Fitch affirms Mahindra Ideal Finance at ‘AA-(lka)’; outlook stable

Fitch Ratings has recently affirmed Sri Lanka-based Mahindra Ideal Finance Limited’s (MID) National Long-Term rating of ‘AA-(lka)’.  The outlook is stable.

Following are excerpts from Fitch’s commentary following the rating action.

MID’s parent is Mahindra & Mahindra Financial Services Limited (MMFL), which is a  52%-owned subsidiary of India-based Mahindra & Mahindra Limited (M&M).

Shareholder Support Underpins Rating: MID’s rating reflects Fitch’s expectation that MID’s parent, MMFL, would provide extraordinary support to MID, if required. This is based on our assessment of MMFL’s ability and propensity to provide support, if needed. MMFL is the largest financier for M&M’s vehicles sales. The rating also takes into consideration the increased integration since MMFL acquired the majority 58.2% stake in MID in 2021 along with closer alignment of branding.

Limited Importance to Parent: MID is of limited importance to MMFL, in Fitch’s view. This is because of MID’s nascent role in the group and a limited performance record since the acquisition. MMFL’s investment in MID aims to support M&M’s sales in Sri Lanka as part of its international expansion. Fitch believes that the reputational damage to MMFL resulting from MID’s default could be contained. This is due to the different jurisdictions of the entities. In addition, Ideal Motors, the previous dominant shareholder in MID, remains a significant minority shareholder.

Standalone Credit Profile Weaker: MID’s intrinsic financial strength is assessed as significantly weaker than its support-driven rating due to a small market share, evolving business model and high-risk profile. The customer segments MID targets are more susceptible to the challenging operating environment. MID’s core segment, vehicle financing, was constrained amid a weakened economy and restriction on vehicle imports. However, vehicle financing is likely to pick up in near to medium term, in line with the stabilising economy.

Stabilising Economic Outlook: We expect the operating environment for Sri Lankan finance and leasing companies (FLCs) to continue to stabilise following the inflation and interest-rate shocks over the past two years. Easing inflation and interest-rate pressures should provide steadier conditions for FLC sector performance. Some headwinds linger, as higher taxes will continue to weigh on household finances in 2024. Investor confidence will also take time to recover. Still, we expect economic activity in Sri Lanka to improve in the financial year ending March 2025 as GDP growth recovers.

Improving Performance: MID’s recent performance has shown signs of improvement, in line with the stabilising economy. This is reflected in the improvement in its 90-day past due loans ratio and funding costs. The performance is likely to improve further as loan growth picks up, the net interest margin recovers, and operational and credit costs remain controlled. The liquidity profile is likely to remain stable due to sustained momentum in deposit growth. Even so, the low debt/tangible equity of 2.3x at end-December 2023 will increase with higher business growth.