Detailed Rationale

CRISIL Ratings has reaffirmed its ratings on the debt programmes and bank facilities of Mahindra and Mahindra Financial Services Limited (Mahindra Finance) at ‘CRISIL AA+/FAAA/Stable/CRISIL A1+’.

 

CRISIL Ratings has also withdrawn Rs 100.5 crore of subordinated debt, Rs 201.6 crore of non-convertible debentures and Rs 16,626 crore of bank facilities (See Annexure 'Details of Rating Withdrawn' for details) as the same has been repaid/unutilised as on date. CRISIL Ratings has reaffirmed and withdrawn its ratings on the Fixed Deposit programme of the company. Withdrawal is in line with CRISIL Ratings' withdrawal policy.

 

The ratings reflect the company’s majority ownership by, and strategic importance to, the parent, Mahindra & Mahindra Ltd (M&M; rated ‘CRISIL AAA/Stable/CRISIL A1+’). The ratings are also underpinned by a strong position in the utility vehicle (UV) and tractor financing business in rural and semi-urban areas, adequate capitalisation, and stable resource profile. These strengths are partially offset by modest asset quality.

 

Mahindra Finance’s asset quality deteriorated in Q1FY22 on account of outbreak of second wave of thepandemic, however it improved subsequently with pickup in economic activities. Gross stage 3 assets showed improvement and stood at 7.66% as on March 31, 2022 as compared to 8.96% as on March 31, 2021.

 

Under the RBI August 2020 and May 2021 Resolution Framework for COVID-19-related stress, the company has implemented restructuring on accounts amounting to Rs 4019 crore (6.2% of the portfolio) as on March 31, 2022; performance of this portfolio remains to be seen. Mahindra Finance’s ability to manage collections and asset quality in the current environment will remain a key monitorable.

 

The impact of the revised norms of the RBI on asset classification as part of the circular released on November 12, 2021 and further extended upto September 30, 2022 as per RBI circular dated February 15, 2022 remains to be seen.

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). CRISIL Ratings has also factored in the strong support the company is likely to receive from its parent, Mahindra and Mahindra Limited, on an ongoing basis and in times of distress. While MRHFL is in the rural housing finance segment, a fund-based business, MIBL is in insurance broking, a fee-based business.

 

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 financial and operational linkages that Mahindra Finance has with M&M.  M&M participated in the rights issue done in August 2020 post which its stake went up from 51.2% to 52.2%. M&M is expected to remain the largest shareholder and maintain controlling interest in Mahindra Finance over the medium term, given the latter’s critical role in facilitating M&M’s sales.

 

The company remains of strategic importance to M&M, as the former 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 pandemic period which has now increased again. 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 proportion of captive finance business stood at 46% of overall loan book in fiscal 2022. Further, M&M’s majority ownership of Mahindra Finance, shared brand, and strong linkages between the two imply a moral obligation on M&M’s part to support Mahindra Finance in case of distress.

 

* Strong and established market position in rural and semi-urban areas, particularly in UV and tractor financing business

Mahindra Finance’s market position in the UV and tractor financing segments remains strong, given the operational linkages with M&M, which enables Mahindra Finance to access the parent’s widespread dealer network. The company’s main competitors include cooperative and nationalised banks and financing entities in the unorganised sector. Overall gross loan assets of Mahindra Finance remained flat Y-o-Y and stood at Rs 64961 crores as on March 31, 2022 as company adopted cautious approach in disbursements in Q1FY22 given the challenging business environment; however, disbursements have picked up since then. The company has considerably strengthened its distribution network: it had 1384 branches across 27 states and 7 Union Territories as on March 31, 2022, 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 entered rural housing finance through MRHFL.

 

* Adequate capitalisation and stable resource profile:

Capitalisation continues to be adequate with Tier I and overall capital adequacy ratios of 24.3% and 27.8% respectively, as on March 31, 2022 (22.4% and 26.2% respectively as on March 31, 2021). Networth was sizeable at Rs 15628 crore and gearing at 3.6 times 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 3089 crores of equity capital through right issue which resulted in improvement in gearing ratio post completion of Rights Issue. Networth coverage for net NPAs stood at 7.5 times as on March 31, 2022.

