Key Rating Drivers & Detailed Description
Strengths:
Majority ownership by, and strategic importance to, M&M
The ratings factor in the strategic, financial and operational linkages between Mahindra Finance and M&M. The parent participated in the rights issue in August 2020 following which its stake in Mahindra Finance went up to 52.2% from 51.2%. CRISIL Ratings expects M&M to maintain majority shareholding in Mahindra Finance and exercise management oversight over the company to conduct its business in line with governance and compliance standards that all Mahindra group entities follow, including Mahindra Finance, honouring its debt obligation in a timely manner.
Mahindra Finance continues to finance around 30% each of M&M’s utility vehicles (UVs) and light commercial vehicle (LCVs) sales. Its market share in tractors segment, after remaining impacted during the Covid-19 pandemic era, has now revived. However, financing of M&M vehicles as a proportion of Mahindra Finance’s yearly total loan disbursements has reduced over the past few years, resulting in the share of AUM deployed in captive financing business declining to 44% in fiscal 2023. As part of its growth strategy, Mahindra Finance has been increasingly financing vehicles of other manufacturers which would impart diversity to its business channel. Mahindra Finance has done two equity capital issuances in the past five years; M&M participated in both and had cumulatively infused Rs 2,696 crore into Mahindra Finance – demonstrating the strong financial and strategic linkages. M&M is expected to support Mahindra Finance on an ongoing basis and in case of distress, given the majority ownership, shared brand name and the strategic importance of the financial services business.
Strong and established market position in rural and semi-urban areas, particularly in the UV and tractor financing businesses
Mahindra Finance’s market position in the UV and tractor financing segments remains strong, owing to the operational linkages with M&M, which enables the company to access the parent’s widespread dealer network. The company finances consumer purchases of auto/UVs (35% of gross business assets as on December 31, 2023), commercial vehicles (CV)/commercial equipment (CEs) (11%), tractors (13%), cars (19%) and other assets. The company endeavors to diversify into, and increase its non-vehicle portfolio over the medium term. In the last 2-3 years, the company has started to offer products such as small and medium enterprise (SME) loans, loan against property (LAP) and leasing. However, the company’s ability to profitably scale these newer portfolios remains a monitorable.
Over fiscals 2021 and 2022, the company had calibrated its growth strategy in light of macro-economic challenges, leading to overall business assets remaining almost flat at Rs 64,961 crore as on March 31, 2022. However, growth revived in fiscal 2023 and overall business assets stood at Rs 82,770 crore on March 31, 2023. Disbursements in the first nine months of fiscal 2024 were Rs 40,916 crore which yielded a growth of 25.5% (year-on-year) in gross loan assets, taking this metric to Rs 97,048 crore as on December 31, 2023.
The company has considerably strengthened its distribution network: it had 1,386 branches across 27 states and 7 Union Territories as on March 31, 2023, with a large number of branches in semi-urban and rural areas, where it enjoys a strong market share. To leverage its existing presence in these geographies, Mahindra Finance has been expanding its rural housing finance portfolio through MRHFL.
Adequate capitalisation and stable resource profile
Capitalisation continues to be adequate, as reflected in tier I and overall capital adequacy ratios of 19.9% and 22.5% respectively, as on March 31, 2023 (24.3% and 27.8%, respectively, as on March 31, 2022). Owing to the growth exhibited during the first nine months of fiscal 2024, Tier 1 and overall capital adequacy ratios declined marginally to 16.5% and 18.3%, respectively as on December 31, 2023. Networth was sizeable at Rs 17,523 crore, and gearing of 4.9 times, respectively as on December 31, 2023 (Rs 17,089 crore and gearing at 4.4 times as on March 31, 2023). Networth coverage for net non-performing assets (NPAs) stood at 12.2 times as on December 31, 2023. The company also declared a dividend of Rs 741.3 crore in fiscal 2023.
The company’s capital profile is also supported by its demonstrated ability to raise equity capital. In August 2020, the company raised Rs 3,089 crore of equity capital through rights issue, which resulted in improvement in gearing.
Apart from capitalization, the financial flexibility also benefits from the company’s stable and diversified resource profile and adequate unutilised bank limits along with its demonstrated ability to raise resources at competitive costs. As on December 31, 2023, the company had a fairly diverse borrowing mix consisting of 28.1% of NCDs, 4.9% of securitisation, 7.7% of fixed deposits and 49.7% of bank borrowings. Cost of borrowing was reasonable at 7.8% (annualised) in 9 months of fiscal 2023 (7.0% in fiscal 2023) and is expected to remain better than industry average over the medium term.
Weakness:
Modest, albeit improving, asset quality
Mahindra Finance’s asset quality, though exhibiting sequential improvement, remains modest. Gross stage 3 (GS3) assets stood at 3.97% as on December 31, 2023, down from 4.49% as on March 31, 2023 and, 7.66% as on March 31, 2022. The improvement was primarily driven by revision in the Expected Credit Loss (ECL) calculation model used by the company, apart from organic increase in resolution and recoveries across buckets stemming from company’s efforts to strengthen underwriting and risk management. The company has also written off Rs 1,113 crore during 9M 2024 as compared to Rs 2213 crore worth of write offs done in fiscal 2023.
The company continues to lay emphasis on collection and recovery efforts and CRISIL Ratings notes that Mahindra Finance has shown ability to ultimately recover from delinquent accounts even post loan maturity date. Overall ultimate credit loss has been in the range of 1% to 3% over the past 10 years. The company's track record in the vehicle financing business, understanding of the target customer segment and robust underwriting practices are expected to support the asset quality metrics on a steady state basis. However, with newer portfolios scaling up, the company’s ability to maintain sound asset quality metrics alongside seasoning of these newer books, remains critical.
In terms of profitability, the company reported a net profit of Rs 1,984 crore for fiscal 2023, translating to a RoMA of 2.3%, higher than Rs 989 crore of profit and a corresponding RoA of 1.3% for fiscal 2022. The increase profits during fiscal 2023 was a factor of higher recoveries and reversals done during the year. There was a subsequent correction in this and resultantly, net profit and RoMA for nine months ended December 31, 2023 stood at Rs 1,141 crore and 1.5%, respectively as compared to Rs 1,300 crore of PAT and 2.1% of RoMA for the corresponding period of previous fiscal.
CRISIL Ratings has also taken note of the recent disclosure made by the company relating to embezzlement of funds at its branches in the North-East, with an estimated financial impact of close to Rs 150 crore. It is understood that this matter is under investigation and in the interim, corrective actions have been initiated by the company. Further developments in this matter will continue to be monitored closely.