| TVS Credit Services Limited | ||||||||
| Ratings reaffirmed at 'CRISIL AA- / Stable , CRISIL A+ / Stable / CRISIL A1+ '; rated amount enhanced for Bank Debt;rated amount enhanced for Commercial Paper | ||||||||
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| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has reaffirmed its ‘CRISIL AA-/CRISIL A+/Stable/CRISIL A1+’ ratings on the bank facilities and debt instruments of TVS Credit Services Limited (TVS Credit; part of the Chennai-based TVS Motor group).
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. These factors limited the decline in motorcycle sale volumes (domestic and exports) to 2% in 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 4% volume decline in fiscal 2021 over fiscal 2020. The impact on scooter segment however was higher given its dependence on urban markets; for fiscal 2021, TVS Motor’s scooter volumes (domestic and exports) declined by 11% compared to previous fiscal. Operating profitability (excluding other income) improved marginally in fiscal 2021 to over 8.5% compared to ~8.2% in fiscal 2020 due to cost reduction initiatives taken by the company.
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 2022 owing to adequate capacity, 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 2022, though its real estate division (which accounts for low share of revenues) may 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.
As part of streamlining of holdings held by TVS family members in various TVS group companies, the family has decided to align the ownership of different group companies with the respective arms of the families managing them. As part of the restructuring, a composite scheme of amalgamation and arrangement is planned, involving T.V. Sundram Iyengar & Sons Ltd. (TVS & Sons), Sundaram Industries Private Ltd. (SIPL) and Southern Roadways Private Ltd. (SRPL) and the family holding companies. While the operating companies are not directly part of the family agreement, their holdings may witness a change. The restructuring within the TVS group family members is not expected to have a major impact on TVS Motor.
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).
In line with the Reserve Bank of India (RBI) measures for Covid-19, TVS Credit had given moratorium to its borrowers. While collection efficiency was impacted during the initial months of the moratorium, collections have inched up since then. However, the second wave of the pandemic has resulted in intermittent lockdowns and localised restrictions, which could lead to some delay in collections in the coming months following the impact on the underlying borrower cash flows. Further, any change in the behaviour of borrowers on payment discipline can affect delinquency levels.
TVS Credit witnessed an inch up in overall delinquencies in most of the asset classes during fiscal 2021. It has restructured around 4.6% of its portfolio as on March 31, 2021, under the RBI’s August 2020 Resolution Framework for COVID-19-related Stress and June 2019 Prudential Framework for Resolution of Stressed Assets. The ability of the company to manage collections and asset quality during the second wave of the pandemic will remain a key monitorable.
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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 fourth-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 ~6% for the fiscal 2021 has been lower than industry, where volumes have declined by ~12% for the same period. Its domestic two-wheeler (motorcycles and scooters) market share has improved marginally to ~13% in fiscal 2021 from ~12% in previous fiscal. 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 is expected to improve with demand for two wheelers set to increase in fiscal 2022 and benefits of cost cutting measures continuing; 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 84.52 as on March 31, 2021. The parent has infused Rs 742 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 405 crore) directly into TVS Credit. This includes Rs 100 crore equity capital infused in fiscal 2021. This regular support has resulted in adequate capitalisation, with TVS Credit having a networth of Rs 1564 crore and reported gearing of 6.5 times as on March 31, 2021.
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 11,240 crore as on March 31, 2021 (Rs 9,215 crore as on March 31, 2020). In the last five years till fiscal 2021, the AUM has grown at a compounded annual growth rate (CAGR) of 24%. 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 37% as on March 31, 2021 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, however there has been an uptick in delinquencies in current difficult macro-economic scenario. The gross non-performing assets (NPAs) stood at 5.0% as on March 31, 2021, as compared to 3.8% as on March 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 years 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 97 crore for fiscal 2021. Credit cost was 2.9% for fiscal 2020 and 4.1% for fiscal 2021, compared to 2.2% for fiscal 2019.
Core profitability continues to be supported by a high net interest margin (11.7% for fiscal 2021), 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 8.3% for fiscal 2021. 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 lower, 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 26% 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 March 31, 2021 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 1085 crore as on May 31, 2021. This is against the debt repayment (including interest) of Rs 1787 crore coming due till October 2021, with large portion being commercial paper and WCDL lines. Further, the company also benefits from the linkages with the TVS Motor. |
Outlook Stable CRISIL Ratings 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
Downward factors
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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 84.52% stake in the company as on March 31, 2021, while the remaining was held by, TVS Motor Services Limited & its nominees (0.57%), Lucas-TVS Limited (5.91%; rated ‘CRISIL AA+/Negative/CRISIL A1+’), HDFC Ltd (2.61%; rated ‘CRISIL AAA/FAAA/Stable/CRISIL A1+’), Phi Research Pvt Ltd (1.62%),TVS Motor Foundation (1.82%), Phi Capital Services LLP (1.82%), and Sundaram-Clayton Limited (1.14%; 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 11,240 crore as on March 31, 2021. 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 2021, TVS Credit reported profit after tax (PAT) of Rs 97 crore on total income of Rs 2241 crore, as against a net profit of Rs 151 crore on total income of Rs 2015 crore for the previous fiscal. |
About the TVS Motors 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 612 crore on total operating income of Rs 16,750 crore in fiscal 2021, compared to Rs 592 crore and Rs 16,423 crore, respectively, in the previous fiscal. |
Key Financial Indicators : TVS Credit
#CRISIL adjusted number. RoA is calculated as: (PAT for the fiscal)/ (Average of total assets as on starting and end of the fiscal)*100. |
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)
*Yet to be issued #Includes sub debt loans of Rs 450.0 crore comprising Aditya Birla Finance: Rs 200 crore, Axis Bank: Rs 50 crore, DCB Bank: Rs 50 crore, Federal Bank, Rs 75 crore, HDFC Bank Ltd: Rs 25 crore, Tata Capital: Rs 50 crore. **Interchangeable with short term bank facilities %Yet to be drawn-down |
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## Includes sub debt loans of Rs 450.0 crore comprising Aditya Birla Finance: Rs 200 crore, Axis Bank: Rs 50 crore, DCB Bank: Rs 50 crore, Federal Bank, Rs 75 crore, HDFC Bank Ltd: Rs 25 crore, Tata Capital: Rs 50 crore.
# 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.
*Interchangeable with short term bank facilities
Criteria Details
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