 

A 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, 2022, company has a fairly diverse borrowing mix comprising of 29.2% of NCDs, 14.5% of securitization, 15.1% of fixed deposits and 27.5% of Bank loans and WCDL limit among other instruments.  Cost of borrowing remains at healthy levels of 6.5% for fiscal 2022 (7.6% for fiscal 2021) and is expected to remain better than industry average over the medium term.

 

Weakness:

* Modest asset quality impacting profitability:

During Q1FY22, the pandemic-induced challenges, localized lockdowns and associated impact on cash flows of borrowers resulted in deterioration in asset quality. Asset quality weakened to 15.46% as on June 30, 2021 led by impact on collection efforts and overall economic slowdown in the wake of the second wave of pandemic. However, with pickup in economic activities, it improved from thereon and gross stage 3 assets stood at 7.66% as on March 31, 2022.  Further, company has restructured accounts amounting to Rs 4019 crores (6.2% of the overall portfolio) as on March 31, 2022.

 

The company is increasingly focusing on collection and recovery efforts and CRISIL Ratings notes that Mahindra Finance has displayed ability in the past to ultimately recover from these accounts, even post loan maturity date. The overall ultimate credit losses have been in the range of 2% 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 could support the asset quality metrics. The company's ability to manage collections and asset quality during the current challenging macroeconomic environment is a key monitorable.

 

Weakening of asset quality and increase in provision coverage ratio had impacted profitability in fiscal 2021 and first quarter of fiscal 2022 with company reporting low annualised return on managed assets (RoMA) of 0.4% and -8.2% respectively. However, the company reported a profit of Rs 989 crore in fiscal 2022 (1.3% RoMA). The increase in profitability is partly supported by reversal in provisioning cost. Ability to contain asset quality and credit cost will remain a key rating sensitivity factor.

Liquidity: Strong

Liquidity position remains comfortable with positive cumulative mismatch in each bucket up to 1 year as on March 31, 2022. Liquidity is further supported with cash and cash equivalents of Rs 312 crore and other liquid assets of around Rs 8573 crore as on May 31, 2022.  Company also has Rs 1261 crore of unutilised committed bank lines as on same date. The total liquidity is sufficient to repay debt for next 3 months assuming no collections. Moreover, being a part of the M&M group, additional liquidity support will be available to the entity as and when required

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

Upward Factors:
* Sustainable improvement in asset quality with GNPA improving to under 5% on a sustainable basis with a consequent improvement in earnings profile
* Any material increase in the shareholding or group support philosophy of M&M

 
Downside Factors:
* Any significant reduction in support to Mahindra Finance or any downward rating action on M&M may result in a corresponding rating action on Mahindra Finance

* Deterioration in asset quality and profitability on sustained basis

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, 2022. Mahindra Finance ranks among the larger NBFCs in India with gross loan assets of Rs 64961 crore as on March 31, 2022 (Rs 64608 crore as on March 31, 2021). The company finances consumer purchases of UVs, LCVs, tractors, cars, and other assets. To leverage its extensive branch network and rural clientele, the company has entered the rural housing finance business through subsidiary, MRHFL. MIBL is the insurance broking arm of Mahindra Finance, providing insurance broking services both in the life and non-life segments.

 

On a consolidated basis, total income and net profit were Rs 11401 crore and Rs 1150 crore, respectively, for fiscal 2022, against Rs 12170 crore and Rs 780 crore, respectively, for fiscal 2021.

 

On standalone basis, company reported a profit of Rs 989 crore on total income (net of interest expense) of Rs 5799 crore (Rs 335 crore and 5784 crore, respectively for fiscal 2021). This increase in profitability was led by reversal in provisioning cost.

Key Financial Indicators

As on year ended Mar 31		2022	2021
Total Assets	Rs crore	75289	77036
Total income	Rs crore	9719	10517
Profit after tax	Rs crore	989	335
Gross NPA*	%	7.66	8.96
Return on assets (annualized) ^	%	1.3	0.4
Adjusted gearing	Times	3.6	4.0

*on Business Assets as on March 31

^on average Total Assets

Any other information: Not applicable