GMAC Financial Services India also on watch

CRISIL has placed the rating on GMAC Financial Services India Limited's (GMAC India) short-term debt programme on rating watch with developing implications following Standard & Poor's (S&P) recent downgrade of the rating on its parent viz. General Motors Acceptance Corp. (GMAC) to BB/Negative/B-1 from BBB-/Negative/A-3 along with that of General Motors Corp. (GM).

CRISIL's rating of GMAC India is based on the support that it receives from its parent, which has a 74.9 per cent equity stake in the subsidiary and has in the past guaranteed the latter's non-convertible debenture programme. CRISIL is in dialogue with GMAC to assess the impact on the support that GMAC India receives from its parent post S&P's rating action. CRISIL will take an appropriate rating action once there is enhanced clarity on this issue.

According to S&P, its downgrade to non-investment-grade of GMAC and GM reflects its conclusion that the management's strategies may be ineffective in addressing GM's competitive disadvantages. Still it believes, GM should not have any difficulty accommodating near-term cash requirements. Of greatest immediate concern to S&P is that GM's sport utility vehicles (SUVs) will no longer be as profitable as they have been in recent years while its financial performance has been heavily dependent on the profit contribution of the SUVs.

CRISIL's rating on GMAC India continues to reflect its adequate financial flexibility, backed by reasonable levels of unutilized bank lines, and adequate resources profile. Its bank lines are fully guaranteed by the parent. These rating strengths are, however, tempered by the challenges that GMAC India faces in terms of maintaining its market share in the car financing business, arresting the deterioration in its asset quality and improving its profitability and capitalization levels in an intensely competitive business environment.

About the company: GMAC holds a 74.9 per cent stake in the company while Nucleus Software Exports Limited holds the balance 25.1 per cent. The company is in the business of providing car finance to retail customers and wholesale finance to General Motors India Limited's dealers. GMAC India is one of the smaller players in the car finance business in terms of disbursements. Total disbursements in the first nine months of FY2004-05 were at Rs.3.64 billion as against Rs.4.61 billion for the full FY2003-04. Dealer financing accounted for a large proportion of the disbursements in the first 9 months of FY2004-05. On a total income of Rs.540 million in FY2003-04, the company reported a net profit of Rs.17.9 million. For the first six months of FY2004-05, GMAC India had a total income of Rs.266 million and a net profit of Rs.17.6 million.