has downgraded Escorts Finance (EFL) fixed deposits rating
(up to a limit of Rs186crore) from 'CARE BBB(FD)' to CARE
BB+(FD). This rating indicates that the instruments are
considered to be speculative, with inadequate protection
for interest and principal payments.
rating revision reflects EFL's declining business volumes,
relatively high cost of funds, high operating expenses
and the consequent pressure on profitability, declining
recovery levels, continued high reliance on FDs and the
increasingly competitive business environment for NBFCs.
The downgrade also takes into account the sharp deterioration
in the credit profile of parent company Escorts Ltd, which
will impact its ability to infuse additional funds.
rating takes into account EFL's satisfactory capital adequacy
and track record in the construction equipment financing
business. The company's ability to reduce its dependence
on FDs, expand business, improve profitability and improve
recoveries will remain key rating sensitivities.
is part of the Escorts Group, with an 81 per cent group
holding. It mainly finances construction equipment and
agri-machinery. Over 85 per cent of EFL's total disbursements
are for financing group products. It also conducts bill
discounting operations and inter-corporate deposit activities,
primarily within group companies and hires out construction
equipment. EFL recently made a foray into the distribution
of life and non-life insurance products. The management
is expecting to focus on these activities in the future.
The company has also been regularly selling its receivables
on a recourse basis.
loans as a percentage of opening standard assets has been
around 1.5 in the past few years. Recoveries as a percentage
of overall demands (for loans against hypothecation of
assets) declined from around 94 per cent for the year
from September 30, 2002 to March 31, 2004 to 89 per cent
for the half year ended September 2004. The proportion
of debtors overdue above 90 days has also risen from 40.72
per cent of total overdues as on March 31, 2004, to 64.26
per cent as on September 30, 2004. EFL's resource mix
is skewed towards FDs, which constitute around 39 per
cent of its total resources as on March 31, 2004.
Interest yield declined from 19.63 per cent during the
period ended Sep 30, 2002, to 17.30 per cent during the
period ended Mar 31, 2004, leading to a decline in interest
income at a CARG of 18 per cent on an annualised basis,
over the period March 31, 1999 to March 31, 2004. The
net spread remains low for the period March '01 to March
'04, on account of high cost of capital and high operating
expenses. During the last few years, the interest coverage
of EFL has remained low - in the range of 1.11 times.
Its gearing was at 2.8 times as on March 31, 2004.