| Hero E-Cycles Private Limited | ||||||
| Long-term rating downgraded to 'CRISIL A'; Continue on 'Watch Negative' | ||||||
| Rating Action | ||||||
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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 downgraded its rating on the long-term bank facilities and debt instruments of Hero E-Cycles Pvt Ltd (HECPL) to ‘CRISIL A’ from ‘CRISIL A+’; the ratings remain on 'Rating Watch with Negative Implications'.
The downgrade reflects a similar rating action on the parent, Hero Cycles Ltd (HCL; rated ‘CRISIL A+/CRISIL A1/Watch Negative), reflecting the weaker-than-expected operating performance of the remaining cycle business of HCL after the demerger of its auto components business into Hero Motors Ltd (rated ‘CRISIL A+/Stable/CRISIL A1+’). HCL’s consolidated revenue for fiscal 2023 is estimated to remain at ~Rs 2,100 crore (similar to fiscal 2022). Though there has been slight improvement year on year in the operating profits from the domestic cycle business in fiscal 2023, it remains lower than CRISIL expectations. Furthermore, slower-than-expected turnaround in the subsidiaries has led to continued pressure on the operating performance for the overall cycle business. Ramp-up in subsidiaries and subsequent turnaround in overall operating profitability in fiscal 2024 will be a key monitorable.
The ratings remain on watch because HCL has announced the demerger of its cycle business and that of its subsidiary, HECPL, into a new entity, Hero Cycles Group Pvt Ltd, which will be owned directly by the promoters of HCL; the transaction is pending requisite approvals. CRISIL Ratings is in talks with the management and will resolve the watch once there is clarity on the balance sheets of the entities after the demerger.
The management has indicated steps, including monetisation of non-core assets in the near term, which may bring in significant liquidity. Timely execution of these liquidity events, leading to reduction in debt, will remain a rating sensitivity factor.
The ratings reflect the strong operational, managerial, and financial linkages with the parent and expectation of need-based support. The business risk profile of HECPL is also supported by its experienced management and expectation of healthy prospects in the export segment. These strengths are partially offset by the project phase of operations, leading to a weak financial risk profile. |
Analytical Approach CRISIL Ratings has applied its parent notch-up framework to factor in the strong operational, financial and managerial linkages HECPL shares with HCL.
For arriving at the ratings of HCL, CRISIL Ratings has combined its business and financial risk profiles with that of its subsidiaries, joint ventures and associates because all these entities are under a common management and have strong business and financial linkages. |
Key Rating Drivers & Detailed Description StrengthsStrong support from the parent: HECPL is a wholly owned subsidiary of HCL and receives strong operational, financial and managerial support from HCL. The company houses a new manufacturing unit that is central to the growth plans of the parent and is, therefore, strategically important to the latter. All sales of HECPL will be routed to various entities in HCL, which has an established distribution network across India and the global markets, including Europe.
HCL has complete management control over HECPL. A common team oversees the treasury operations. HCL has already invested over Rs 150 crore in the form of equity shares, preference shares and temporary intercorporate deposits towards the capital expenditure and working capital requirement of HECPL. The company will continue to receive strong and timely support from its parent during the initial phase of operations.
Experienced management and strong export opportunity: HECPL has the same experienced management as HCL, which is the largest bicycle player in the domestic market. The promoters have decades of experience in the cycle segment. HECPL is targeting sales of premium bicycles and e-cycles in the domestic market as well as the more lucrative overseas markets such as Europe. The Europe market is witnessing healthy demand growth for e-bicycles, which have relatively lower price sensitivity and higher margin. The management ability to capture share in the competitive international market will be a key monitorable.
WeaknessProject phase of operations leading to weak debt protection metrics: Operations commenced in the second-half of fiscal 2022, with sales estimated at Rs 150 crore against moderate operating losses in fiscal 2023. Against negative cash accrual, external debt is estimated at Rs 225 crore at the end of fiscal 2023, leading to weak debt protection metrics. HCL will likely provide need-based financial support to HECPL for timely debt servicing. Ability of the company to ramp-up operations and turn profitable in fiscal 2024 will remain a key rating sensitivity factor. |
Liquidity: StrongHECPL has strong financial linkages with HCL, which is expected to provide need-based support for timely debt servicing. The company had cash and liquid investments of around Rs 1 crore as on March 31, 2022. HECPL also has healthy financial flexibility from being a part of HCL. |
Rating Sensitivity factors Upward factors * Upgrade in the ratings of HCL by one or more notches * Significant increase in revenue leading to sustained healthy operating profitability
Downward factors* Downgrade in the rating of HCL by one or more notches * Weakening of linkages between HCL and HECPL |
About the Company HECPL, incorporated in January 2020, is a wholly owned subsidiary of HCL. It houses the new manufacturing unit at Hero Industrial Park in Ludhiana, Punjab (cycle valley project), for manufacturing cycles and e-cycles for the domestic and overseas markets. The unit has installed capacity of 20 lakh cycles on a two-shift basis, with 1 lakh units for high-end e-cycles. Sales would be via the distribution network of HCL. |
About the Parent Incorporated in 1956, HCL 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 state-of-the-art manufacturing plant that will supplement sales of HCL in southern India and Europe.
HCL had entered the commercial real estate business through Munjal Hospitality Pvt Ltd (MHPL) 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 the HNF brand in Germany in fiscal 2019 to become a full-range supplier in the European market. |
Key Financial Indicators for HCL (pre-demerger of the auto components business)
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Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
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| 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 28-Apr-2023 in line with the lender-wise facility details as on 18-Oct-2021 received from the rated entity
Criteria Details
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