Detailed Rationale

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

 

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.

 

Revenues during fiscal 2022 were up by ~19.0% y-o-y on the back of 8.4% y-o-y volume growth and 9.2% y-o-y increase in realization per unit. Though domestic business faced headwinds on account of COVID-19 pandemic disruption and semi-conductor shortage, sales in overseas markets performed relatively well, thereby partially offsetting decline in domestic markets. Operating margins during fiscal 2022 were impacted by 200 bps due to high raw material prices especially steel and partial price hikes.

 

During fiscal 2023, the Company is expected to maintain its operating performance on the back of healthy domestic demand coupled with expectation of better semi-conductor availability, offset by subdued exports (especially Africa) due to global inflationary concerns resulting in currency shortages. Operating margins are expected to improve by 40bps to 200bps on the back of easing raw material prices and price hikes.

 

Credit metrics continues to remain strong on account of robust capital structure given debt free balance sheet, and Total Outside Liabilities / Networth (TOL / NW) is 0.2 times. Liquidity continues to be superior, with a surplus of over INR 19,090 crores as on March 31, 2022, and unutilized bank limit

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, Chetak Technologies Limited, Baja Auto Consumer Finance Limited, Bajaj Auto Spain SL, and Bajaj Auto Thailand Limited because all six 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:

• Diversified product portfolio supported by healthy market position in two-wheeler segment (motorcycles) in domestic and overseas markets: Bajaj Auto is the third-largest player in the domestic motorcycle segment, with a market share of 18.2% for the year ended 31st March 2022. It is the largest exporter of two-wheelers, accounting for nearly more than ~50.0% of total motorcycle exports for fiscal 2022. CRISIL Ratings expects market share to sustain because of strong positioning of key brands and launch of new product under flagship 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, CT and Platina in the economy segment and Pulsar and Dominar brands in the executive segment. Bajaj Auto has strong market share in each of the above segments.

 

Since FY2021 the domestic markets have undergone macro-economic headwinds due to COVID-19 pandemic disruption, and as a result domestic industry volumes declined by 8.1% 4-year CAGR. However, on account of strong overseas presence, Bajaj Auto’s total sales volumes declined by only 4.6% 4-year CAGR. Strong exports during the fiscal 2021 and fiscal 2022 to a large extent arrested fall in domestic volumes.

 

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.

 

• 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 ~60.0% in fiscal 2022. Passenger vehicles category within the three-wheeler segment account for ~80.0% of total Bajaj Auto’s three-wheeler volumes, and under this segment, the Company has 70.9% market share as on March 31, 2022.

 

Steady accrual from this segment provides considerable strength to overall business risk profile, and top-line diversity.

 

• Robust financial risk profile: The Company is likely to maintain near debt-free balance sheet. For fiscal 2023, the Company has announced INR 2,500 crores share buy-back as against cash surplus of INR 19,090 crores as on March 31, 2022. Further, the Company’s ability to generate strong cash flow from operations is more than sufficient to cover dividend payments and capex requirements. For fiscal 2023, the Company’s capex requirement is INR 600 to 800 crores, and the same is expected to be covered through internal cash accruals and surplus. 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.

 

Weaknesses:

• Profitability susceptible to macro-economic factors, industry cyclicality and raw material prices: The automobile industry is subjected to macro-economic headwinds emanating from inflationary pressure and economic slowdown. Economic downturns impact consumer spending on discretionary items, and hence slowdown in economic activity can impact industry sales and thus impact Bajaj Auto.  Raw materials and components prices constituting 70.0% - 75.0% of revenues are directly influenced  by international commodity prices. During fiscal 2022, the Bajaj Auto’s margins contracted due to higher raw material prices (such as steel and aluminium) coupled with muted demand sentiments. Basic raw material index (BRMI) which constitutes over 35.0% of the overall raw material costs increased by ~37.0% on year; led by a 51.0% and 47.0% surge in prices of steel and aluminium (key inputs). As of fiscal 2023, high inflationary trends in key overseas markets are expected to impact Bajaj Auto’s exports especially to Africa also due to dollar shortage.

 

• Modest presence in the economy segment: Although Bajaj Auto is the second largest player in the economy segment, its market share has remained modest at 14-18%. Share in this segment has increased from about 14% in fiscal 2021 to 15% in fiscal 2022. Company is also looking to improve its market share in the electric two-wheeler market with Bajaj Chetak.

 

• Exposure to intense competition: The Indian two-wheeler market remains highly competitive, with major players being 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; unutilized bank limit; and strong cash accrual as against capex requirements of INR 600 to 800 crores should support liquidity over the medium term. Bajaj Auto has healthy surplus of over INR 19,090 crores as on March 31, 2022, which is sufficient to cover near term fixed obligations.

Outlook: Stable

CRISIL Ratings 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 10.0%, or a sharp fall in the operating profitability margin to below 10.0%
• 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

Erstwhile Bajaj Auto was incorporated in 1945 as Bachhraj Trading Corporation Pvt 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 significant market share in the three-wheeler segment, and a strong position in the motorcycle segment in both domestic and export markets.

 

As per a scheme of demerger, Bajaj Auto formed two 100% subsidiary 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, which became effective from 20 February 2008), BHIL was renamed Bajaj Auto (new), while Bajaj Auto (old) was renamed BHIL. Shareholders of erstwhile Bajaj Auto were all given shares in the ratio of 1:1 in the new Bajaj Auto and Bajaj Finserv as part of the scheme of demerger

 

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 5.7 million units of motorcycles and 0.9 million units of commercial vehicles (passenger carrier, goods carrier, and quadricycles) at its plants in Waluj and Chakan in Maharashtra; and Pantnagar in Uttarakhand.

 

As of 1Q23 Bajaj Auto’s sales volume were 933,646 units (down 7.2% y-o-y) and reported operating income of INR 8,005 crores (up by 7.7% y-o-y) with operating margins at 16.1%.

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 crores