit risk profiles. Industry delinquency levels in the two-wheeler finance business, the company's dominant product, have historically remained higher on account of weaker borrower profiles and low resale value of the used asset. While for TVS Credit, the GS3 assets in the two-wheeler portfolio remained comparatively low, the portfolio has grown rapidly over years and the current difficult macro-economic conditions could lead to inch up in delinquencies. Moreover, the focus is on customers, who have limited access to bank finance. The borrower profiles in the used-car and tractor segments are similar. Furthermore, the tractor segment, which accounts for 24% of the portfolio, is mainly linked to the position of agriculture and the rural economy. Because of the inherently risky borrower segment and the current Covid-19 situation, maintaining asset quality over the near to medium term will remain a key monitorable.

Liquidity: Strong

TVS Credit's liquidity profile remains strong. The company's Asset Liability Maturity (ALM) profile on December 31, 2020 remains well matched with cumulative positive gap in all maturity buckets. It had liquidity in the form of cash & bank balance and sanctioned bank lines of Rs 1045 crore as on December 31, 2020.  Against this, the debt repayment coming due over till March 31, 2021 are Rs 1772 (including interest), which a large portion of this being commercial paper and WCDL lines. Further, the company also benefits from the linkages with the TVS Motor.

Outlook Stable

CRISIL believes TVS Credit will remain strategically important to TVS Motor, and will continue to scale up operations significantly over the medium term.

Rating Sensitivity factors

Upward Factor

• Upward change in CRISIL’s credit view on TVS Motors
• Significant scale up of operations while improving asset quality with gross NPAs stabilizing at around 2%
• Significant and sustainable improvement in profitability, with RoA at around 3%.

 

Downward factors

• Downward change in CRISIL’s credit view on TVS Motors
• Any material change in the shareholding (below 50%) or support philosophy of TVS Motors.

About the Company

TVS Credit, based in Chennai is a captive finance company and subsidiary of TVS Motor. TVS Credit was incorporated in 2008 as a subsidiary of TVSMS (and was a step-down subsidiary of TVS Motor). However, in line with TVS Motor’s plan to increase its direct shareholding in the entity, TVS Motor invested equity into TVS Credit directly since fiscal 2017. TVS Credit is now a direct subsidiary of TVS Motor, which held 84.24% stake in the company as on December 31, 2020, while the remaining was held by, TVS Motor Services Limited & its nominees (0.58%), Lucas-TVS Limited (6.01%; rated ‘CRISIL AA+/Negative/CRISIL A1+’), HDFC Ltd (2.65%; rated ‘CRISIL AAA/FAAA/Stable/CRISIL A1+’), Phi Research Pvt Ltd (1.65%),TVS Motor Foundation (1.85%), Phi Capital Services LLP (1.65%), and Sundaram-Clayton Limited (1.16%; rated ‘CRISIL AA-/Stable/CRISIL A1+’).

 

TVS Credit commenced operations as a non-deposit-taking NBFC in May 2010. It has scaled up its business and had an AUM of Rs 10,790 crore as on December 31, 2020. The company currently finances two-wheelers (of TVS Motor), new tractors, used tractors, used cars, consumer durables and used commercial vehicle. It caters largely to rural customers who have little or no access to bank financing and has a high share of cash collection.

 

For fiscal 2020, TVS Credit reported profit after tax (PAT) of Rs 151 crore on total income of Rs 2015 crore, as against a net profit of Rs 148 crore on total income of Rs 1634 crore for the previous fiscal. During the nine months ended December 31, 2020, the company reported a PAT of Rs 34 crore on total income of Rs 1583 crore, against a PAT of Rs 93 crore on total income of Rs 1476 crore for corresponding period previous fiscal.

 

About TVS Motor

Incorporated in 1983, TVS Motor is part of the Chennai-based TVS group, which is a leading automotive manufacturer. TVS Motor was originally incorporated in 1983 as Indian Motorcycles Pvt Ltd, a joint venture between the TVS group and Suzuki Motor Corporation of Japan (SMC). The company went public in 1984 and changed its name to TVS-Suzuki Ltd. In 2002, SMC exited the joint venture and the company was renamed TVS Motor Company Ltd. Sundaram Clayton Ltd (promoted by Mr Venu Srinivasan and part of the TVS group) holds 57.4% stake in TVS Motor.

 

TVS Motor has three plants in India: in Solan district, Himachal Pradesh; Hosur, Tamil Nadu; and Mysuru, Karnataka. It also has a manufacturing subsidiary in Indonesia, PT TVS Motor Co. Significant investments have been made in PT TVS Motor Co, which has been reporting losses due to intense competition and changing market preferences in the past, has achieved break-even in the quarter ending December 2019.

 

TVS Motor (standalone) had a net profit of Rs 323 crore on total revenues of Rs 11,455 crore in first 9 months of fiscal 2021 compared to a net profit of Rs 518 crore on total revenues of Rs 12,949 crore in the same period previous fiscal.

Key Financial Indicators

As on/for the period ended December 31	Unit	2020	2019
Total assets	Rs crore	12076	9,891
Total income	Rs crore	1,583	1,476
Profit after tax	Rs crore	34	93
Gross stage 3 assets	%	4.4*	3.6
Gearing	Times	7.0	6.1
Return on Assets (Annualized)#	%	0.4	1.3

*Proforma, without considering Supreme Court order

#CRISIL adjusted number. RoA is calculated as: (PAT for the nine months*4/3)/ (Average of total assets as on starting of the fiscal and as on end of the period)*100.

Any other information: Not applicable

Annexure - Details of Instrument(s)

*Yet to be issued

#Includes sub debt loans of Rs 364.50 crore comprising HDFC Ltd:Rs 14.5 crore, HDFC Bank Ltd: Rs 25 crore, Tata Capital: Rs 50 crore, Federal Bank, Rs 75 crore, Aditya Birla Finance: Rs 100 crore, Axis Bank : Rs 50 crore, DCB Bank: Rs 50 crore