Ind-Ra rates Mahindra & Mahindra NCDs 'AAA' with stable outlook

India Ratings and Research (Ind-Ra) has assigned Mahindra & Mahindra (M&M) non-convertible debentures (NCDs) a final rating of AAA with a stable outlook.

Ind-Ra said M&M has maintained its leadership position in the domestic tractor market with 40 per cent market share in volume terms from FY09 to FY19. The company is also the number one player in the light commercial vehicle (goods carriers) segment with around 42.6 per cent market share in 11M FY20.

M&M has a diversified business profile with presence across farm equipment, auto and automotive components, defence, information technology, hospitality, steel trading, infrastructure and aerospace.

However, farm equipment and auto businesses together are the key revenue and profitability drivers, accounting for over 85 per cent of revenue and reported earnings before interest and taxes of the consolidated entity in FY19 (excluding Mahindra & Mahindra Financial Services Ltd).

"A diversified revenue stream shields the company's consolidated credit profile to an extent against demand variations in individual business divisions," said Ind-Ra.

The demand drivers for auto segment (GDP growth rate, disposable income, fuel prices, level of industrial production and interest rates) are different than those for farm equipment (adequacy of rainfall, interest subvention schemes and cost of labour in rural areas).

Within these two divisions, the company has a wide range of product offerings at various price points to cater to different customer segments. The demand cycles for products of the two divisions are independent of each other.

This is reflected by 22 per cent decline in M & M's auto sector volumes in FY20 while the volumes in tractors' segment fell only 9 per cent in FY20 due to a high rabi output and the government's renewed focus on the rural sector through higher allocation in the Union Budget.

Overall, the volume decline was 17 per cent year-on-year (auto and tractor sector combined) in FY20. The company's diversified profile helped limit the overall drop in revenue to about 5 per cent year-on-year during 9M FY20.

M & M's consolidated financial profile is characterised by low financial leverage and high coverage ratios. In 9M FY20, gross interest coverage (EBITDA/interest expenses) fell to over 8 times due to the weak performance of its subsidiaries. The net adjusted leverage (adjusted debt net of cash/EBITDAR) improved to 0.6 times in FY19 due to a lower net debt position.

Ind-Ra estimates it to have remained below 1 time in FY20 and to be at a similar level in FY21. M & M's debt stood at Rs 12,040 crore at FYE19 and the agency has factored in the impact of additional NCD issuances in the same.