India Ratings & Research has assigned Mahindra and Mahindra (M&M) a long-term issuer rating of 'AAA' with a stable outlook.
Ind-Ra has analysed M&M's financial profile over multiple business cycles extending back to FY95 (year end March). Over this period, the company has handled several demand slowdowns. In addition, it has successfully integrated the operations of acquired entities with itself. However, its credit profile has not been structurally impaired over this 19 year period.
M&M has negotiated the high operational risk inherent in the auto sector by exhibiting low volatility of earnings and credit profile across business cycles. This is amply exhibited in the recent downturn, one of the most severe in the last two decades. The company has positioned itself to benefit from the expected economic recovery FY15 onwards.
M&M has the leadership position in the domestic market for tractors and utility vehicles, with market shares of 41.4% and 41.1%, respectively in 9MFY14. It also holds the second position in the light commercial vehicle segment, with a market share of 34.8% in the same period. Its farm equipment and auto businesses together accounted for over 80% of the consolidated revenue and profit before tax for 9MFY14. The company's leadership in these fast growing segments also resulted in a revenue CAGR of around 27% over FY03-FY13. M&M's understanding of the market together with its distribution network helps protect its market share.
The key drivers of M&M's overall revenue vary across wide ranging economic factors such as industrial and urban consumption, rural consumption, exports and services. For instance, in FY14, the slowdown in demand for passenger and commercial vehicles was offset by strong demand for tractors. Demand drivers for auto segment (GDP growth rate, disposable income, level of industrial production, interest rates) are different from that for farm equipment (adequacy of rainfall, interest subvention schemes, cost of labour in rural areas). This has ensured consistently positive margin even at the bottom of economic cycles. Its revenue is also geographically diversified with overseas operations contributing 29.19% to total revenue.
M&M (M&M consolidated excluding MMFSL) had been free cash flow positive for FY11-FY13. The company had cash and cash equivalents of INR60,370m at FYE13. In addition, its use of the fund-based facilities is negligible as it meets its working capital entirely from CFO. According to Ind-Ra's analysis, M&M's repayments over the medium term are small compared with its CFO.
Large debt-fuelled capex: A negative rating action could result from the quantum of capex/investment plans exceeding Ind-Ra's expectations and entailing debt funding, leading to pressure on the key credit metrics. In any case, net leverage (M&M consolidated excluding MMFSL) being sustained above 1.5x could result in a rating downgrade.
Shares of the company gained Rs 52.15, or 4.43%, to settle at Rs 1,230.50. The total volume of shares traded was 225,707 at the BSE (Friday).
