Rating Rationale

Key Rating Drivers & Detailed Description

Strengths:

High strategic importance to and expectation of strong support from TML

The ratings on the debt instruments of TMFHL group are based upon the expectation of strong support from the ultimate parent TML. This is because of the high strategic importance of TMFHL group to its parent, being the captive financing arm.

TMFL received the approval from National Company Law Tribunal (“NCLT”), vide order dated May 12, 2023 (which was made available on NCLT website and to TMFL on June 14, 2023), sanctioning the scheme of arrangement between TMFL, TMFSL and their respective shareholders. The demerger became effective post filing of documents with Registrar of Companies (RoC) on June 30, 2023. Post the demerger, TMF Holdings Ltd (TMFHL) will continue to hold TMFSL, which will subsequently be renamed to TMFL, while the current TMFL will be renamed as TMF Business Services Limited, subject to requisite approvals. The demerger is a share swap, and the outstanding assets and liabilities pertaining to NBFC business have been transferred to TMFSL from TMFL. TMFL subsequently only houses the operating lease business.

For arriving at the ratings, CRISIL Ratings combines the business and financial risk profiles of TMFHL and its subsidiaries, TMFL and TMFSL, given the integration of operations and commonality of management, together referred to as the TMF Group.

In the past, TML has been infusing equity capital into TMFHL (including in its earlier form as TMFL, the operating company) at regular intervals. TML infused Rs 300 crore in fiscal 2018, Rs 600 crore in fiscal 2019 and Rs 150 crore in fiscal 2020. CRISIL Ratings believes TML will continue to provide similar support through TMFHL, enabling the companies to maintain their capital adequacy above the minimum requirement.

Consequently, TMFHL infused Rs 300 crore of equity into TMFL and subscribed to Rs 370 crore of Compulsorily Convertible Preference Shares issued by TMFL and Rs 150 crore of subordinated debt issued by TMFL in fiscal 2019. Furthermore, in the first quarter of fiscal 2020, TMFHL infused Rs 150 crore of equity and subscribed to Rs 300 crore of subordinated debt in TMFL. Further, in August 2022, TMFHL infused Rs. 300 crore of equity and in February 2023, TMFHL infused Rs. 400 crore of equity in TMFL to shore up its equity base.

The total capital ratio of TMFL was comfortable at 24.0% as on March 31, 2023 (18.7% as on March 31, 2022). While the total capital ratio of TMFSL stood at 23.2% as on March 31, 2023 (20.4% as on March 31, 2022). CRISIL Ratings believes TMFL and TMFSL will continue to receive need-based support from TML through TMFHL, to maintain their capital adequacy above the minimum requirement.

TMFHL and its subsidiaries have a high level of managerial and operational integration, where the parent extends management support through representation of its senior management on the boards of TMFL and TMFSL. CRISIL Ratings believes TML will continue to have majority ownership in TMFL through the holding company structure. This, along with operational integration and a shared brand name, makes TML morally obligated to support TMFHL group.

Leading position in CV finance

Post demerger, the entire NBFC business of TMFL is now transferred to TMFSL and all the NBFC lending activities in TMF group will be carried out under TMFSL going forward. TMF group is a leading vehicle financier in India with consolidated AUM as on March 31, 2023 stands at Rs 41,314 crore (March 31, 2022: Rs 44,134 crore). TMFL is among the top five CV financiers with assets under management (AUM) of Rs 30,294 crores as on March 31, 2023 (Rs. 34,993 crore as on March 31, 2022). As on March 31, 2023 TMFSL had a standalone portfolio of Rs 11,020 crore (Rs. 9141 crore as on March 31, 2022).

Weakness:

Weak asset quality

The asset quality metrics for TMF group were impacted owing to implementation of IRACP norms from October 2022 onwards, however in fourth quarter of fiscal 2023, the asset quality metrics have improved amidst continued strong collections and write offs. The reported gross NPA and net NPA for the TMF Group stood at 9.26% and 5.02% respectively as on March 31, 2023 (9.66% and 5.75% respectively as on March 31, 2022). The gross NPA and net NPA for TMFSL on a standalone basis stood at 4.08% and 2.82% respectively as on March 31, 2023 (7.38% and 4.94% respectively as on March 31, 2022). For TMFL the reported gross NPA and net NPA increased to 11.28% and 5.91% respectively as on March 31, 2023 (10.31% and 5.98% respectively as on March 31, 2022).

The company NNPA stood below 6% as on March 31, 2023. Nevertheless, given the segment company is catering to, going forward company’s ability to manage its asset quality is a key monitorable. CRISIL Ratings understands that the group is committed to bringing in additional equity capital to provide cushion against the asset side risk and maintain consolidated Net NPA and capitalisation metrics well within the regulatory thresholds. The overall rating continues to factor in expectation of timely financial and capital support from TML in case of any exigency.