Detailed Rationale

CRISIL Ratings has assigned its ‘CRISIL  AA-/Positive’ rating to the Rs 500 crore Tier II Bonds of TVS Credit Services Limited (TVS Credit; part of the Chennai-based TVS Motor group). The outlook on the long-term rating has been revised to 'Positive' from 'Stable' while reaffirming the rating at 'CRISIL AA-/CRISIL A+'. The rating on the short-term bank facilities and commercial paper programme has been reaffirmed at '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.

 

The revision in the outlook is driven by expected strengthening of the credit risk profile of TVS Motor. It also factors steady scale up in operations of TVS Credit, as seen in the growth in the AUM.  After a weak first quarter in fiscal 2021, which saw closure of dealerships due to lockdown restrictions, TVS Motor’s two-wheeler sales, especially motorcycles, have 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 combined) to 2% in fiscal 2021 over fiscal 2020. Mopeds too benefited from better rural sentiments, however the impact of first quarter resulted in 4% volume decline in fiscal 2021. The impact on scooter segment however was higher given its dependence on urban markets. Operating profitability (excluding other income) improved marginally in fiscal 2021 to over 8.5% compared to ~8.2% in fiscal 2020 due to price hikes and cost reduction initiatives taken by the company.

 

While operations were impacted in the first quarter of fiscal 2022 as well due to the second wave of the pandemic, subsequent demand pick up has been healthy, including on the exports front. Operating margins improved to ~9% in the first half of fiscal 2022 compared to ~6% in corresponding period of fiscal 2021, as timely price hikes and continued benefit of improvements in operating efficiency ensured partial offset of impact of rising commodity prices. 

 

TVS Motor is expected to invest in developing Electric Vehicles (EV) over the medium term with new launches across product categories. Over the near term, CRISIL expects TVS Motor’s to continue to improve its business risk profile with new launches and continued focus on exports while simultaneously improving its domestic market share in all categories. Steady improvement in performance of overseas subsidiaries including Norton will also aid in overall improvement. Its overseas subsidiary based in Indonesia is expected to continue with the improvement shown in fiscal 2021. Its real estate division (which accounts for low share of revenues) is also expected to improve as construction work has resumed and demand is returning in key markets. However, prolonged chip shortage issue, logistics issues impacting exports, and ability to take further price hikes to counter rising commodity prices will be key monitorables.

 

TVS Motor’s financial risk profile is expected to remain adequate, and witness steady improvement. The company is expected to prudently fund capital spend for its existing product lines in fiscal 2022 owing to adequate capacity. However, the company is expected to incur sizeable capex/investments for its proposed EV portfolio. TVS Motor is also expected to continue to optimize its working capital optimization levels, thereby keeping debt levels and debt metrics under control. 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. SCL has sold ~5% stake in TVS Motor in the first quarter of fiscal 2022 to raise funds, if required. The restructuring within the TVS group family members is not expected to have a major impact on the operations of 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 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 Ratings believes that it will continue to maintain adequate cushion (refer to CRISIL Ratings publication 'Criteria for rating hybrid instruments of NBFCs and HFCs' for details on CRISIL Ratings approach for rating such instruments).

 

In line with the measures announced by the Reserve Bank of India (RBI) for Covid-19, TVS Credit had given moratorium to its borrowers. Though collections declined during the initial months of the moratorium, they have inched up since then. However, the second wave of the Covid-19 pandemic had resulted in intermittent lockdowns and localised restrictions, again impacting collections. Although the impact has been moderate compared to the past fiscal, any change in the payment discipline of borrowers may affect delinquency levels.

 

Under the schemes announced by the RBI on June 2019 Prudential Framework for Resolution of Stressed Assets), August 2020 Resolution Framework for COVID-19-related Stress and May 2021 resolution framework 2.0, TVS Credit had outstanding restructured portfolio of around 5%  as on September 30, 2021. Nevertheless, the ability of the company to manage collections and asset quality going forward this fiscal will be a key monitorable. The impact of the third wave of the pandemic, if and when it comes in terms of its spread, intensity and duration will also be closely monitored.

Analytical Approach

CRISIL Ratings has assessed the standalone business and financial risk profile of TVS Credit. Further, the ratings factor in the expectation of strong support from the parent, TVS Motor. This is because TVS Credit and TVS Motor have extensive business and operational linkages and a common brand. CRISIL Ratings 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 was lower compared with the overall sector decline of ~12%. Its domestic two-wheeler (motorcycles and scooters) market share therefore improved marginally to ~13% in fiscal 2021 from ~12% in previous fiscal. TVS Motor’s 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 company is also entering the EV space with substantial investments expected over the next 3-4 years for manufacturing vehicles across categories.

