BWI: Mahindra and Mahindra Financial Services Limited’s Unsecured Redeemable Subordinated Debt Instruments Issue of INR 200 crore or 2 billion

Press release from Business Wire India
Source: Brickwork Ratings
Thursday, November 26, 2009 10:00 AM IST (04:30 AM GMT)
Editors: General: Consumer interest, Economy; Business: Advertising, PR & marketing, Banking & financial services, Business services, Financial Analyst, Stock exchanges
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Mahindra and Mahindra Financial Services Limited's Unsecured Redeemable Subordinated Debt Instruments Issue of INR 200 crore or 2 billion
NCD Issue Rating: BWR AA+, Outlook : Positive

Bangalore, Karnataka, India, Thursday, November 26, 2009 -- (Business Wire India) -- Brickwork Ratings has assigned BWR AA+ (Pronounced BWR Double A plus) for Mahindra and Mahindra Financial Services Limited's ("MMFSL") proposed Unsecured Redeemable Subordinated Debt Instruments issue of INR 200 crore. 'BWR AA+' stands for an instrument that is considered to offer HIGH credit quality in terms of timely servicing of principal and interest obligations. The rating takes into account MMFSL's business model which has clear focus on untapped rural/semi-urban markets, proven track record in asset financing, wide network of field staff across 25 states, well diversified portfolio, high capital adequacy and backing of the parent company Mahindra & Mahindra Ltd. (M&M). The rating is however constrained by high NPA of the company. BWR has essentially relied upon the audited financial results, the projected financial figures, information and clarification provided by MMFSL.

Background

Mahindra Finance was promoted by M&M (US$ 6.3 billion Mahindra Group) and Kotak Mahindra Bank Ltd (formerly Kotak Mahindra Finance Ltd [KMFL]), with M&M as the major shareholder. In 1998, Mahindra Finance became a subsidiary of M&M after the latter bought out KMFL's stake. Currently, M&M holds 61% stake in the company.

The company principally finances UVs used both for commercial and personal purposes, tractors and cars. MMFSL's client base predominantly is small entrepreneurs or self-employed individuals such as transport operators, taxi operators and farmers. Its business model is positioned to tap the demand for financing in rural and semi-urban areas.

MMFSL has a good track record of increasing profitability. Profit Before Tax has increased from Rs. 133 crore in FY2005 to Rs. 326 crore in FY2009. Profit After Tax has increased from Rs. 82 crore to Rs. 215 crore during the same period. It's Profit After Tax (PAT) increased by 21% in FY 2009, mainly on back of increased spreads and margins. Profit After Tax (PAT) during the first half of FY2010 improved to Rs. 109 crore an increase of 76% from Rs. 62 crore in the corresponding period last year. It has however posted a slower growth in income at 13 % in FY09, essentially due to the economic slowdown across the world and consequent slowdown in sales of passenger cars, CVs and utility vehicles.

In first half of FY2010 MMFSL's disbursement improved and registered a growth of 9% at Rs. 3804 crores as compared to Rs.3475 crores during the same period previous year. Gross NPAs increased steeply from 5.5% in FY 2007 to 8.7% in FY 2009. It had touched a high of 9.4% in Q2 of FY 09. As of Q2 FY 2010 the gross NPAs have slightly comedown to 9.0%.

Network

MMFSL has a network of 439 branches in rural and semi-urban areas spread over 25 states and 2 union territories in India covering almost 90% of the districts in India. M&M vehicles account for about 60% of the loan book as it provides finance to over 1350 dealers of which 70% are M&M and PTL (Punjab Tractors Ltd.) dealers.

Shareholding pattern

As at Q2 FY10, Promoters and promoters group have aggregate holdings of 60% in MMFSL, FIIs and ESOP Trust hold of 32% and 1% respectively and the public holds 7%.

Subsidiaries

In 2005, MMFSL commenced insurance broking business in MIBL (Mahindra Insurance Brokerage Ltd.) which is into direct insurance broking for life and non-life products. MIBL posted PAT of INR 650 lacs in FY09. PAT as of Q2 FY 2010 improved to Rs. 520 lacs. MMFSL also started MRHFL (Mahindra Rural Housing finance Ltd.), a rural and semi-urban housing finance company in 2007. It had posted a profit of Rs. 0.43 crore during the first half of FY2010 as compared to loss of Rs. 0.71 crore for same period of the previous year.

Industry Analysis

After the Global economic turbulence during the period 2008-09 there has been a healthy pick-up in the demand the housing and auto sectors. Activities in the infrastructure sector are looking up too. After declining for the last 11 months, CV sales grew in July and August 2009. These factors taken together are likely to increase credit disbursement by asset financing companies and consequently the income of the sector is expected to grow. The rural market is also expected to continue to grow, though the delayed monsoon could have some adverse impact. Liquidity pressure on NBF companies has eased. This is reflected in the successful fund raising exercise carried out by leading financing services companies in the recent months.

Rating Outlook

MMFSL has, since inception, concentrated on semi-urban and rural areas, where competition is relatively low. The vast distribution network has enabled MMFSL to post strong and consistent growth in business as reflected in MMFSL's asset book which has grown at a robust 28% CAGR over FY05-FY09 led by aggressive expansion and strong growth in the auto sector. MMFSL has in recent years made attempts to diversify its loan portfolio and also reduce dependence on its parent company. The rating has, inter alia factored the management quality, measures being taken to increase provisions against NPA as well as to reduce the high level of NPAs, comfortable capital adequacy ratio which is currently at 19.40% and the support of the promoter group. Demand in the auto sector seems to be picking up which will be beneficial to the company. However, reducing the NPAs quickly and improving the assets quality will be crucial to the company's performance.

Copyright ©, 2009, Brickwork Ratings.

Brickwork Ratings has assigned the rating based on the information obtained from the issuer and other reliable sources, which are deemed to be accurate. Brickwork has taken considerable steps to avoid any data distortion; however, it does not examine the precision or completeness of the information obtained. And hence, the information in this report is presented "as is" without any express or implied warranty of any kind. Brickwork does not make any representation in respect to the truth or accuracy of any such information. The rating assigned by Brickwork should be treated as an opinion rather than a recommendation to buy, sell or hold the rated instrument and BWR shall not be liable for any losses incurred by users from any use of this report or its contents. Brickwork has the right to change, suspend or withdraw the ratings at any time for any reasons.


CONTACT DETAILS
Jubin Pandey, Analyst Contact, Brickwork Ratings, +1-860-425-2742, jubin.p@brickworkratings.com
Mukesh Mahor, Analyst Contact, Brickwork Ratings, +1-860-425-2742, mukesh.m@brickworkratings.com
Anitha G, Media Contact, Brickwork Ratings, +1-860-425-2742, media@brickworkratings.com
K N Suvarna, Senior VP-Business Development, Relationship contact, Brickwork Ratings, +1-860-425-2742, kn.suvarna@brickworkratings.com

KEYWORDS
CONSUMER, ECONOMY, MARKETING, BANKING, BUSINESS SERVICES, Financial Analyst, STOCK EXCHANGES

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