Detailed Rationale

CRISIL Ratings has reaffirmed its 'CRISIL AAA/Stable/CRISIL A1+' ratings on the debt programmes and bank loan facilities of Hero Motocorp Limited (HMCL).

 

HMCL reported y-o-y revenue growth of 16% for the period of 9 month ending December 2022 supported by both rise in volume and realizations. Revenues for fiscal 23 is expected to grow by 14% led by a recovery in volumes post volumes declines witnessed from fiscal 2020 onwards. Going ahead revenue growth would be supported by recovery in the rural demand and with launch of new models across segments.

 

The financial risk profile is likely to remain healthy backed by adequate cash accrual (Net of dividend payouts) of 1600-1800 crore against capital expenditure of Rs 700-1,000 crore per annum. Credit metrics remain strong with gearing at  0.02 time as on March 31, 2022. Liquidity remains robust with cash surplus of over Rs 7400 crore and unutilised bank lines.

 

The ratings continue to reflect the company’s strong business risk profile led by leadership position in the two-wheeler market in India, and robust financial risk profile due to large networth, negligible debt, and substantial liquid surplus. These strengths are partially offset by exposure to intense competition, and modest presence in the premium motorcycles segment and in the overseas market.

Analytical Approach

For arriving at its ratings, CRISIL Ratings has combined the business and financial risk profiles of HMCL along with its wholly owned subsidiaries. The company has investments in financing business company Hero FinCorp Ltd (HFL; ‘CRISIL AA+/Stable/CRISIL A1+’). CRISIL Ratings believes that this business will receive support from HMCL, depending on its strategic importance and the extent of HMCL’s shareholding and investment in it. CRISIL has made financial adjustments to factor in this support. Adjustments have also been made for the assets and liabilities of HFL, (even though there is no recourse to HMCL) as per CRISIL's capital allocation approach for the financing business undertaken by HFL.

 

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:

• Leadership in two-wheeler market in India

HMCL’s market share in the overall two-wheeler industry at domestic level has come down to ~32% as at 9MFY23. Despite the decline in overall market share, HMCL continues to maintain dominant position for the entry level motorcycle segment (75-110CC). The market position is backed by strong brand appeal, wide dealer distribution and service network, and considerable focus on growing rural markets.

 

HMCL launched new model in the scooter segment – Xoom which would help recover its market share in the scooter segment. HMCL is also focusing on the premium segment in collaboration with Harley Davidson. Recovery is expected in 125CC segment backed by new model launches and marketing initiatives in medium term. HMCL entered electric vehicle space in Dec-22 with launch of brand “VIDA” with 2 models V1 Pro and V1 Plus.

 

• Robust financial risk profile

The company is virtually debt-free on a standalone level with robust cash accrual and substantial liquid surplus of over Rs 7400 crore as at March 31, 2022. The strong financial position enables it to withstand competitive challenges in terms of pricing as well as making fresh investments. Capital expenditure (capex) of Rs 700-1000 crore per annum is expected towards capacity expansion, product innovation and technology upgrade over the medium term. This is likely to be funded through internal cash accrual. The company has also invested in Zero Motorcycles Inc. Ather Energy Pvt Ltd, as well as in an internal incubation centre for development of electric two-wheelers.

 

Weaknesses:

• Exposure to intense competition and vulnerability to macro-economic factors, industry cyclicality and commodity prices

The Indian two-wheeler market remains highly competitive, with 12 players, including Honda Motorcycles & Scooters India Pvt Ltd (HMSI), Bajaj Auto Ltd (‘CRISIL AAA/Stable/CRISIL A1+’), and TVS Motors Ltd. Furthermore, players continue to launch new models. EV space became extremely competitive with new OEMs expanding in the space.

 

However, HMCL maintained its leadership position at the entry level motorcycle segment backed by new products, strong dealership network and, its five-year warranty program. The company will continue to focus on in-house research and development (R&D) to launch new models with its own technology and has also been open to partnerships, from time to time.

 

The automobile industry is subject to macro-economic headwinds emanating from inflationary pressure and economic slowdown. The overall decline in volume from fiscal 2019 is caused due pandemic and lower demand including from the rural sector. These Economic downturns impact consumer spending on discretionary items and hence slowdown in economic activity has impacted overall industry sales resulting in company’s performance. The rise in commodity pricing has impacted gross margin in the initial months of the current fiscal.

 

• Modest presence in premium motorcycles segment and in the overseas market

HMCL has extremely modest presence in premium motorcycle segment (Above 125CC) with overall domestic market share of 3.4% as at 9MFY23. The same is expected to improve in medium term with launch of new models in the segment.

 

The share in the overseas markets has declined to 4.6% as at 9 monthly level of the current fiscal than that of 6.5% of the previous fiscal for the same period. The company has started assembly plants in Colombia and Bangladesh to increase export volumes, and will target new geographies.

Liquidity: Superior

HMCL had healthy cash and liquid investments of over Rs 7400 crore as on March 31, 2022. Unutilised bank lines and cash accrual of over Rs 1500 crore per annum will be sufficient to fund capex of Rs 700-1,000 crore annually.

 

ESG Profile:

CRISIL Ratings believes that the Environment, Social, and Governance (ESG) profile of HMCL supports its already strong credit risk profile.

The auto sector has a significant impact on the environment because of the high greenhouse gas (GHG) emissions of its core operations as well as products. The sector also has a moderate social impact because of its large workforce across its own operations and value chain partners and focus on innovation and product development. HMCL has continuously focused on mitigating risks arising from environmental and social factors.

