| HMC MM Auto Limited | ||||||
| Rated amount enhanced | ||||||
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| Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. | ||||||
| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has assigned its ‘CRISIL AA-/Stable’ rating to the long-term bank facilities of HMC MM Auto Limited (HMC MM) and reaffirmed its rating on the short-term bank facilities at ‘CRISIL A1+’.
In fiscal 2023, the company’s operating performance witnessed an improvement on y-oy basis as revenues increased by 20% and operating margins improved to 5.4% from 3.8% in fiscal 2022 driven by addition of newer models from its key customer – Hero Motocorp Ltd (HMCL; rated CRISIL AAA /Stable/CRISIL A1+). However, the company is expected to report net losses even in fiscal 2023 due to slower-than-anticipated ramp-up in overall sales volumes. Consequently, the company’s financial profile has weakened with gearing and debt coverage ratios remaining modest. In this backdrop, the company’s promoters i.e., HMCL and Marelli Europe S.p.A (Marelli) plan to infuse Rs 25 crore equity in the current financial year before September 2023, to support HMC MM’s liquidity position and overall financial profile. Further, with the expected ramp-up in volumes due to addition of new models, HMC MM’s operating revenue is expected to increase significantly in fiscal 2024 with operating margin improving to over 6.5%. Successful ramp-up in scale of operations with addition of newer models and new customer addition resulting in net profits will remain key monitorable in the medium term.
Financial and technical support is received from the parent, Hero Motocorp Ltd (HMCL; rated CRISIL AAA /Stable/CRISIL A1+ and Marelli Europe S.p.A (Marelli) respectively. Given the losses in past years, adjusted net worth is estimated to be negative as on March 31, 2023, however the tangible net worth is estimated to be around Rs 15 crores as on same date. The adjusted networth is expected to turn positive from this fiscal onwards after the equity infusion. Consequently, the working capital limits of Rs 110 crores which was utilized to the extent of ~82% in the past 6 months ended February 2023 is also expected to decrease. The rating also factors in, the timely need-based support being provided by Hero Motocorp in case of any exigency.
The ratings continue to reflect the company’s criticality to, and expectation of strong support from, its largest shareholder, HMCL, to which it is a principal supplier of some models. This strength is partially offset by the gradual ramp up of operations, susceptibility to the cyclicality inherent in the automobile industry, and a weak financial risk profile. |
Analytical Approach For arriving at its ratings, CRISIL Ratings has factored in business and financial support from the majority shareholder, HMCL. |
Key Rating Drivers & Detailed Description Strengths * Strong operational and financial support from the largest shareholder, HMCL and joint venture (JV) partner, Marelli The company is a JV between HMCL (60%) and Marelli (40%). It was set up to design, develop, manufacture, distribute, assemble, buy and sell EFI systems and related components and sub-assemblies. Given the criticality of the product, HMCL has management and operational control in the company. Marelli is responsible for technical support and product quality. Strong operational and management support is expected from HMCL, and financial support from the promoters.
* Criticality and strategic importance to the parent The company will be the one of the principal suppliers of EFI systems to HMCL; it can sell to other automotive players after meeting the parent's requirement. The plant is based in Manesar, Haryana, near that of the parent. The company used to supply for four two-wheeler models of HMCL and has added three more to its portfolio in this fiscal. Volumes are expected to rise as it will cater to demand from various two-wheeler models of HMCL and other new customers
The company is likely to remain critically and strategically important for supplies of EFIs to HMCL, thus providing strong revenue visibility over the medium term.
Weaknesses * Weak financial risk profile Debt protection metrics were weak, with interest coverage and net cash accrual to total debt ratios estimated at 1.45 times and 0.03 times, respectively, for financial year 2023 on account of low accruals which weakened these ratios. But equity infusion of Rs. 25 crores is expected in the first half of this fiscal reinforcing, the need-based support from parents which is likely to continue. The financial risk profile should improve over the medium term with full ramp up of operations from fiscal 2023 onwards and improvement in operating margin. Successful ramp-up in scale of volumes resulting in higher accruals will remain key monitorable.
* Moderate scale of operations The company has implemented its project to cater to Bharat Stage (BS) VI volumes by having in house production of EFI. Ramp-up in scale is expected as the company has increased its capacity in this fiscal. While revenues remain subdued in fiscal 2023 due to lower-than-expected volume offtake, revenues are expected to gradually recover from fiscal 2024 onwards driven by new model addition and new customer addition; however overall scale of operations continue to remain moderate.
* Revenue concentration in a single customer HMCL is the principal customer, given the critical importance of the product. However, HMCL is exposed to risks related to the inherent cyclicality in the two-wheeler sector. High dependence on HMCL for revenue growth exposes HMC MM to customer concentration risk. This was also seen in fiscal 2022 as a drop in volumes of HMCL to which HMC MM supplies resulted in a decline in revenues for HMC MM as well.
Furthermore, the company remains exposed to changes in regulations in the Indian automotive segment, which will drive the adoption of its products. |
Liquidity: Strong Average bank limit utilization was high at 82% during the 6 months through February 2023. The company had large capex requirement in past fiscals which was primarily debt funded. Need-based financial support from the parent will aid liquidity over the medium term. |
Outlook: Stable CRISIL Ratings believes that HMC MM’s financial risk profile will improve in the medium term with the equity infusion this fiscal and will continue to benefit from operational, financial, and managerial support from the parents. |
Rating Sensitivity Factors Upward Factors
Downward Factors
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About the Company HMC MM is a joint venture between HMCL (60%) and Marelli (40%). The company is set up to design, develop, manufacture, assemble and sell EFI systems and related components to HMCL.
HMCL, formerly Hero Honda, is an Indian motorcycle and scooter manufacturer based in New Delhi. It benefits from its strong brand appeal, wide distribution and service network, and high penetration in rural areas. After the split from Honda, the company is also expanding its global footprint in new geographies. HMC MM is a strategically important venture for HMCL, given its focus on technology development in post implementation of BS VI emission norms from April 1, 2020.
Marelli is engaged in development and manufacturing of systems, modules and high-technology components for the automotive industry. Marelli has a wide-ranging expertise in this space through a process of ongoing innovation and environmental sustainability. Marelli is providing the technical know-how to roll out a product line-up for EFI systems and related components.
HMC MM’s revenue was Rs 217 crore and net loss of Rs 6 crore for the first nine months of financial year 2023. |
Key Financial Indicators^
^CRISIL Ratings adjusted numbers |
Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
&Fully Interchangeable with Working Capital demand Loan, Short term Bank Loan Facility ^Fully Interchangeable with Letter of Credit Facility |
| Annexure - Rating History for last 3 Years | |||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | |||||||||||||||||||||||||||||||||||||||
| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||
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This Annexure has been updated on 10-Apr-23 in line with the lender-wise facility details as on 10-Apr-23 received from the rated entity
&Fully Interchangeable with Working Capital demand Loan, Short term Bank Loan Facility
^Fully Interchangeable with Letter of Credit Facility
Criteria Details
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