| Hero Motors Limited | ||||||
| Ratings reaffirmed at 'CRISIL A+/Stable/CRISIL A1'; 'CRISIL A+/Stable' assigned to Non Convertible Debentures | ||||||
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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 A+/Stable' rating to the NCDs of Rs 33 crore for Hero Motors Limited (HML) while reaffirming the 'CRISIL A+/Stable/CRISIL A1' ratings on the bank facilities.
Consolidated revenue more than doubled to an estimated Rs 1,100 crore in fiscal 2023 from ~Rs 510 crore in fiscal 2020 driven by strong revenue growth in the new segments, bike power train (BPT) and gears and transmission (G&T), as well as addition of customers. Revenue growth will be healthy over the medium term driven by addition of products and ramp-up in subsidiaries, many of which have been set up over the past 12-18 months to expand the product line and geographic reach.
Operating margin is estimated to rise to 12-13% in fiscal 2023, compared with 10.9% in fiscal 2022, owing to increasing contribution from the high-margin BPT and G&T segments where value addition is much higher. Increased revenue contribution from these segments, along with ramp up of subsidiaries should lead to gradual margin expansion over the medium term, which will be a key monitorable.
Consolidated debt is estimated at Rs 250 crore as on March 31, 2023. To fund growth, the company is expected to undertake capital expenditure (capex) of Rs 500-600 crore in the next 3-4 fiscals. However, given healthy cash accrual and existing liquidity, the capex will be funded through internal funds. Networth is estimated at ~Rs 375 crore as on March 31, 2023, aided by Rs 145 crore equity infusion by the external investor, GEF Capital, in December 2022. The financial risk profile will sustain over the medium term supported by healthy cash accrual and no significant debt-funded capex plans.
The ratings reflect the healthy business risk profile of the company driven by improving revenue diversification and strong financial risk profile despite high capex intensity. These strengths are partially offset by investment towards subsidiaries in ramp up phase, customer concentration in revenue and exposure to cyclicality in the automotive (auto) components industry. |
Analytical Approach CRISIL Ratings has combined the business and financial risk profiles of HML, its subsidiaries and joint ventures (JVs). This is because all these entities have common management and strong business and financial linkages.
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:Healthy business risk profile driven by increasing revenue diversification HML has gradually added higher value-added components and built capabilities in more complex parts, such as BPT, which has led to significant improvement in product diversity and operating performance in recent years. Contribution from the low-margin alloy and metals business reduced to ~55% in fiscal 2023 from ~90% in fiscal 2018.
Geographic diversity has improved, with export contributing to over 40% of estimated revenue in fiscal 2023, compared with minimal share in fiscal 2018. Revenue rose significantly to ~Rs 1,100 crore in fiscal 2023 from Rs 703 in fiscal 2021.
The revenue growth will continue to be healthy over the medium term driven by product addition and ramp up in subsidiaries. Furthermore, the company expects contribution from the electric vehicles business to increase significantly in the medium term. CRISIL Ratings expects the business risk profile to remain healthy driven by growth in the higher value-added segments and addition of customers and products, leading to improving revenue diversity.
Strong financial risk profile despite high capex intensity: Consolidated debt is estimated at Rs 250 crore as on March 31, 2023. Networth is estimated at ~Rs 375 crore as on the same date aided by equity infusion of Rs 145 crore by GEF Capital in December 2022. The company is expected to undertake significant capex of Rs 500-600 crore in the next 3-4 fiscals. However, owing to healthy cash accrual, the capex will be largely funded through internal accrual.
Debt protection metrics were strong, as reflected in estimated interest coverage ratio of over 6 times in fiscal 2023 and are expected at similar levels over the medium term given healthy profitability and no significant debt funded capex plans.
Weaknesses:Investment towards subsidiaries in ramp up phase: The company has acquired stake in Hewland Engineering Ltd to gain capabilities in the high-performance two-wheeler and four-wheeler segment. Similarly, it has set up other subsidiaries recently, such as Hero Yamaha Drive Systems Pvt Ltd and Hero EDU Systems Pvt Ltd for expansion into new geographies and product lines. Hence, these subsidiaries will require financial support and likely generate operating loss in the near term. Until fiscal 2022, the subsidiaries had negligible contribution to the operating performance of the company. While Hero Motors Thai Ltd and Hewland Engineering Ltd are expected to be profitable in fiscal 2023, these entities are unlikely to be margin accretive in the near term. Ramp up in operations of the subsidiaries and their contribution to the overall operating performance over the medium term will be a key monitorable.
Customer concentration in revenue and exposure to cyclicality in the auto components industry: Revenue is largely dependent on demand from original equipment manufacturers in the two-wheeler industry, which in turn depends on several factors, such as disposable incomes, consumer preferences, credit availability and fuel prices. Furthermore, while the company has gradually added new customers, the top three customers contributed to over 80% of revenue in fiscal 2022. This dependence poses a risk to operating performance in case of any significant slowdown. |
Liquidity: StrongCash and liquid investments are estimated at Rs 100 crore as on March 31, 2023. Fund-based limit was utilised over 80% on average during the 12 months through January 2023. Healthy accrual, expected at Rs 100-125 crore in fiscals 2024 and 2025, will sufficiently cover moderate debt obligation and working capital requirement. Company has significant capex plans of Rs 500-600 crore over the next 3-4 fiscals will be covered through internal accrual. |
Outlook: Stable CRISIL Ratings believes that HML’s business risk profile will remain healthy over the medium term with addition of customer, products and ramp up of subsidiaries. Financial risk profile is expected to remain strong due to healthy accruals and no significant debt funded capital expenditure. |
Rating Sensitivity factors Upward factors
Downward factors
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About the Company Incorporated in 1998, HML is part of the OP Munjal group, whose flagship company is Hero Cycles Ltd (‘CRISIL AA-/CRISIL A1+/Watch Negative’). HML manufactures and supplies auto components including gearboxes, BPTs and other components for the two-wheeler segment. The company had demerged its automotive businesses into Hero Cycles Ltd with effect from April 1, 2014.
The auto components division of Hero Cycles Ltd was demerged back into HML in December 2022. |
Key Financial Indicators
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Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
*Interchangeable with export packing credit, non-fund based limits and working capital demand loan |
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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Criteria Details
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