India Ratings affirms M&M and its NCDs at IND AAA/Stable

India Ratings and Research (Ind-Ra) has affirmed Mahindra & Mahindra (M&M)'s long-term issuer rating at 'IND AAA' while maintaining 'stable' outlook.

Ind-Ra said it continues to take a consolidated view of M&M and its subsidiaries while arriving at the ratings, after excluding its financial services subsidiary, Mahindra & Mahindra Financial Services (MMFSL; 'IND AAA'/Stable), because of moderate strategic, operational and legal linkages among them.

Ind-Ra said that M&M has maintained its leadership position in the domestic tractor market, with 40% market share in volume terms from FY09-FY19. The company is also the number one player in the light commercial vehicle (goods carriers) segment with around 42.6%market share in 11MFY20.

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% of revenue and reported EBIT of the consolidated entity in FY19 (excluding MMFSL). A diversified revenue stream shields the company's consolidated credit profile to an extent against demand variations in individual business divisions.

It further said that the automaker's consolidated financial profile is characterised by low financial leverage and high coverage ratios.

India Ratings said that auto sales remained subdued in FY20 due to weak consumer sentiments in urban and rural segments; increased cost of ownership amid higher fuel and interest cost; higher insurance cost, weak liquidity at non-banking finance companies, and revised axle norms. In FY20, domestic industry vehicle sales fell 18%yoy. The agency believes the COVID-19 led lockdown will make consumers wary of making discretionary purchases, and could further weaken consumer sentiments amid lower income groups across various sections, and lead to decreased industrial output, reduced transportation and an overall challenging economic environment. Hence, the agency believes auto volumes will remain subdued in FY21.

Further, the BS-VI ramp-up, planned between February and March, was affected due to the challenge of procuring parts from suppliers. Tractor industry production volumes dropped 14%in February 2020 from April 2019. The agency, however, believes the tractor segment will witness a faster recovery due to central government's initiatives for the farming community in the form of specific relief packages after the lockdown ends.

Ind-Ra said a negative rating action could result from the quantum of capex/investment plans exceeding the ratings agency's expectations and entailing debt funding, leading to pressure on the key credit metrics.

M&M's business is currently diversified across farm equipment, auto and automotive components, real estate, hospitality, defence and aerospace and financial services. Further, M&M has significant market share in light commercial vehicle, tractors and UV space.

Shares of M&M fell 4.80% to Rs 362.90 on Monday (13 April). In the past one month, the stock has lost 7.38% while the BSE S&P Auto index has risen 6.63%. The stock has spurted 47.62% from its 52-week low of Rs 245.80 hit on 25 March 2020.

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