CRISIL has reaffirmed the AA+ rating on the full range of Mahindra & Mahindra Financial Services Limited's (Mahindra Finance) instruments, based on the fact that it is 96 per cent owned by Mahindra & Mahindra (M&M) and on its strategic importance to the parent. The company finances one-third of M&M's sales, has full access to the parent's dealer network, and is actively involved in M&M's business planning. M&M's ownership of Mahindra Finance implies a moral obligation on the parent to support the company in the event of distress.

The company finances nearly one out of every three UVs and one out of every five tractors manufactured by M&M. Almost 60 per cent of Mahindra Finance's disbursements in 2003-04 were to the UV segment, while tractors constituted 12 per cent and cars 20 per cent. The company has recently started financing non-M&M products (primarily cars) by leveraging its large distribution network of 224 branches. With total funds deployed of Rs20.04 billion as at March 31, 2004, Mahindra Finance ranks among the large non-banking finance companies (NBFCs) in India. The company reported a profit before tax (PBT) of Rs1.02 billion in 2003-04, against Rs0.72 billion in the previous year. For the half-year ended September 2004, Mahindra Finance posted a total income of Rs1.8 billion and a profit after tax of Rs391 million.

Mahindra Finance has a comfortable resource profile, evident in its competitive borrowing costs and strong position in the utility vehicle (UV) financing market. This business risk profile is, however, tempered by the average asset quality of its overall portfolio. The company's tractor portfolio continues to exhibit higher overdue levels, but the final credit losses are moderate because of significant post-default recoveries.

Mahindra Finance has an average financial risk profile, moderate capitalisation and a good earnings profile. It has a Tier 1 capital adequacy of 11.2 per cent, as on March 31, 2004. Given the relatively high asset-side risks in tractor and UV financing, as well as the company's aggressive growth plans, it will require fresh capital infusions in 2004-05. The company has a healthy earnings profile and high net profitability margins of 5.7 per cent (interest spread less operating expenses and including fee income, but before credit losses as a percentage of funds deployed).

CRISIL Outlook: Mahindra Finance will continue to be strategically important to M&M and will, therefore, benefit from the parent's funding and management support. CRISIL also expects the company to maintain its good business position and moderate financial profile in the medium term.