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

Fitch Ratings has affirmed Sri Lanka-based Mahindra Ideal Finance Limited’s (Ideal) National Long-Term Rating at ‘AA-(lka)’. The Outlook is Stable.

Ideal’s National Long-Term Rating reflects Fitch’s expectation that Ideal’s parent, Mahindra & Mahindra Financial Services ltd., (MMFSL), would provide extraordinary support to Ideal, if required. This is based on our assessment of MMFSL’s ability and propensity to provide support, if needed. MMFLS is a 52%-owned subsidiary of India-based Mahindra & Mahindra ltd., (M&M) and is the largest financier for M&M’s vehicles. 

The rating also takes into consideration the increased integration since MMFSL acquired the majority 58.2% stake in Ideal in 2021 and closer alignment of branding after changing its name to include the “Mahindra” brand in 2022. 

Ideal is of limited importance to MMFSL, in Fitch’s view. This is because of Ideal’s nascent role in the group that has yet to be proven and a limited performance record since the acquisition. MMFSL’s investment in Ideal aims to support the sales of M&M in the Sri Lankan market as part of M&M’s international expansion strategy, but Ideal’s near- to medium-term performance and prospects are likely to remain muted in the challenging operating environment. 

Fitch believes that reputational damage to MMFSL resulting from Ideal’s default could be contained considering the different jurisdictions of the entities, and former major shareholder, Ideal Motors, remains a significant minority shareholder with a sizeable stake. 

Ideal’s intrinsic financial strength is assessed to be significantly weaker than its support-driven rating. This stems from its small market share, limited history of operations and high risk profile given its targeted customer segments are more susceptible to the challenging operating environment.

Ideal met the regulatory requirement of R. 2.5 billion minimum core capital by 31 March 2021 before the end-2021 deadline, and its capital adequacy ratios remain well above the regulatory requirements. We expect leverage in terms of debt/equity to rise in the medium term as a result of the planned expansion. Ideal’s deposit base has increased, but we expect the reliance on wholesale funding will remain high in the medium term. 

“Ideal’s loan growth aspirations and focus on high-margin products could support its medium-term profitability buffers against potentially high credit and operating costs.  Ideal’s regulatory gross non-performing loan (NPL) ratio (greater than 180 days overdue)  remained below the sector average at 3.4% as of end-September 2021, although we  believe asset quality risk would persist in the near- to medium-term, due mainly to the  difficult operating environment,” Fitch added.