Detailed Rationale

CRISIL Ratings has reaffirmed its 'CRISIL AAA/Stable/CRISIL A1+' ratings on bank facilities of Bajaj Auto Limited (Bajaj Auto). 

 

After moderation in fiscal 2021, revenue is expected to grow in higher single digit in fiscal 2022 driven by recovery in 3-wheeler segment, premiumisation, increase in price realisation and strong export momentum. Revenues for the first quarter grew by 140% to Rs. 7386 crore up on lower base of the corresponding quarter in previous year.

 

Auto manufacturers faced headwinds in fiscal 2021 due to rising cost of raw materials such as steel and aluminium. The raw materials costs are expected to increase further especially in H1 of fiscal 2022, however calibrated price hikes and cost saving measures will help the company sustain its operating profitability in 15-17% range for FY22.

 

Credit metrics remained strong with gearing was 0.01 time and interest coverage ratio of over 1500 times as on March 31, 2021. Liquidity continued to be superior, with a surplus of over Rs 16,000 crore as on March 31, 2021, and an unutilised bank limit.

 

The ratings continue to reflect Bajaj Auto’s strong business risk profile backed by its established market position in the motorcycle segment, leading position in the three-wheeler passenger carrier segment, diversified geographic profile with presence in over 70 countries. The rating also factors in robust financial risk profile aided by a strong balance sheet with adequate liquidity. These strengths are partially offset by modest presence in economy motorcycle and absence in the scooter segment.

Analytical Approach

For arriving at its ratings, CRISIL Ratings has combined the business and financial risk profiles of Bajaj Auto and its subsidiaries, PT Bajaj Auto Indonesia, Bajaj Auto International Holdings BV and Bajaj Auto Thailand Limited because all three companies are under a common management and have high operational linkages.

 

Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

• Healthy market position in the motorcycle segment

Bajaj Auto continues to be the second-largest player in the domestic motorcycle segment, with a market share of 18% as on March 2021. It is the largest exporter of two-wheelers, accounting for nearly 59% of total motorcycle exports for fiscal 2021. CRISIL expects market share to sustain because of strong positioning of key brands.

 

Over the past few years, the company has demonstrated robust product development capabilities, as reflected in model launches under the KTM, and Husqvarna brands in the premium segment, and CT, Platina and Pulsar brands in the economy and executive segment. Segment share of Bajaj Auto in the 125cc motorcycle market has grown from 2% in fiscal 2019 to 19% in fiscal 2021 and 28% in first quarter of fiscal 2022.

 

Performance is expected to remain stable over the medium term, driven by a healthy market position, strong product development capabilities, an established brand, and a diversified product portfolio. The company is also looking to gain crucial edge in the electric two-wheeler market with Bajaj Chetak. Impact of pandemic, consumer preference for mobility and export contribution will remain key monitorables.

 

• Leadership in the three-wheeler passenger carrier segment

The company is the single-largest player in the domestic three-wheeler segment, with a market share of ~50% in fiscal 2021. For the same period, it is also the largest exporter of three-wheelers, with a 65% share. Domestic three-wheeler volumes declined by 66% year-on-year on March 31, 2021. The domestic three wheeler industry was severely impacted in fiscal 2021 and recovery across this segment would be led by reopening of institutions such as offices, schools, entertainment options like malls, etc.

 

The company continues to dominate the export market with a market share of 65% in fiscal 2021.

Steady accrual from this segment provides considerable strength to overall business risk profile, helps diversify revenue base, and improves ability to weather intense competition in the motorcycle segment.

 

• Robust financial risk profile

The company is likely to maintain near debt-free status, given that its  annual capital expenditure (capex) requirement of FY 22 Rs.600-800 Crs (~Rs.650 Crs for new plant in Chakan over next 2 years i.e. FY22 and FY23) will continue to be met through internal cash accrual. A substantial portfolio of investments and cash surplus (over Rs 16000 crores as on March 2021) provides steady treasury income, besides enhancing financial flexibility. The strong financial risk profile will help withstand any competitive challenge in terms of pricing flexibility, and meet necessary expenditure for in-house research and development, product launches and upgrades, or any sluggishness in revenue growth. Revised dividend policy will result in limited accretion to networth and lower net cash accruals however the financial risk profile is expected to remain robust with strong liquidity surplus.

