Detailed Rationale CRISIL Ratings has assigned its ‘CRISIL AAA/Stable’ rating to the Rs 10,000 crore Non-Convertible Debentures of Mahindra And Mahindra Financial Services Limited (Mahindra Finance) and reaffirmed its ‘CRISIL AAA/Stable/CRISIL A1+’ ratings on the bank facilities and debt instruments of the company.
CRISIL Ratings has also withdrawn its rating on the Rs.127.8 crore subordinated debt programme, (see the 'Annexure - Details of Rating Withdrawn' for details) on receipt of independent confirmation that these instruments are fully redeemed and at the request of the company, in line with its withdrawal policy.
The ratings continue to reflect the company’s majority ownership by, and strategic importance to, the parent, Mahindra & Mahindra Ltd (M&M; rated ‘CRISIL AAA/Stable/CRISIL A1+’). CRISIL Ratings expects the financial services business housed in Mahindra Finance to remain strategically important to M&M. Mahindra Finance is the largest financier of M&M’s automotive and tractor business and has strong relationships with its dealer network. With extensive experience, expertise and penetration in rural and semi urban markets, Mahindra Finance is a key part of M&M’s growth strategy in these markets.
CRISIL Ratings expects M&M to maintain majority shareholding in Mahindra Finance and exercise management oversight for the company to conduct its business in line with governance and compliance standards that all Mahindra group entities follow, including Mahindra Finance, honoring its debt obligation in a timely manner.
The rating also reflects the gradual improvement in Mahindra Finance’s asset quality and profitability, though the former continues to be modest. The rating also factors in Mahindra Finance’s strong position in the utility vehicle (UV) and tractor financing business in rural and semi-urban areas, adequate capitalisation, and stable resource profile. |
Analytical Approach For arriving at the ratings, CRISIL Ratings has combined the business and financial risk profiles of Mahindra Finance and its key subsidiaries, Mahindra Rural Housing Finance Ltd (MRHFL) and Mahindra Insurance Brokers Ltd (MIBL). While MRHFL is in the rural housing finance segment, a fund-based business, MIBL is in insurance broking, a fee-based business. CRISIL Ratings has factored in the strong support the company is likely to receive from its parent, M&M, on an ongoing basis and in times of distress.
Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation. |
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 went up to 52.2% from 51.2%. CRISIL Ratings expects M&M to maintain majority shareholding in Mahindra Finance and exercise management oversight for 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 UV and light commercial vehicle (LCV) sales. Market share in tractors was impacted during the Covid-19 pandemic and has now increased. However, financing of M&M vehicles as a proportion of Mahindra Finance’s yearly total loan disbursements has reduced over the past few years. As part of its growth strategy, Mahindra Finance has been increasingly financing vehicles of other manufacturers. The captive finance business accounted for 44% of the overall loan book in fiscal 2023. Mahindra Finance has done two equity capital issuances in the past five years; M&M participated in both and had 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 (33% of gross business assets as on March 31, 2023), commercial vehicles (CV)/commercial equipments (CEs) (11%), tractors (14%), cars (20%) and other assets. The company has plans to diversify and increase its non-vehicle portfolio over the medium term. It has recently started offering products such as small and medium enterprise (SME) loans, loan against property (LAP), leasing and digital lending. The scalability of this portfolio remains a monitorable.
Disbursements remained subdued in fiscal 2021 and the first half of fiscal 2022 as the company adopted a cautious approach owing to challenging business environment. Consequently, overall gross business assets of Mahindra Finance remained flat at Rs 64,961 crore as on March 31, 2022. However, disbursements picked up in fiscal 2023 and stood at Rs 49,541 crore (80% year-on-year growth); gross loan assets witnessed 27% growth in fiscal 2023 and stood at Rs 82,770 crore as on March 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 strong market share. To leverage its existing presence in these geographies, Mahindra Finance entered rural housing finance 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). Networth was sizeable at Rs 17,089 crore and gearing at 4.4 times as on March 31, 2023 (Rs 15,628 crore and 3.6 times, respectively, as on March 31, 2022). 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. Networth coverage for net non-performing assets (NPAs) stood at 11.3 times as on March 31, 2023.
Stable and diversified resource profile and substantial unutilised bank limits provide significant financial flexibility to raise resources at competitive costs to meet increasing funding requirement. As on March 31, 2023, the company had a fairly diverse borrowing mix consisting of 31.8% of NCDs, 8.9% of securitisation, 7.4% of fixed deposits and 40.3% of bank borrowings. Cost of borrowing was healthy at 6.6% in fiscal 2023 (6.5% in fiscal 2022) and is expected to remain better than industry average over the medium term.