 

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 and may require some support for turnaround.

 

Operating profitability is expected to continue to improve as regular price hikes and benefits of past cost cutting measures has restricted the impact of rising commodity prices. Moreover, operations at the Indonesian subsidiary have also been improving with company booking profits in fiscal 2021.  

 

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 85.0% as on October 31, 2021. The parent has infused Rs 792 crore of capital since fiscal 2012.  This includes Rs 100 crore equity capital infused in fiscal 2022 so far. This regular support has resulted in adequate capitalisation, with TVS Credit having a networth of Rs 1,658 crore and reported gearing of 6.4 times as on September 30, 2021.

 

TVS Motor also provides managerial support to TVS Credit. TVS Motor’s 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 11,696 crore as on September 30, 2021 (Rs 11,240 crore as on March 31, 2021). In the last five years till fiscal 2021, the AUM has grown at a compounded annual growth rate (CAGR) of 37%. 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 35% as on September 30, 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 September 30, 2021 (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.

 

Weaknesses

* Average earnings profile:

Earnings profile remains average with overall profitability being constrained by elevated provisioning costs in recent years. The company reported a profit after tax (PAT) of Rs 97 crore for fiscal 2021, Rs 151 crore for fiscal 2020 and Rs 148 crore for fiscal 2019 (RoA of 0.9%, 1.6% and 1.9%, respectively, for fiscal 2021, fiscal 2020 and fiscal 2019). Credit cost increased to 4.1% for fiscal 2021 from 2.9% for fiscal 2020 and 2.2% for fiscal 2019. For the half year ended September 31, 2021, the company reported a PAT of Rs 2 crore, on account of 4.9% credit costs (on annualized basis).

 

Nevertheless, core profitability continues to be supported by a high net interest margin (11.7% for fiscal 2021 and 12.4% for half year ended September 30, 2021; includes bank charges), 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 (9.3% for half year ended September 30, 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: TVS Credit reported overall gross NPA of 5.0% as on September 30, 2021 (5.0% as on March 31, 2021 and 3.8% as on March 31, 2020). 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 gross NPAs in the two-wheeler portfolio remained comparatively lower, the portfolio has grown rapidly over years and the current difficult macro-economic conditions has led 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 27% of the portfolio as on September 30, 2021, 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 September 30, 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 1,706 crore as on October 31, 2021.  This is against the debt repayment (including interest) of Rs 1,977 crore coming due till January 31, 2022, with large portion being commercial paper. Further, the company also benefits from the linkages with the TVS Motor.

Outlook: Positive

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

• Upward change in CRISIL Ratings credit view on TVS Motor
• 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 Ratings credit view on TVS Motor
• Any material change in the shareholding (below 50%) or support philosophy of TVS Motor.

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 85.0% stake in the company as on October 31, 2021, while the remaining was held by, TVS Motor Services Limited & its nominees (0.55%), Lucas-TVS Limited (5.72%; rated ‘CRISIL AA+/Negative/CRISIL A1+’), HDFC Ltd (2.52%; rated ‘CRISIL AAA/FAAA/Stable/CRISIL A1+’), Phi Research Pvt Ltd (1.77%), TVS Motor Foundation (1.76%), Phi Capital Services LLP (1.57%), and Sundaram-Clayton Limited (1.10%; 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 11,696 crore as on September 30, 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 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. For the half year ended September 30, 2021, the company reported a PAT of Rs 2 crore on total income of Rs 1,260 crore, as against loss of Rs 10 crore on total income of Rs 990 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 52.2% 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 had been reporting losses due to intense competition and changing market preferences in the past. The company broke-even in fiscal 2021. 

