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

Fitch Ratings has affirmed Sri Lanka-based Mahindra Ideal Finance Limited’s (MID) National Long-Term rating of ‘AA-(lka), with a Stable Outlook.
MID’s rating reflects Fitch’s expectation that MID’s parent, Mahindra & Mahindra Financial Services Limited (MMFL), which is a 52 percent-owned subsidiary of India-based Mahindra & Mahindra Limited (M&M), would provide extraordinary support to MID, if required. This is based on Fitch’s assessment of MMFL’s ability and propensity to provide support, if required.

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 percent stake in MID in 2021 along with closer alignment of branding.
While MID is of limited importance to MMFL, 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.

Fitch assessed MID’s intrinsic financial strength to be 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. 
MID’s recent performance has shown signs of improvement, in line with the stabilising economy as 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,” Fitch added.
Fitch expects the operating environment for Sri Lankan finance and leasing companies to continue to stabilise following the inflation and interest-rate shocks over the past two years.