Weakness: Modest asset quality Mahindra Finance’s asset quality is modest despite showing improvement in recent times. Gross stage 3 assets stood at 4.49% as on March 31, 2023, as against 7.66% as on March 31, 2022, and 8.96% as on March 31, 2021. The improvement in asset quality was driven by reduction in gross stage 3 assets across all asset classes. Furthermore, the outstanding restructured portfolio stood at Rs 1,635 crore (2% of the overall portfolio) as on March 31, 2023.
The company is increasingly focusing 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 may support the asset quality metrics. The company's ability to manage collections and asset quality going forward will be a key monitorable. The impact of the revised norms of the Reserve Bank of India (RBI) on asset classification as part of the circular released on November 12, 2021 stood at Rs. 1,184 crores (1.4% of the gross business assets) as on March 31, 2023.
Weakening of asset quality and increase in provision coverage ratio impacted profitability in fiscal 2021 (0.4% return on managed assets [RoMA]) and in the first quarter of fiscal 2022 (-8.2% RoMA annualised). Thereafter, the company has witnessed quarter-on-quarter improvement in profitability as reflected in RoMA of 1.3% in fiscal 2022 (reported profit of Rs 989 crore). The company further reported PAT of Rs 1,984 crore (RoMA of 2.3%) in fiscal 2023. The increase in profitability is partly supported by lower provisioning cost. Ability to contain asset quality and credit cost will remain a key rating sensitivity factor. |
Liquidity: Superior Liquidity was comfortable with positive cumulative mismatch in each bucket up to one year as on March 31, 2023. Cash and equivalent and other liquid assets stood at around Rs 10,400 crore as on March 31, 2023. The company has sufficient liquid surplus to repay debt for the next three months assuming no collection. Moreover, being a part of the M&M group, additional liquidity support will be available to the entity as and when required
Environment, social and governance (ESG) profile CRISIL Ratings believes the ESG profile of Mahindra Finance supports its already strong credit risk profile.
The ESG profile of financial institutions typically factors in governance as a key differentiator. The sector has reasonable social impact because of its substantial employee and customer base. While the sector does not have a direct adverse environmental impact, lending decisions may have a bearing on environment and other sustainability factors.
Mahindra Finance has demonstrated focus on strengthening various aspects of its ESG profile.
Key ESG highlights:
There is growing importance of ESG among investors and lenders. The company’s commitment to ESG will play a key role in enhancing stakeholder confidence, given high share of foreign investors as well as access to both domestic and foreign capital markets.
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Outlook: Stable CRISIL Ratings believes Mahindra Finance will benefit from the support it is likely to receive from M&M, given the majority shareholding of, and Mahindra Finance’s strategic importance to, its parent. CRISIL Ratings also believes the company will maintain its strong market position and adequate capitalisation over the medium term. |
Rating Sensitivity factors Downward Factors: * Deterioration in the asset quality and profitability with RoA < 0% on a sustained basis * Material reduction in shareholding by M&M |
About the Company Mahindra Finance, a non-banking financial company (NBFC), was incorporated in 1991. M&M, the majority shareholder, held 52.2% in Mahindra Finance as on March 31, 2023. Mahindra Finance ranks among the larger NBFCs in India with gross loan assets of Rs 82,770 crore as on March 31, 2023 (Rs 64,961 crore as on March 31, 2022). The company finances consumer purchases of UVs, LCVs, tractors, cars and other assets. It has recently started offering products such as SME loans, LAP, leasing and digital lending. To leverage its extensive branch network and rural clientele, the company has entered the rural housing finance business through its subsidiary, MRHFL. MIBL is the insurance broking arm of Mahindra Finance, providing insurance broking services both in the life and non-life segments.
On consolidated basis, total income and net profit were Rs 12,832 crore and Rs 2,071 crore, respectively, in fiscal 2023, against Rs 11,401 crore and Rs 1,150 crore, respectively, in fiscal 2022.
On standalone basis, the company reported profit of Rs 1,984 crore on total income (net of interest expense) of Rs 6,479 crore in fiscal 2023 (Rs 989 crore and 5,799 crore, respectively, in fiscal 2021) |
Key Financial Indicators (on a standalone basis)
*on business assets ^on average total assets |
Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
^not yet issued/availed *Partly paid up NCDs
Annexure - Details of Rating Withdrawn
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Annexure - List of Entities Consolidated
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| Annexure - Rating History for last 3 Years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Criteria Details
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