 

TVS Motor (standalone) reported a net profit of Rs 331 crore on total operating income of Rs 9,554 crore in the first half of fiscal 2022, compared to Rs 57 crore and Rs 6,037 crore, respectively, in the corresponding period previous fiscal. 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

As on/for the half year ended September 31	Unit	2021	2020
Total assets	Rs crore	12965	11043
Total income	Rs crore	1260	990
Profit after tax	Rs crore	1.8	-9.7
Gross NPA	%	4.96	2.46
Gearing	Times	6.4	6.4
Return on Assets (Annualized)#	%	0.03	Negative

#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

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs.Cr)	Complexity Levels	Rating assigned with outlook
INE729N08022	Tier II Bond	07-Feb-19	10.90%	07-Aug-24	100	Complex	CRISIL AA-/Positive
INE729N08030	Tier II Bond	09-Dec-20	9.40%	10-Jun-26	150	Complex	CRISIL AA-/Positive
INE729N08048	Tier II Bond	25-Feb-21	9.40%	26-Aug-26	150	Complex	CRISIL AA-/Positive
NA	Tier II Bond*	NA	NA	NA	500	Complex	CRISIL AA-/Positive
INE729N08014	Perpetual bond	24-Nov-17	11.50%	Perpetual	100	Highly complex	CRISIL A+/Positive
NA	Commercial paper	NA	NA	7 to 365 Days	2000	Simple	CRISIL A1+
INE729N07024	Non-convertible debentures	08-Oct-20	7.40%	08-Apr-22	100	Simple	CRISIL AA-/Positive
INE729N07016	Non-convertible debentures	26-Jun-20	8.35%	23-Mar-23	325	Simple	CRISIL AA-/Positive
NA	Non-convertible debentures*	NA	NA	NA	375	Simple	CRISIL AA-/Positive
NA	Cash Credit	NA	NA	NA	304.75	NA	CRISIL AA-/Positive
NA	Working Capital Demand Loans	NA	NA	NA	1815.25	NA	CRISIL AA-/Positive
NA	Short term loans	NA	NA	NA	175	NA	CRISIL A1+
NA	External commercial borrowings	NA	NA	NA	634.84	NA	CRISIL AA-/Positive
NA	Proposed long-term bank loan facility**	NA	NA	NA	2141.27	NA	CRISIL AA-/Positive
NA	Term loan#	NA	NA	01-Jul-21	50.00	NA	CRISIL AA-/Positive
NA	Term loan#	NA	NA	01-May-22	50.00	NA	CRISIL AA-/Positive
NA	Term loan#	NA	NA	01-Jul-26	100.00	NA	CRISIL AA-/Positive
NA	Term Loan	NA	NA	20-Aug-22	150.00	NA	CRISIL AA-/Positive
NA	Term loan#	NA	NA	29-May-23	50.00	NA	CRISIL AA-/Positive
NA	Term Loan	NA	NA	19-Nov-22	200.00	NA	CRISIL AA-/Positive
NA	Term Loan	NA	NA	18-Nov-23	200.00	NA	CRISIL AA-/Positive
NA	Term Loan	NA	NA	29-Mar-24	300.00	NA	CRISIL AA-/Positive
NA	Term Loan	NA	NA	15-Oct-22	45.00	NA	CRISIL AA-/Positive
NA	Term loan#	NA	NA	24-Jul-23	50.00	NA	CRISIL AA-/Positive
NA	Term Loan	NA	NA	28-Jan-22	50.00	NA	CRISIL AA-/Positive
NA	Term Loan	NA	NA	12-Feb-24	150.00	NA	CRISIL AA-/Positive
NA	Term Loan	NA	NA	17-Sep-21	37.50	NA	CRISIL AA-/Positive
NA	Term loan#	NA	NA	28-Apr-22	50.00	NA	CRISIL AA-/Positive
NA	Term loan#	NA	NA	29-Sep-22	25.00	NA	CRISIL AA-/Positive
NA	Term Loan	NA	NA	18-Dec-22	100.00	NA	CRISIL AA-/Positive
NA	Term Loan	NA	NA	26-Sep-21	27.88	NA	CRISIL AA-/Positive
NA	Term Loan	NA	NA	30-Aug-22	125.07	NA	CRISIL AA-/Positive
NA	Term loan#	NA	NA	29-Sep-22	25.00	NA	CRISIL AA-/Positive
NA	Term Loan	NA	NA	29-Sep-22	89.00	NA	CRISIL AA-/Positive
NA	Term Loan	NA	NA	NA%	400.00	NA	CRISIL AA-/Positive
NA	Term Loan	NA	NA	30-Dec-21	60.00	NA	CRISIL AA-/Positive
NA	Term loan#	NA	NA	27-Sep-21	50.00	NA	CRISIL AA-/Positive
NA	Term Loan	NA	NA	19-Mar-24	250.00	NA	CRISIL AA-/Positive
NA	Term Loan	NA	NA	24-May-24	200.00	NA	CRISIL AA-/Positive
NA	Term Loan	NA	NA	30-Mar-24	94.44	NA	CRISIL AA-/Positive

*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