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).

 

The ratings continue to reflect the strong business risk profile of the company supported by its leading position in the two-wheeler market in India, and robust financial risk profile owing to strong networth, negligible debt, and substantial cash surplus. These strengths are partially offset by exposure to intense competition, modest presence in the premium motorcycles segment, low geographic diversity, and domestic operations susceptible to rural demand.

 

Revenues grew by 16% on-year to Rs. 34,158 crore in fiscal 2023 on the back of around 8% on-year volume growth and around 7% on-year growth in realizations. The growth in volumes was on account of low base, particularly during the first quarter of fiscal 2022, steady demand in rural geographies, and strong volume growth in the scooters segment. Scooter volumes witnessed an on-year growth of 16%, while motorcycle volumes witnessed on-year 7% growth owing to steady volume growth in the entry level motorcycle segment (75cc to 110cc) driven by steady rural demand, while executive (110cc to 150cc) and premium (150cc and above) motorcycle segment volumes remained flat. The growth in realizations was driven by multiple price hikes owing to commodity inflation, and introduction of on-board diagnostic transition norms, among others. Operating margins improved by 40 basis points (bps) to 12.1% in fiscal 2023 because of multiple price hikes and lower freight expenses.

 

During the nine months ended December 2023, revenues witnessed around 10% on-year growth to Rs. 28,172 crore on the back of around 4% year-on-year (y-o-y) growth in volumes and around 5% y-o-y growth in realization per unit respectively. While overall volumes were down by 2% on-year during the first half of fiscal 2024, strong growth during the third quarter of the fiscal driven by the festive season, lifted overall volume during the nine months ended December 2023. In addition, volume growth was further supported by product launches in the above 200cc motorcycle segment. Operating margins for nine months ended December 2023, improved to 14% on the back of stable raw material prices.

 

HMCL continues to invest in its associate companies Hero FinCorp Limited (HFCL, rated ‘CRISIL AA+ /CRISIL PPMLD AA+/Stable/CRISIL A1+’), and Ather Energy Private Limited (Ather). The investments are of strategic importance. In fiscal 2023, the company invested Rs. 700 crore in HFCL and Rs. 263 crore in Ather. In fiscal 2024, HMCL has purchased an additional stake in Ather by investing Rs. 639 crore; and as on January 2024, on fully diluted basis, HMCL holds around 39.7% stake in Ather. Furthermore, the company invested Rs 493 crore in Zero Motorcycles Inc

 

The financial risk profile remains strong backed by robust networth, negligible debt, strong debt protection metrics and cash reserves. Adjusted networth and interest coverage ratio stood at Rs. 13,662 crore and 44.49 times respectively, as on March 31, 2023. Over the medium term, the interest cover ratio is expected above 50 times. The financial risk profile is further strengthened on the back of strong cash reserves of Rs. 5,845 crore as on March 31, 2023 (Rs. 5,785 crore as on September 30, 2023) and unutilized bank lines.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profile of HMCL, its wholly owned subsidiaries in Netherlands and Bangladesh, and HMC MM Auto Limited (rated, ‘CRISIL AA-/Stable/CRISIL A1+’).  The ratings factor in support to HFCL and adjustments have been carried out to the networth accordingly, in line with the capital allocation criteria.

 

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:

• Leading position in the two-wheeler market in India

The market share of HMCL in the two-wheeler industry has come down to around 27% as on January 2024 from around 28% as on March 2023. Despite the decline in overall market share, the company continues to maintain a dominant position in the entry level motorcycle segment (75cc to 110cc). The market position is backed by strong brand appeal, wide dealer distribution and service network.

 

Within the two-wheeler electric vehicle (EV) segment, the company has around 2% market share as on date. Currently, HMCL’s EV brand ‘Vida’ is being sold at 150 stores across 100 cities, and to improve market share, the company shall be opening exclusive electric scooter stores, and over the next twelve months shall launch mid-priced and economically priced electric scooters under their Vida range. 

 

HMCL will also focus on improving market share in the executive and premium motorcycle segments. In fiscal 2024, the company launched Hero Karizma in the above 200cc motorcycle segment. In addition, HMCL have also partnered with Harley Davidson, and during the said fiscal, launched HD X440, which also gained strong traction. As a result of the said launches, market share within the above 200cc motorcycle segment improved to 3.5% during the third quarter of fiscal 2024, and further improved to 4.9% for the month of January 2024, and the company shall continue to launch new products within the premium category to further improve their market share. HMCL will also focus on improving market share in above 125cc motorcycle segment with upcoming launches.

 

• Robust financial risk profile

The financial risk profile remains strong owing to negligible debt, large networth, and strong cash reserves. The company maintains a negative net working capital cycle, thereby resulting in limited working capital requirements, and in addition capital expenditure (capex) spends is largely for maintenance capex. As a result, the company’s balance sheet is virtually debt free. Furthermore, internal cash accruals are more than sufficient to cover fixed obligation requirements, thereby resulting in strong free cash generation and a build-up of strong cash reserves. Adjusted networth and cash reserves stood at Rs. 13,662 crore and Rs. 5,845 crore respectively, as on March 31, 2023. Over the medium term, the company’s fixed obligation requirements comprising of working capital requirements and yearly capex spends of Rs. 950-1,200 crore shall be met through internal cash accruals. Interest coverage ratio stood at 44.49 times as on March 31, 2023, and is expected above 50 times over the medium term.

