Detailed Rationale

CRISIL Ratings has assigned its ‘CRISIL BBB/Stable’ rating to Rs 30 crore subordinated debt issuances of Mahaveer Finance India Limited (Mahaveer Finance). The ratings on outstanding bank facilities and debt instruments have been reaffirmed at 'CRISIL BBB/Stable'.

 

Earlier on February 24, 2022, CRISIL Ratings had upgraded its rating on the long-term debt instruments of Mahaveer Finance to 'CRISIL BBB/Stable' from 'CRISIL BBB-/Stable'. This rating action was driven by the company’s consistent growth in scale of operations while maintaining capitalisation metrics at adequate levels. Further, the company is also expected to benefit from lower cost of funding with diversity in its lender base through the addition of multiple banks. The company has also demonstrated improvement in its collection efficiency over the last two quarters despite the on-going challenging macroeconomic environment. The long-standing experience of promoters, with vintage of 4 decades, in the used CV financing segment has also helped manage the overall operations during this period.  

 

Mahaveer Finance has reported consistent growth in its assets under management (AUM) to reach Rs 398 crore as on December 2021 as compared to Rs 278 crore as on March 31, 2020. The company has managed this growth by raising equity capital and maintaining adequate capital position. The adjusted gearing (including securitization / assignment) stood 4 times as on December 31, 2021. CRISIL Ratings believes that company will continue to maintain its gearing at below 5 times over medium term.

 

The company has also shown considerable improvement on resource raising front. During ten months of fiscal 2022, the company raised total debt of over Rs 170 crore. During fiscal 2022, the company was able to add few banks to the lender base and incremental cost of funds is expected to be lower by almost 200-250 bps. Incrementally, the management is expected to focus on raising funds from banks thereby reducing its cost of borrowing to sub 11% over medium term.

 

Mahaveer Finance has demonstrated ability to improve its monthly collection efficiency ratio[1] despite the challenging times. The collections were impacted during the peak of Covid second wave, dropping to 56% in April 2021 and then 44% in May 2021. However, post June 2021, the collections on month-on-month basis has shown consistent improvement reaching to over 90% in September 2021 and crossing 110% in December 2021 and January 2022.  

[1] Calculated as Total collections including overdue but excluding prepayments divided by current billing

Analytical Approach

CRISIL Ratings has considered the business and financial risk profiles of the company on a standalone basis.

Key Rating Drivers & Detailed Description

Strengths:

• Extensive experience of the promoters

The promoters have experience of four decades, leading to in-depth understanding of borrower behaviour and maintenance of comfortable asset quality, which should continue to support the business. The promoters have expanded their branch network in the southern region, within Tamil Nadu (TN), Andhra Pradesh (AP), Telangana and Pondicherry. The managing director, Mr. Mahaveer Chand Dugar, has substantial experience in the vehicle financing business, and has also conducted training sessions for other financiers. Mr. Mahaveer Chand Dugar is supported by his sons, Mr. M Deepak Dugar and Mr. M Praveen Dugar, who are also the co-promoters in the business. Both Deepak and Praveen have been involved in the day-to-day operations for over 20 years.

 

• Adequate capitalisation metrics

The company has maintained adequate capitalisation metrics despite capital requirement on account of both growth as well as creating higher provision buffer for asset side risks. The networth and adjusted gearing stood at Rs 85.2 crore and 4.0 times, respectively, as on December 31, 2021, against Rs 81.7 crore and 3.5 times, respectively, as on March 31, 2021. The company had last raised equity capital from Banyan Tree Growth Capital II LLC for Rs 25 crore in fiscal 2018 and now plans to raise additional equity of up to Rs 20 crore by first half of fiscal 2022 to support its envisaged growth plans. The management’s stance is keep gearing at below 5 times, considering growth in the loan book, going forward.

 

• Earnings profile remains adequate despite higher provisioning

The company has exhibited good track record of profitability since inception. The return on managed assets (RoMA) has been consistent in the range of 2.1 to 2.9% over the last 3 years. During the nine months ended December 2021, RoMA reduced to 1.11%. However, this was due to higher provisioning buffer created by the company. The provision cover for 90+ dpd stands now at 34% as compared to 12% as on March 31, 2021. CRISIL Ratings notes that the company’s collection efficiency has improved to over 110% in December 2021 and January 2022 indicative of recovery from overdue contracts. Additionally, the company has good track record of negligible losses on repossessed assets. Hence, CRISIL Ratings believes that the company is likely to report improvement in RoMA and revert back to historical average levels in fiscal 2023.

 

• Expected benefits from diversified resource profile

Despite the ongoing pandemic and challenges faced by Covid the company has showcased ability to consistently raise funds from banks and NBFCs. The company has been able to raise Rs ~170 crore since April 2021 till January 2022, out of which Rs 72 crore was raised in Q3 of fiscal 2022. Furthermore, the company has sanctions in pipeline of Rs 128 crore primarily from public sector banks at significantly lower cost of borrowings. The incremental cost of funds is expected to be lower by almost 200-250 bps. CRISIL Ratings expects the company to continue having a strong and diversified resource base and benefit from lower borrowing costs.

