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AA+ Rating For M&M Fin Services' NCD

The company’s is to issue unsecured redeemable subordinated debt instruments of Rs 200 crore

Mahindra and Mahindra Financial Services Limited’s (MMFSL) business model that has a clear focus on rural/semi-urban markets, a network across 25 states, well diversified portfolio, and high capital adequacy has got its proposed unsecured redeemable subordinated debt instruments issue of Rs 200 crore a BWR AA+ grade from Brickwork Ratings.

The rating indicates that the instrument is considered to offer high credit quality for servicing of principal and interest obligations. However, the rating does not take into account the fact that the company’s non-performing assets (NPAs) are high.

With a business model positioned to tap the demand for financing in rural and semi-urban areas, MMFSL gives loans for vehicles used both for commercial and personal purposes like tractors and cars. MMFSL's client base consists of small entrepreneurs or self-employed individuals such as transport operators, taxi operators and farmers.

MMFSL has a good track record of rising profitability. Profit Before Tax has increased from Rs 133 crore in FY2005 to Rs 326 crore in FY2009. Profit After Tax (PAT) has increased from Rs 82 crore to Rs 215 crore during the same period. It’s PAT increased by 21 per cent in FY09, mainly on back of increased spreads and margins. PAT during the first half of FY10 improved to Rs 109 crore an increase of 76 per cent from Rs 62 crore in the corresponding period last year. Growth in income is slow at 13 per cent in FY09.

In first half of FY2010 it’s registered a growth of 9 per cent at Rs 3,804 crore as compared to Rs 3,475 crore during the same period in previous year. Gross NPAs increased steeply from 5.5 per cent in FY07 to 8.7 per cent in FY09. It had touched a high of 9.4 per cent in Q2 of FY09. As of Q2 FY10 gross NPAs come down to 9 per cent.

As at Q2 FY10, promoters and promoter’s group have aggregate holdings of 60 per cent in MMFSL, FIIs and ESOP Trust hold of 32 per cent and 1 per cent respectively while the public holds 7 per cent.

After the Global economic turbulence during the period 2008-09 there has been a healthy pick-up in demand in the auto sector. After declining for the last 11 months, commercial vehicles 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.

MMFSL’s asset book has grown at a robust 28 per cent 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. However, reducing the NPAs quickly and improving the assets quality will be crucial to the company’s performance.

NCD Issue Rating: BWR AA+, Outlook : Positive