India Ratings & Research (Ind-Ra) has upgraded Cholamandalam Investment & Finance (CIFCL) long-term issuer rating to 'AA' from 'AA-'. The outlook is stable. The agency has also upgraded CIFCL's Rs 6.75 billion lower Tier 2 subordinated debt to 'AA' from 'AA'.
The upgrade reflects the company's gradual bolstering pre-provison operating profitability (PPoP) through improving operating leverage which should help strengthen credit cost buffers, measured diversification of asset portfolio and demonstrated ability to raise equity at periodic intervals supporting capitalisation. The rating also factors in CIFCL's niche franchise and competitiveness in financing small and light commercial vehicles, management of credit costs which are lower than most peers' and pan India diversified portfolio.
The ratings factor in Ind-Ra's expectation of liquidity support from Murugappa group to CIFCL, if required. The company received liquidity support from its group companies in FY09 during the global liquidity crisis. CIFCL's commercial vehicle loan portfolio has come under cyclical pressure in the current economic downturn (gross NPL on assets under management. The overcapacity in the system reduced load availability for commercial vehicle operators and their margins shrunk due to increased cost of running the vehicle, impacting their repayment capabilities. While asset quality pressures may persist in the near term, the company's delinquencies and credit costs as a proportion of AUM in its vehicle finance portfolio compares favorably with that of most of the other large vehicle finance companies. CIFCL's loan against property portfolio (about quarter of the total AUM) has not witnessed any significant pressure and continues to perform well. The company’s credit cost buffers (PPoP/credit costs) though reduced is reasonable.
The company is expanding its product suits from largely commercial vehicles and loan against portfolio to housing finance, tractor finance and Small and medium enterprises (SME) loans. While these additions are modest at present, they will help in product diversification in the medium to long term. Nevertheless, as CIFCL has limited experience in these segments, faster growth without proper evaluation of risks could impact asset quality.
CIFCL's capitalisation buffer improved with infusion of INR5bn of compulsory convertible preference shares in September 2014. While the company's capital buffers are modest compared with large peer vehicle finance companies', it has demonstrated ability to raise capital at projected intervals. CIFCL will, however, continue to require capital infusion at regular intervals to support its portfolio growth.
Shares of the company gained Rs 1.85, or 0.39%, to trade at Rs 472. The total volume of shares traded was 1,010 at the BSE (1.50 p.m., Thursday).
