| Hero Cycles Limited | ||||||
| Rated amount enhanced | ||||||
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| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has reaffirmed its 'CRISIL AA/Stable/CRISIL A1+' ratings on the bank facilities and debt instruments of Hero Cycles Limited (Hero Cycles; part of the HCL group).
The ratings continue to reflect the company’s leadership position in the domestic bicycles market, supported by a pan-India distribution network; healthy operating performance of the automotive (auto) components business; and robust capital structure and financial flexibility backed by strong liquidity. These strengths are partially offset by modest debt protection metrics and subdued, albeit improving, operating performance of subsidiaries and associate entities. |
Analytical Approach To arrive at its ratings, CRISIL Ratings has combined the business and financial risk profiles of Hero Cycles and its subsidiaries, joint ventures (JVs) and associates. This is because all these entities, together referred to as the HCL group, are under a common management and have strong business and financial linkages.
Please refer Annexure - List of entities consolidated, which highlights entities considered and their analytical treatment of consolidation. |
Key Rating Drivers & Detailed Description Strengths Leadership position in the bicycles industry: The group is the largest player in the domestic bicycles market, backed by its large manufacturing capacity, strong brand and pan-India distribution network. HCL has the biggest manufacturing capacity with ~65 lakh bicycle per annum. Hero Cycles is a leader in volume sales with around 40 lakh bicycles sold in fiscal 2021. Further, a new unit has been setup under a separate wholly owned subsidiary HECPL (Hero E-cycles pvt. Ltd.; rated ‘CRISIL AA-/Stable/CRISIL A1+’) with an installed capacity of 20 lakh units on a 2 shift basis with 1 lakh units for higher end e-bicycles. Strong revenue growth is expected in fiscal 2022 on the back of healthy demand scenario, especially in the premium segment in which the group has brands such as Sprint and Firefox. Turnover should also benefit from the expected revival in government orders. New manufacturing facility in Ludhiana (Punjab) should help meet requirement for premium bicycles as well as e-cycles for the domestic and foreign markets. Sustenance of growth in the core cycles segment going forward will be a monitorable.
Healthy operating performance in the auto components business: Demerged from Hero Motors Ltd in 2015, the auto components business has seen a robust turnaround over the past few fiscals. Revenue from this division registered a compound annual growth rate of 17% over the three fiscals through 2021 to an estimated Rs 650 crore, along with a healthy Ebitda (earnings before interest, taxes, depreciation and amortisation) of Rs 80 crore. This has been despite the pandemic, mainly because of new client addition, focus on higher value-added products and steady export orders. Growth in operating performance is expected to sustain over the medium term.
Strong liquidity and high financial flexibility: Capital structure was marked by a healthy consolidated adjusted networth of over Rs 1,300 crore as on March 31, 2021, while gearing sustained below 1 historically. HCL’s liquidity was comfortable estimated at Rs 459 crore. The established Hero brand enhances financial flexibility, enabling the group to raise debt from the capital markets and banks. Therefore, despite modest debt protection metrics, overall financial risk profile should continue to be supported by strong liquidity and high financial flexibility.
Weaknesses Modest debt protection metrics: Though scale of operations is large, modest profitability has kept cash accrual relatively subdued. As a result, net cash accrual to total debt and adjusted interest coverage ratios for HCL were muted estimated at 0.25 time and 3.7 times, respectively, in fiscal 2021. Consolidated debt is likely at Rs 750 crore as on March 31, 2021, and is expected to increase to over 900 crore as on March 31, 2022 since company is incurring significant capital expenditure (capex) to build capabilities in manufacturing premium bicycles as well as e-cycles. However, despite higher debt level, debt protection metrics should improve with expected improvement in operating performance.
Subdued, albeit improving, profitability in subsidiaries and associate companies: Hero Cycles acquired three businesses - Firefox Bikes Pvt Ltd (Firefox), Insync, and BSH Ventures Pvt Ltd (BSH) - for Rs 135 crore in fiscal 2016. The company has also invested in two JVs, Munjal Kiriu Industries Pvt Ltd and ZF Hero Chassis System Pvt Ltd, which are engaged in the auto components segment. Hero Cycles has made significant investments to scale up the subsidiaries and fund their losses in the past, resulting in subdued return on capital employed (RoCE). However, the standalone performance of subsidiaries has improved with Firefox and BSH generating profits in fiscal 2021.
While additional support may be required for entities such as HECPL till its operations ramp up, the subsidiaries are expected to add to the consolidated operating profits going forward. This turnaround in operating performance will be a key monitorable.
Liquidity: Strong Consolidated cash and liquid investments were estimated at over Rs 459 crore as on March 31, 2021. Healthy expected cash accrual of over Rs 150 crore should comfortably cover debt repayment of around Rs 60-70 crore in fiscal 2022. Capex of Rs 180-200 crore in 2022 for the new manufacturing unit under separate HECPL should be funded through a mix of debt and internal accrual. Capex over the medium term is expected to be moderate at Rs 60-90 crore and will be largely met via internal accrual. |
Outlook: Stable The business risk profile of Hero Cycles will benefit from its established market position in the bicycles industry, while strong liquidity, high financial flexibility and a healthy capital structure should support financial risk profile over the medium term. |
Rating Sensitivity Factors Upward Factors * Sizeable growth in revenue and profitability leading to net cash accrual above Rs 250 crore * Significant improvement in the performance of subsidiaries enhancing RoCE
Downward Factors * Decline in revenue and operating margin resulting in lower cash accrual, and interest coverage ratio sustaining below 2.5 times * Large investments in subsidiaries or significant capex further impacting capital structure |
About the Company Incorporated in 1956, Hero Cycles is the largest bicycles manufacturer in the world. The company has capacity of 65 lakh bicycle per year, with units in Ludhiana, Bihta (Bihar) and Ghaziabad (Uttar Pradesh). It also manufactures auto rims and components. Operations are managed by Mr Pankaj Munjal and his family.
In fiscal 2016, the group completed three acquisitions: Firefox, Insync and BSH. Firefox is a leading player in the premium bicycles segment in India and currently sells over 100 different models. Insync is one of the top three distributors of bicycles, e-bikes, bicycle parts and accessories, with presence across Europe. BSH is a bicycle manufacturer based in Sri Lanka, with a state-of-the-art manufacturing plant that will supplement sales of the HCL group in southern India and Europe.
Hero Cycles entered the commercial real estate business through Munjal hospitality pvt. Ltd. and acquired an under-construction hotel property in Gurugram in fiscal 2012. In 2019, the company diluted 60% stake in MHPL for a consideration of Rs 438 crore. Also, the company acquired ‘HNF’ brand in Germany in fiscal 2019 aimed at emerging as a full-range supplier in the European market |
Key Financial Indicators
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Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL Ratings' complexity levels are assigned to various types of financial instruments. The CRISIL Ratings' complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL Ratings' complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
Annexure - Details of Instrument(s)
*Two way interchangeability between Fund Based and Non-Fund Based #Two way interchangeability between Fund Based and Non-Fund Based including Stand By Letter of Credit |
Annexure - List of Entities Consolidated
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| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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*Two way interchangeability between Fund Based and Non-Fund Based
#Two way interchangeability between Fund Based and Non-Fund Based including Stand By Letter of Credit
Criteria Details
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