Escorts Finance rating down from CARE BBB(FD) to CARE BB+(FD)

Mumbai: CARE 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.

The 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.

The 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.

EFL 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.

Bad 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.