 

Weaknesses:

• Modest presence in the economy segment and absence in scooter segment

Economy segment accounts for 54% of the domestic motorcycle volumes in fiscal 2021. Although Bajaj is the second largest player in the economy segment, its market share has remained modest at 14-18. Furthermore, share in this segment has reduced from about 17% in fiscal 2020 to 14% in fiscal 2021. Bajaj has also been absent from the scooter segment however the company is looking to gain crucial edge in the electric two-wheeler market with Bajaj Chetak.

 

• Exposure to intense competition

The Indian two-wheeler market remains highly competitive, with 12 players, including Honda Motorcycles & Scooters India Pvt Ltd (HMSI), Hero Motocorp (HMCL) and TVS Motors Ltd. Furthermore, players continue to launch new models. The company has been able to maintain its healthy market share in the industry through strong product development and diversified product portfolio.

Liquidity: Superior

Liquidity is expected to remain superior in the absence of debt; unutilised bank limit; and strong cash accrual as against capex requirements of Rs 600-800 crores should support liquidity over the medium term. Bajaj has healthy   surplus of over Rs 16000 crore as on March 2021.

Outlook: Stable

CRISIL believes Bajaj Auto will maintain its credit risk profile over the medium term on the back of well-diversified revenue and a robust financial risk profile.

Rating Sensitivity factors

Downward factors:

• Sustained decline in market share in the motorcycle segment to below 10%, or a sharp fall in the operating profitability margin to below 10%
• Sizeable cash outflow in the form of dividends, share buyback, or large acquisition, severely depleting cash surpluses, or increasing dependence on debt

About the Company

Bajaj Auto was incorporated in 1945 as Bachraj Trading Corporation Ltd to import scooters and motorised three-wheelers from Piaggio & Company. The entity’s name was changed to Bajaj Auto Pvt Ltd in June 1960, and then to its current one in August 1960, after it was reconstituted as a public limited company. Currently, Bajaj Auto has a dominant market share in the three-wheeler segment, and a strong position in the motorcycle segment.

 

As per a scheme of demerger, Bajaj Auto formed two companies in fiscal 2008, Bajaj Holdings and Investment Ltd (BHIL) and Bajaj Finserv Ltd (Bajaj Finserv). The two- and three-wheeler manufacturing business carried out by Bajaj Auto was transferred to BHIL, while the wind energy, insurance, and consumer finance businesses were transferred to Bajaj Finserv. After completion of the demerger formalities (Bombay High Court approved the demerger on December 18, 2007), BHIL was renamed Bajaj Auto (new), while Bajaj Auto (old) was renamed BHIL.

 

Bajaj Auto had set up an assembly line capacity in its Waluj plant in Aurangabad, Maharashtra, to manufacture quadricycles (branded as Qute), which it started exporting apart from catering to the domestic market. The company has a total capacity to manufacture 54 lakh units of motorcycles and 9.3 lakh units of commercial vehicles (passenger carrier, goods carrier, and quadricycles) at its plants in Waluj and Chakan in Maharashtra; and Pantnagar in Uttarakhand.

 

As on YTD June 2021, Bajaj Auto’s consolidated operating income stood at Rs 7386 crore (Rs 3079 crore for the corresponding period last year) with operating margin of ~15.6% (14.3% for the corresponding period last year).

Key Financial Indicators (CRISIL adjusted)

Particulars for period ended March 31,	Unit	2021	2020
Revenue	Rs crore	27741	29918
Profit after tax (PAT)	Rs crore	4857	5212
PAT margin	%	17.5	17.4
Adjusted debt/adjusted networth	Times	0.01	0.01
Interest coverage	Times	939	2050

 

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN Name of instrument Date of allotment Coupon rate (%) Maturity date Issue size (Rs crore) Complexity level Rating assigned with outlook NA Bank Guarantee* NA NA NA 786.67 NA CRISIL A1+ NA Cash Credit NA NA NA 97 NA CRISIL AAA/Stable NA Proposed Fund-Based Bank Limits NA NA NA 3 NA CRISIL AAA/Stable NA Proposed Non Fund based limits NA NA NA 5.08 NA CRISIL A1+ *Interchangeable with letter of credit to the extent of Rs 290 crore

 

Annexure – List of entities consolidated

Company name	Holding/Subsidiary/Associate	% of shares held
PT. Bajaj Auto Indonesia	Subsidiary	99.25%
Bajaj Auto International Holdings BV	Subsidiary	100%
Bajaj Auto (Thailand) Ltd	Subsidiary	100%