| Volvo Financial Services (India) Private Limited | ||
| Rating Reaffirmed | ||
| Rating Action | ||
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| 1 crore = 10 million | ||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has reaffirmed its 'CRISIL A1+' rating on the Rs 300 crore commercial paper of Volvo Financial Services (India) Private Limited (VFS India).
On November 30, 2021, S&P Global Ratings (S&P) revised its rating outlook on AB Volvo (the ultimate parent of VFS India) to ‘Positive’ from ‘Stable’ and reaffirmed the ‘A-/A-2’ ratings. The outlook revision is based on the likelihood of stable operating margin despite headwinds from the global chip shortage and increasing raw material prices. S&P expects AB Volvo's adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) margin at 12-13% in 2021, up from 9% in 2020, indicating solid prospects, profitability and cash flow this year with demand for new trucks supported by increased e-commerce and freight rates.
CRISIL Ratings centrally factors in the strategic importance of VFS India to AB Volvo and the strong moral obligation of the ultimate parent to support the Indian subsidiary, both on an ongoing basis and during distress, given its 100% ultimate ownership in VFS India, shared brand, and strong operational linkages. The rating on VFS India also reflects its adequate capitalisation. These strengths are partially offset by its limited track record in the business.
The nationwide lockdown in the first quarter of fiscal 2021 to contain the spread of Covid-19 impacted operational activity across the country. Sustained economic recovery is a key monitorable, given the localised restrictions in a few states following the second wave of the pandemic in the first quarter this fiscal. Collections had dropped to 81% in April 2021, but recovered to 91% in July 2021 as economic activity revived. Any change in the payment discipline of borrowers will affect delinquency.
Around 1.0% of the portfolio of VFS India was restructured as on September 30, 2021, with a bulk being in the Eicher segment. Ability to maintain asset quality remains a key monitorable. |
Analytical Approach The rating continues to centrally factor in the strategic importance of VFS India to AB Volvo and the parent’s strong moral obligation to support the Indian subsidiary, both on an ongoing basis and during distress. The expectation of strong support is based on AB Volvo's 100% ultimate ownership in VFS India, common brand and strong linkages with the Volvo Group. |
Key Rating Drivers & Detailed Description Strengths: Strong support of AB Volvo AB Volvo views India as a key market. VFS India, being the captive financier of the Volvo Group, receives significant business, financial and managerial support from AB Volvo and the Volvo Group, given the strategic role it plays in strengthening the Volvo Group’s market share and sales in India. VFS India has considerable managerial and operational linkages with the Volvo Group which extends management support through representation of their senior management on the board of VFS India. AB Volvo has infused equity capital of Rs 324.4 crore in VFS India since inception. VFS India also benefits from AB Volvo's global linkages with foreign banks operating in India. VFS India’s risk management policies, systems, and processes are in line with those globally approved by AB Volvo. AB Volvo is likely to maintain its 100% ownership in VFS India. The ownership, shared brand and strong operational integration lead to a high moral obligation on AB Volvo to support VFS India. The Volvo Group has stayed committed to its Indian operations all through the Covid-19 crisis, demonstrating the strategic importance of the Indian market.
Adequate capitalisation Capitalisation remains adequate, as indicated by networth of Rs 278 crore and capital adequacy ratio (CAR) of 18.64% as on March 31, 2021, against Rs 282 crore and 26.63%, respectively, a year earlier. Gearing increased to 4.0 times from 2.7 times during the same period. As on September 31, 2021, networth was Rs 278 crore, CAR was 18.08%, and gearing was 4.2 times.
Weakness: Limited track record of operations VFS India began operations in September 2015 and its loan book, though increasing, remains small. The loan book was at Rs 1,347 crore as on March 31, 2021, up 38% from Rs 973 crore as on March 31, 2020. Disbursements, at Rs 689 crore in fiscal 2021 (Rs 566 crore in fiscal 2020), were majorly in the Volvo trucks segment (~44%), followed by Volvo construction (~36%) and Eicher (~20%). Loan book was Rs 1,395 crore as on September 30, 2021, and the company disbursed Rs 299 crore in the first half of fiscal 2022.
Gross non-performing assets (GNPAs) improved to 7.6% (including restructuring of 1.2%) as on March 31, 2021, from 12.0% as on March 31, 2020, primarily due to recoveries and growth in the loan book. GNPAs were at 8.6% (including restructuring of 1.0%) as on September 30, 2021.
Ability to scale up the business profitably while maintaining asset quality will be closely monitored. |
Liquidity: Strong Structural liquidity statement as on September 30, 2021, shows cumulative positive mismatch in all the buckets. Liquidity has been adequate, with cash and equivalent of Rs 82 crore and unutilised bank lines of Rs 960 crore as on September 30, 2021; this is sufficient to cover upcoming obligation of Rs 146 crore till March 31, 2022. As on September 30, 2021, outstanding borrowings was Rs 1,158 crore, with no outstanding commercial paper. Liquidity is further cushioned by the funding support from AB Volvo if required. |
Rating Sensitivity Factors Downward factors:
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About the Company VFS India is a wholly owned step-down subsidiary of AB Volvo. VFS India, a non-deposit-taking non-banking financial company, received a non-banking financial company license on August 28, 2015, and began operations in September 2015. It offers finance to customers of Volvo Group India Pvt Ltd (VGIPL), Volvo CE India Pvt Ltd (VCEI) and Volvo Eicher Commercial Vehicles Ltd (VECV), a joint venture between AB Volvo and Eicher Motors Ltd (EML). |
About the Group The Sweden-based Volvo Group is one of the world’s leading manufacturers of trucks, buses, construction equipment and drive systems for marine and industrial applications. It has a market leadership position in heavy commercial vehicles, buses and construction equipment. It has a diverse geographic outreach, with production facilities across 18 countries and sales in more than 190 markets. To strengthen its market position, the company has established captive financing arms through VFS in all major global markets. VFS operates in 50 countries and employs 1500+ people worldwide.
AB Volvo reported a profit after tax (PAT) of Swedish krona (SEK) 20.1 billion for 2020 against SEK 36.5 billion for the previous year. PAT for the nine months ended September 30, 2021, was SEK 25.2 billion compared with SEK 10.7 billion for the corresponding period last year. |
Key Financial Indicators
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Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL Ratings' complexity levels are assigned to various types of financial instruments. The CRISIL Ratings' complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL Ratings' 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)
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| Annexure - Rating History for last 3 Years | |||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | |||||||||||||||||||||||||||||||||||||||
Criteria Details
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