Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AAA/Stable/CRISIL A1+’ ratings on the bank facilities and debt instruments of Toyota Financial Services India Limited (TFSI).

 

CRISIL Ratings has withdrawn its ratings on non-convertible debentures (NCDs) aggregating to Rs 500 crore, as there is no amount outstanding against these instruments. The withdrawal is in line with CRISIL's withdrawal policy. (See Annexure 'Details of rating withdrawn' for details)

 

On February 22, 2020, S&P Global Ratings (S&P) revised its rating outlook on Toyota Motor Corporation (TMC; the ultimate parent of TFSI) to ‘Stable’ from ‘Negative’ and reaffirmed the 'A+/A-1+' ratings. The outlook revision is based on the sustainability of earnings recovery over the next 6-18 months, supported by growing sales in China and the US, strong product competitiveness and a highly resilient global supply chain. TMC is likely to generate over JPY 1.2 trillion in free operating cash flow (FOCF) in fiscal 2021, which will solidify its strong financial standing and enormous net cash position (excluding captive finance operations). Earnings before interest, tax, depreciation, and amortisation (Ebitda) margin is expected above 11% and FOCF to sales ratio at 3-5%. The stable outlook reflects the likelihood of TMC maintaining its leading market position and stable profitability in the next 6-18 months. The ratings on TFSI are unaffected by the rating action on TMC.

 

The ratings on TFSI continue to centrally factor in its strategic importance to TMC, which has a strong moral obligation to support the Indian subsidiary, both on an ongoing basis and during distress. The ratings also factor in the robust underwriting practices and risk management policies, diversified resource profile, and comfortable capitalisation of TFSI. These strengths are partially offset by modest earnings.

 

The nationwide lockdown imposed by the government to contain the spread of Covid-19 impacted disbursements and collections of financial institutions. The lockdown has been eased in a phased manner, but certain states have implemented local lockdowns. Any delay in return to normalcy will further constrain collections and asset quality metrics of financial institutions. Additionally, any change in the payment discipline of borrowers can affect delinquency levels. Also, while the one-time restructuring scheme announced by the Reserve Bank of India (RBI) will provide the necessary support to affected borrowers in the current environment, the details and operational implementation of the same remain to be seen.

On the liability side, RBI had announced regulatory measures under its Covid-19 - Regulatory Package, whereby lenders were permitted to grant moratorium on bank loan repayment. TFSI has not availed of a moratorium on its bank loans or any other borrowing.

On the asset side, TFSI has offered moratorium to its borrowers (around 38% of its portfolio as of August 2020). The collections will remain a monitorable, as income streams of the borrowers have been impacted in the current challenging macro environment.

Analytical Approach

The ratings on TFSI are based on S&P's counterparty credit ratings on TMC, which is in line with the rating methodology of CRISIL Ratings for Indian affiliates of global financial institutions (GFIs). The rating framework for such affiliates considers the following factors: assessment by CRISIL Ratings of the global operating environment and its impact on the credit risk profiles of GFIs; S&P’s ratings on GFIs; translation of the S&P ratings into the rating scale of CRISIL Ratings; and the standalone credit quality of the Indian operations.

Key Rating Drivers & Detailed Description

Strengths:

• Strategic importance to, and strong support from, the ultimate parent, TMC

TMC views India as a key market, as reflected in its presence across the three verticals of manufacturing, sales and marketing, and financing. TFSI is the captive financier of Toyota Kirloskar Motor Pvt Ltd (TKM; the Indian manufacturing and sales subsidiary of TMC), and receives significant business, financial, and managerial support from TMC and Toyota Financial Services Corporation (TFSC; rated ‘A+/Stable/A-1+’ by S&P). TFSC has representation of their senior management on the board of TFSI. The subsidiary plays a strategic role in strengthening the market position and promoting sales of TMC in India. TMC has infused equity of Rs 1,290 crore so far, of which Rs 160 crore was infused in fiscal 2018. The parent is likely to infuse additional capital to support growth plans of the subsidiary. TFSI also benefits from TMC's global linkages with foreign banks operating in India. Risk management policies, systems and processes are in line with those approved by TFSC globally. CRISIL Ratings believes TMC will maintain its 100% ownership in TFSI. High operational and managerial integration, complete ownership, and shared brand lead to high moral obligation on TMC to support TFSI.

 

• Robust underwriting practices and risk management policies

The policies of TFSI are similar to those followed by TFSC globally. The company has focused teams for customer lifecycle management, fraud control, and collection and recovery. The average loan-to-value ratio of 77% is comparable with that of peers. Gross non-performing assets (NPAs) were at 2.24% as on September 30, 2020, and 2.38% as on March 31, 2020 (2.21% a year earlier). The portfolio is reasonably granular with around 90% in retail loans and 10% in dealer finance. Asset quality is likely to be vulnerable to higher slippages this fiscal given the challenging macro environment, and ability to control asset quality will be a key monitorable.

