Fitch upgrades Ideal Finance to ‘AA-’; removes Rating Watch, Outlook Stable

Fitch Ratings has upgraded Sri Lanka-based Ideal Finance Ltd.’s National Long-Term Rating to ‘AA-(lka)’ from ‘BB-(lka)’ and removed the rating from Rating Watch Positive (RWP). 

The Outlook is Stable.

The upgrade follows the completion of the progressive acquisition of a 58.2% stake in Ideal by India’s Mahindra & Mahindra Financial Services Ltd. (MMFSL) in July 2021.

Key rating drivers

Ideal’s National Long-Term Rating reflects Fitch’s expectation of extraordinary support from the parent, MMFSL, based on its assessment of MMFSL’s ability to provide support, if needed. The rating also takes into consideration MMFSL’s majority stake in Ideal, and potential for closer alignment of branding.

Fitch assesses Ideal to be of limited importance to MMFSL due to the nascent role in the group that is yet to be tested and still limited integration. Furthermore, Fitch believes that reputational damage to MMFSL could be contained, considering the different jurisdictions of the entities. MMFSL’s investment has diluted the stake of former major shareholder Ideal Motors, but the stake remains sizeable.

MMFSL is a 52%-owned subsidiary of Mahindra & Mahindra Ltd. (M&M) and is the largest financier for M&M’s vehicles. MMFSL’s investment in Ideal is also aimed at supporting the sales of M&M vehicles in the Sri Lankan market.

Ideal’s intrinsic financial strength is assessed to be significantly weaker than its support-driven rating.

Rating sensitivities

Factors that could, individually or collectively, lead to positive rating action/upgrade:

An upgrade of Ideal’s National Long-Term Rating would most likely result from a higher propensity of support from MMFSL through increased integration, or the evolution of its role in the group, which could raise Ideal’s strategic importance to its parent.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Ideal’s National Long-Term Rating could be downgraded if MMFSL’s ability to provide support were to weaken, as signalled through a weakening of MMFSL’s credit standing. Any perceived weakening in MMFSL’s propensity to support Ideal could also be negative for Ideal’s rating. This could arise from a reduced importance to MMFSL as reflected in a decrease in the shareholding, Ideal’s inability to fulfil its intended role, or a sustained weak performance and prospects undermining its ability to support the majority shareholder’s objectives.