 

Weaknesses:

• Exposure to intense competition and modest presence in premium motorcycles segment

The Indian two-wheeler market remains highly competitive, with major players being Honda Motorcycles & Scooters India Pvt Ltd (HMSI), Bajaj Auto Ltd (Bajaj, rated ‘CRISIL AAA/Stable/CRISIL A1+’), and TVS Motors Ltd. Furthermore, players continue to launch new models. The electric vehicles (EV) space became extremely competitive with new original equipment manufacturers (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.

 

HMCL has a modest presence in the premium motorcycles segment with domestic market share of 0.7% as on January 31, 2024. In the executive motorcycles segment, market share declined to around 15% as of January 2024 from over 30% in fiscals 2020 and 2021. The market share will improve over the medium term with launch of new models.

 

• Susceptibility to rural demand owing to low geographic diversity followed by segment concentration in revenue

Motorcycles accounted for around 93% of total volumes during fiscal 2023 and scooters accounted for the balance. Within motorcycles, around 97% of the volumes come from the domestic market, with major concentration in the entry-level motorcycles segment (around 87% of domestic volumes); and demand for the same is rural and price centric. Entry-level sales volume grew by 12% on-year to 41.66 lakh units in fiscal 2023 after slowdown in three consecutive fiscals owing to weak rural demand; however, entry-level sales volume is yet to reach pre-COVID level of 60.95 lakh units recorded in fiscal 2019. Multiple price hikes followed by low rural disposal income impacted volume recovery. Improvement in the geographic mix can support / cushion slowdown in domestic markets.

Liquidity: Superior

Owing to negligible term debt obligation, expected cash accrual of Rs 1,900-2,100 crore per annum will sufficiently cover yearly capex of Rs 950-1,200 crore and limited working capital requirement. Liquidity is supported by cash reserve of Rs 5,845 crore as on March 31, 2023 (Rs 5,785 crore as on September 30, 2023) and unutilized bank lines.

 

ESG Profile:

CRISIL Ratings believes that HMCL’s Environment, Social, and Governance (ESG) profile supports its 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 significant 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 its environmental and social risks.

 

HMCL’s key ESG highlights:

• The company aims to have carbon neutral operations by 2030. Further, during fiscal 2023, the company’s scope 1+2 GHG emission intensity has reduced to 3.03 times from 3.74 times in fiscal 2022, and the share of renewable energy increased to 6.18% during fiscal 2023 as against 4.35% in fiscal 2022. 
• Hazardous waste generated by the company increased to 0.08 time during fiscal 2023 as against 0.06 time during the previous fiscal.
• On the social front, the company’s innovative product development as a percentage of revenue increased to 2.25% in fiscal 2023 as against 2.08% during fiscal 2022, and gender diversity marginally increased to 4.84% in fiscal 2023 as against 4.65% during the previous fiscal.
• HMCL’s governance structure is characterized by split positions between Chairman and CEO, effective 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. HMCL’s commitment to ESG principles will play a key role in enhancing stakeholder confidence, given its high share of shareholding by foreign portfolio investors.

Outlook: Stable

The business risk profile of HMCL shall continue to benefit from its established market position in the overall two-wheeler industry followed by dominant market share within the domestic entry level motorcycle segment, while also continuing to maintain healthy operating efficiencies. The financial risk profile shall also remain comfortable, driven by robust networth, strong cash reserves, and robust debt protection metrics.

Rating Sensitivity factors

Downward factors

• Sustained decline in overall 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, 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; Halol, Gujarat, and Chittoor, Andhra Pradesh, and a global parts centre in Neemrana, Rajasthan with combined manufacturing capacity of 92 lakh units per annum. It also has plants in Villa Rica, Columbia, and Jessore, Bangladesh. HMCL has a total production capacity of 95 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 ended December 31, 2023, the company reported Rs. 28,172 crore of revenue (vs. Rs. 25,724 crore for the corresponding period of the previous fiscal year) and generated profit after tax (PAT) of Rs. 2,799 crore (vs. Rs. 1,989 crore for the corresponding period of the previous fiscal year).

Key Financial Indicators- CRISIL Ratings Adjusted Numbers

As on / for the period ended March 31	Unit	2023	2022
Revenue	Rs crore	34,158	29,551
PAT	Rs crore	2,800	2,329
PAT margin	%	8.20	7.88
Adjusted debt/adjusted networth	Times	0.35	0.30
Interest coverage	Times	44.49	71.58

 

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	20.0	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	190.0	NA	CRISIL AAA/Stable
NA	Non-Fund Based Limit*	NA	NA	NA	285.0	NA	CRISIL A1+
NA	Non-Fund Based Limit$@	NA	NA	NA	100.0	NA	CRISIL A1+
NA	Non-Fund Based Limit#**	NA	NA	NA	100.0	NA	CRISIL A1+
NA	Non-Fund Based Limit#@	NA	NA	NA	100.0	NA	CRISIL A1+
NA	Non-Fund Based Limit*	NA	NA	NA	100.0	NA	CRISIL A1+
NA	Non-Fund Based Limit#	NA	NA	NA	112.5	NA	CRISIL A1+
NA	Non-Fund Based Limit*	NA	NA	NA	80.0	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 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	36.54%