 

• Diversified resource profile

As on December 31, 2020, the company had borrowing of Rs 5,624 crore. The resource portfolio is reasonably diversified with 32% from banks, 24% in NCDs, 26% in external commercial borrowings (ECBs), 13% in Masala bonds, and 5% in rupee-denominated ECBs. TFSI had no commercial paper outstanding as on December 31, 2020. The company has been able to ensure sustained funding by leveraging relationships of TMC with global banks.

 

• Comfortable capitalisation

Networth was adequate at Rs 1,363 crore as on September 30, 2020, and Rs 1,352 crore as on March 31, 2020 (Rs 1,402 crore a year earlier), and gearing high at 4.3 times and 4.6 times, respectively (4.5 times). Networth coverage of net NPAs improved to 28 times as on September 30, 2020, and 24 times as on March 31, 2020 (19 times a year earlier). Although the company made profits in four of the past five fiscals, internal cash accrual remains low. Nevertheless, capitalisation is likely to remain comfortable over the medium term. Moreover, capital contribution from the parent is likely, if needed.

 

Weakness:

• Modest earnings

Earnings remain modest, constrained by high credit cost. This was further impacted by de-growth in the loan book in fiscal 2020. Net advances declined 7.5% on-year to Rs 6,877 crore as on March 31, 2020, and to Rs 6,855 crore as on September 30, 2020, due to lower disbursements in a weak auto sales environment. TFSI made a loss of Rs 49.7 crore in fiscal 2020 as compared with profit of Rs 35.8 crore in the previous fiscal owing to a one-time Covid-related provisioning of Rs 82.7 crore and notional loss of Rs 35.6 crore in the mark-to-market valuation of the hedging book. The company made a net profit of Rs 10 crore in the half year ended September 30, 2020. TFSI’s ability to control its credit cost, and hence profitability, will remain closely monitored.

Liquidity: Superior

Liquidity remains comfortable, with cash and bank balance of Rs 343 crore and unutilised bank limit of Rs 3,695 crore as on December 31, 2020, sufficient to cover debt obligation of Rs 931 crore till April 30, 2021. The asset-liability management profile was comfortable as on September 30, 2020, with positive cumulative mismatches across all buckets up to one year. Liquidity also benefits from the strong parental support.

Outlook: Stable

TFSI should continue to receive strong financial, managerial and operational support from TMC.

Rating Sensitivity factors

Downward factors

• Downgrade in the rating on TMC by S&P by two or more notches, or any change in the support philosophy of the parent
• Significant and continuous weakening of asset quality, impacting earnings

About the Company

TFSI is a wholly-owned subsidiary of TFSC, which is a wholly owned subsidiary of TMC. TFSI, a non-deposit-taking non-banking financial company, began operations in June 2012. It extends finance to customers and dealers of TKM. The loan book stood at Rs 6,855 crore as on September 30, 2020, and Rs 6,877 crore as on March 31, 2020 (Rs 7,435 crore a year earlier), and 88% of the loan portfolio comprised financing for new cars, with the balance including used car financing and dealer financing.

 

Net loss was Rs 50 crore and total income was Rs 735 crore for fiscal 2020, as against a profit of Rs 36 crore and total income of Rs 713 crore in the previous fiscal. The company generated a net profit of Rs 10 crore and total income of Rs 353 crore for the half year ended September 30, 2020.

 

TMC is a leading global automotive company based in Japan. It had over 50 manufacturing companies in 28 countries at the end of March 2020. To strengthen its market position, the company has established captive financing arms through TFSC in all major global markets. TFSC has a presence in 38 locations worldwide and serves more than 2.8 crore customers.

 

TMC had a profit after tax (PAT) of JPY 2,076 billion (Rs 1.5 lakh crore[1]) for fiscal 2020 against a PAT of JPY 1,883 billion (Rs 1.2 lakh crore[2]) for fiscal 2019. TMC had a PAT of JPY 1,499 billion (Rs 106,432 crore[3]) for the nine months ended December 31, 2020, compared to JPY 1,770 billion (around Rs 116,098 crore[4]) for the corresponding period of the previous fiscal.

[1] Exchange rate as on March 31, 2020: 1 JPY=0.69982 INR

[2] Exchange rate as on March 31, 2019: 1 JPY=0.62595 INR

[3] Exchange rate as on December 31, 2020: 1 JPY=0.710022 INR

[4] Exchange rate as on December 31, 2019: 1 JPY=0.655921 INR

 

Key Financial Indicators

		half year ended 30-Sep-20	31-Mar-20	31-Mar-19
Total assets	Rs crore	7,359	7,579	7,803
Total income	Rs crore	353.4	735.0	712.8
PAT	Rs crore	10.5	-49.7	35.8
Gross NPAs (Stage 3)	%	2.24	2.38	2.21
Return on assets	%	0.28	-0.65	0.48
Gearing	Times	4.3	4.6	4.5