Moody's assigns lowest investment grade rating to M&M

Says declining profitability of its automotive business and limited geographic diversification of non-IT businesses constrain the ratings

Moody's today assigned lowest investment grade rating, Baa3, to homegrown auto major Mahindra & Mahindra, although with a stable outlook.

The declining profitability of its automotive business -- mainly because of the weak performance of its Korea-based subsidiary Ssangyong Motor and the limited geographic diversification of the group's non-IT businesses constrain the ratings, it said.

Elaborating on the first time issuer rating to M&M, Moody's Vice-President and Senior Analyst Kaustubh Chaubal said: "The rating reflects M&M's long track record of operations and, at the same time, its adoption of strong corporate governance practices and a prudent approach to management, as well as its close operational oversight of its group companies".

The rating takes into account the group's diversified business profile across many areas, including farm equipment, automotive, IT, financial services, hospitality and real estate, Moody's said in a statement.

"Furthermore, M&M's credit profile is supported by its strong financial flexibility across listed but group- controlled companies -- based on the market value of its investments and which show substantial unrealised value," said Chaubal, who is also Moody's lead analyst for M&M.

Moody's said the rating also factored M&M's leading market position in India in farm equipment and light commercial vehicle (LCV) goods carriers.

"At the same time, although the group's leading, albeit declining, market position in utility vehicles (UVs) is a strength, increasing competition in the UV segment is a concern," it added.

The ratings agency further said: "The stable outlook reflects our expectation that M&M will retain its diversified business profile, while maintaining its leading market position in its core farm equipment and automotive businesses in India."

The outlook also anticipates that the company will preserve its very solid balance sheet and modest financial leverage.

An upgrade of M&M's rating will require continued strong operational and financial performance and a further diversification in its businesses, Moody's said.

The Baa3 rating could come under pressure if M&M's business profile weakens because of a sustained loss of market share in its key operating segments of tractors, utility vehicles and light commercial vehicles in India, or if Ssangyong Motors continues to report losses, it said.

It could also be under pressure if the company undertakes large debt-funded acquisitions that materially weaken its financial profile, Moody's said.