 

Key ESG highlights-

 

1. With its long-term target of becoming 100% carbon neutral by 2030 (currently ~30 %), HMCL is enhancing its clean energy portfolio through solar power plants and other options of non-fossil fuel based power sourcing under the available regulatory framework (wind solar hybrid, wind energy wheeling options for operations based different states).
2. HMCL has implemented a mechanism of ICP (Internal Carbon Pricing) to facilitate and promote investments in sustainable and eco-friendly technologies. ICP is calculated at around $30 per tonne of CO2 and is used strategically.
3. HMCL medium term target of becoming 500% water Positive facilities by 2025 (currently at ~ 350%) and company has generated clean renewal energy of ~ 1.2 crore units from solar plants.
4. HMCL reserves ~ 2% of the net profit for the purpose of CSR. Also, company has launched “Educate to Empower” program to promote Children education. Over 4.3 lac students are benefitted till date.
5. The governance structure is characterised by 55% of the board comprising independent directors, effective investor grievance redressal, and extensive disclosures. There are no qualifications in the auditor’s report, and there are no deviations from established accounting standards

 

There is growing importance of ESG among investors and lenders. CRISIL Ratings believes the company’s continuous commitment to embed sustainability principles across the organisation and its value chain will play a key role in enhancing stakeholder confidence

Outlook: Stable

CRISIL Ratings believes HMCL will maintain its robust business and financial risk profiles over the medium term backed by its leadership in India's motorcycle market.

Rating Sensitivity factors

Downward factors

• Sustained decline in market share to below 20% or sharp fall in operating profitability
• Sizeable cash outflow in the form of dividends or share buyback, severely depleting cash surplus disproportionately to the cash accruals

About the Company

HMCL, formerly Hero Honda Motors Ltd, was jointly promoted by the Munjal family based in Ludhiana, Punjab, and HMC in 1984, and began manufacturing motorcycles in 1985. In 2011, the joint venture (JV) partners separated. HMCL has six plants in India: one each in Dharuhera and Gurugram, Haryana; Haridwar, Uttarakhand; and Halol, Gujarat, Chittoor, Andhra Pradesh and a global parts centre in Neemrana, Rajasthan with a combined manufacturing capacity of 92 lakh units per annum. It also has a plant in Villa Rica, Columbia, and Jessore, Bangladesh. HMCL has total production capacity of 9.5 million units per annum across the mentioned manufacturing plants. HMCL also has two R&D centres at Centre of Innovation and Technology in Jaipur and Hero Tech Center in Germany.

 

For the nine months ending December 2022, the company reported Rs. 25,724 crore of revenue (Rs 22,055 crore for the corresponding period of the previous fiscal) and generated operating profit of  Rs 2,970 crores against Rs.2,589 Crores for the previous fiscal)

Key Financial Indicators (consolidated)

As on / for the period ended March 31	Unit	2022	2021
Revenue	Rs crore	29551	30531
PAT	Rs crore	2329	2936
PAT margin	%	7.9	9.6
Adjusted debt/adjusted networth	Times	0.31	0.22
Interest coverage	Times	67.37	93.19

 

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs cr)	Complexity level	Rating assigned with outlook
NA	Fund-Based Facilities*	NA	NA	NA	20	NA	CRISIL AAA/Stable
NA	Fund-Based Facilities#	NA	NA	NA	12.5	NA	CRISIL AAA/Stable
NA	Proposed Fund-Based Bank Limits	NA	NA	NA	140.0	NA	CRISIL AAA/Stable
NA	Non-Fund Based Limit*	NA	NA	NA	465.0	NA	CRISIL A1+
NA	Non-Fund Based Limit #	NA	NA	NA	112.5	NA	CRISIL A1+
NA	Non-Fund Based Limit $@	NA	NA	NA	100	NA	CRISIL A1+
NA	Non-Fund Based Limit #^	NA	NA	NA	50	NA	CRISIL A1+
NA	Non-Fund Based Limit#**	NA	NA	NA	100	NA	CRISIL A1+
NA	Non-Fund Based Limit#@	NA	NA	NA	100	NA	CRISIL A1+
NA	Non-convertible debentures^^	NA	NA	NA	15.0	Simple	CRISIL AAA/Stable
NA	Commercial Paper	NA	NA	7-365 days	16.0	Simple	CRISIL A1+
NA	Fixed Deposits	NA	NA	NA	0	Simple	CRISIL AAA/Stable

*Funded facility interchangeable with Non funded lines

#Combined Facility not to exceed the total sanction amount

$Total Caping of Rs. 100.00 Crores

@Non-fund based facilities interchangeable with fund based facilities to the extent of Rs 50 crores

^Non-fund based facilities interchangeable with fund based facilities to the extent of Rs 2 crores

**Non-fund based facilities interchangeable with fund based facilities to the extent of Rs18 crores

^^Yet to be issued

Annexure – List of entities consolidated

Sr. No	Subsidiary companies:	Subsidiary/ JV/associate	Extent of consolidation
1	Hero FinCorp Ltd	Associate	41.18%
2	HMC MM Auto Ltd	Subsidiary	60%
3	HMCL (NA) Inc	Subsidiary	100%
4	HMCL Americas Inc	Subsidiary	100%
5	HMCL Netherlands BV	Subsidiary	100%
6	HMCL Columbia SAS	Step-down subsidiary	68%
7	HMCL Niloy Bangladesh Ltd	Step-down subsidiary	55%
8	Ather Energy Pvt Ltd	Associate	32.31%