 

Weaknesses:

• Average asset quality

Mahaveer Finance’s asset quality has remained average despite showing some marginal improvement in third quarter of fiscal 2022. The surge in Covid-19 cases in quarter ended June 2021, resulted in imposing lockdowns in various states placing significant restrictions on movement of people, resulting in impact on field operations of the company. The collections, therefore, were impacted during this period, with efficiency dropping to 56% in April 2021 and then 44% in May 2021. However, post June 2021, the collections on month-on-month basis shown consistent improvement with efficiency reaching to over 90% in October 2021 and crossing 110% in December 2021 and January 2022. This consequently resulted in slight improvement in asset quality metrics with 90+ dpd at 7.58% from 7.93% as of September 2021 and 7.74% as of June 2021 (which were severely hit due to second wave). However, CRISIL Ratings also notes that the company did not restructure any account under the one-time restructuring scheme that was announced by the Reserve Bank of India (RBI). Nevertheless, the 90+ dpd level has been higher when compared to fiscal 2021 wherein 90+dpd was low at 4.21% as of March 2021. The management, however, is proactively working towards improving its asset quality with increased focus on collections. Furthermore, the historical track record of repossessing vehicles and recovering its overdues has also been good. During fiscal 2022 (till Jan 2022), the company recovered nearly 100% of the outstanding claims from repossessed assets either through direct sale or closure by the same customer. This improvement in collection efficiency is expected to benefit with 90+ dpd potentially reducing to below 6% over near term. CRISIL Ratings notes the company has displayed strong ability to improve its collection efficiency with gradual unlocking of economic activities. Nevertheless, ability of the company to bring its 90+ dpd steadily back to pre-pandemic level will remain key monitorable.

 

• Geographically concentrated operations with presence largely confined to Tamil Nadu

Mahaveer Finance operates predominantly in Tamil Nadu accounting for 50% of the overall portfolio followed by Andhra Pradesh (35%), Telangana (11%) and Pondicherry (3%). While the company intends to gradually expand its presence in other southern states, Tamil Nadu is likely to remain the key market over the medium term.

Liquidity: Adequate

As on January 31, 2022, Mahaveer Finance had liquidity of Rs ~35 crore which includes cash/liquid investments and unutilized CC/WCDL lines. The company's liquidity buffer (assuming nil collections) fully covered total debt and loan repayments and operating expenses arising over February and March 2022. The company has month-on-month collections rate in range of Rs 24-29 crore during last 4-5 months. As a policy, the company plans to maintain a liquidity cover of 2 months (excluding collections/prepayments) at all points in time.

Outlook: Stable

CRISIL Ratings believes Mahaveer Finance will continue to benefit from the extensive experience of its promoters and maintain adequate capitalisation.

Rating Sensitivity factors

Upward factors:

• Ability to significantly scale up the loan book while maintaining RoMA at over 2.5%
• Sustainable improvement in asset quality with 90+ dpd improving to below 5%
• Further improvement in capital position while maintain gearing levels

 

Downward factors:

• Steady state adjusted gearing to exceed 5 times
• Earnings profile remaining average with RoMA of less than 1%
• Significant deterioration in asset quality metrics

About the Company

Incorporated in 1981, Mahaveer Finance was registered as a deposit-taking NBFC with the RBI. It was taken over by the current management in 1987. In 2015, the company surrendered its deposit-taking license to the RBI and was converted into a non-deposit-taking NBFC asset finance company. The company is primarily engaged in used commercial vehicle and passenger vehicles financing in Tamil Nadu, Andhra Pradesh, Telangana and Pondicherry through its network of 53 branches as on December 31,2021.

Key Financial Indicators

Particulars for the year / period ended	Unit	9M Dec-2021	Mar-2021	Mar-2020
Total managed assets	Rs Cr	443.8	380.4	301.0
Total income	Rs Cr	61.4	60.5	51.1
Profit after tax	Rs Cr	3.4	8.4	5.8
90+ dpd	%	7.6	4.2	3.4
Adjusted gearing	Times	4.0	3.4	3.7
Return on managed assets	%	1.1	2.5	2.1

 

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs Crore)	Complexity Level	Rating assigned with outlook
NA	Subordinated Debt*	NA	NA	NA	30.0	Complex	CRISIL BBB/Stable
INE911L08012	Non- convertible debentures	25-May-16	16.4	24-May-22	10.0	Simple	CRISIL BBB/Stable
NA	Cash Credit	NA	NA	NA	29.5	NA	CRISIL BBB/Stable
NA	Proposed Cash Credit Limit	NA	NA	NA	0.5	NA	CRISIL BBB/Stable
NA	Proposed Long Term Bank Loan Facility	NA	NA	NA	70	NA	CRISIL BBB/Stable

*Yet to be issued