Rating Rationale
August 26, 2020 | Mumbai
Hero Motocorp Limited
Ratings Reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.1100 Crore
Long Term Rating CRISIL AAA/Stable (Reaffirmed)
Short Term Rating CRISIL A1+ (Reaffirmed)
 
Rs.15 Crore Non Convertible Debentures CRISIL AAA/Stable (Reaffirmed)
Fixed Deposits FAAA/Stable (Reaffirmed)
Rs.16 Crore Commercial Paper CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
The common independent director on CRISIL's and Hero MotoCorp's boards did not participate in the rating committee meeting and the rating process of these instruments.
Detailed Rationale

CRISIL has reaffirmed its 'CRISIL AAA/FAAA/Stable/CRISIL A1+' ratings on the debt programmes and bank loan facilities of Hero Motocorp Limited (HMCL).
 
Operating income to moderate by 12-15% in fiscal 2021 post decline of 64% in the first quarter of fiscal 2021 due to the nationwide lockdown to contain the Covid-19 pandemic amid the ongoing slowdown in the automotive (auto) industry. Positive momentum and normal monsoon bode well for the economy segment for HMCL and may help contain the erosion in volume. Signs of rural recovery benefitting the company were evident from the July 2020 volume growth, despite staggered lockdown HMCL posted a marginal degrowth of 0.87% compared to July 2019. Operating profitability will moderate to 10-12% due to negative operating leverage in fiscal 2021.

The financial risk profile is likely to remain healthy backed by adequate cash accrual of 1,200-1,500 crore against capex of Rs 600-1,000 crore per annum. Credit metrics remain strong with gearing at 0.2 time as on March 31, 2020. Liquidity remains robust with cash surplus of over Rs 6,400 crore and unutilised bank lines.
 
The ratings continue to reflect the company's strong business risk profile because of 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 has combined the business and financial risk profiles of HMCL and its subsidiaries. The company has investments in financing business company Hero FinCorp Ltd (HFL; 'CRISIL AA+/Stable/CRISIL A1+'). CRISIL 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 (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 improved to 40.6% as on July 2020 from 35.78 as on March 2020. The company is India's largest motorcycle manufacturer and fourth-largest scooter manufacturer, accounting for 54.2% and 11.1%, respectively, of the domestic market share as on July 2020. The market position is backed by strong brand appeal, wide distribution and service network, and considerable focus on growing rural markets.
 
HMCL has also launched new brands in the premium segment - Xpulse and Xtreme to improve market share in the premium segment. Company is also investing in electric vehicle segment to gain an edge over competitors. HMCL has further invested Rs 84 crore in Ather Energy, an electric vehicle company, in July 2020. HMCL's stake in the company stands at 34.58% as on July 2020.
 
* Robust financial risk profile
The company is near debt-free on a standalone level with robust cash accrual and substantial liquid surplus of over Rs 6,400 crore as on March 31, 2020. 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 600 crore is expected towards capacity expansion, product innovation and technology upgrade for the fiscal 2021. This is likely to be funded through internal cash accrual. The company has also invested in Ather Energy Pvt Ltd, an electric scooter company, as well as in an internal incubation centre for development of electric two-wheelers.
 
Weaknesses:
* Exposure to intense competition
The Indian two-wheeler market remains highly competitive, with 12 players, including Honda Motorcycles & Scooters India Pvt Ltd (HMSI), Bajaj Auto Ltd ('CRISIL AAA/FAAA/Stable/CRISIL A1+'), and TVS Motors Ltd. Furthermore, players continue to launch new models.
 
HMCL has maintained its leadership position backed by new products and refreshes, introduction of five-year warranty, and an enhanced dealership network. The company will continue to focus on in-house research and development (R&D) to launch new models with its own technology. The company faces intense competition in the scooter segment, wherein revenue declined 43% in fiscal 2020. Impact of the lockdown to contain Covid-19, consumer preference for mobility and the extent of revival in rural demand will remain key monitorables.
 
To increase its technological prowess, HMCL had entered into a strategic alliance with Magneti Marelli, headquartered in Milan, Italy, to develop and manufacture new-generation fuelling systems. Launch of new models and continuous investment in R&D will be crucial for sustaining its leadership position in the Indian two-wheeler market.
 
* Modest presence in premium motorcycles segment and in the overseas market
While the company had a 53% market share in the economy segment (less than 125 cc) and a 7% market share in the scooter segment, its share in the executive segment (125-200 cc) remained 2% as on March 2020.
 
The share in the overseas markets is also low at 4%, though HMCL has expanded to over 40 countries now. The company has started assembly plants in Colombia and Bangladesh to increase export volume, and will target new geographies including SAARC nations. Increasing overseas presence will improve revenue mix and cushion the impact of increasing competition or slowdown in the domestic market.
Liquidity Superior

HMCL had healthy cash and liquid investments of over Rs 6,400 crore as on March 31, 2020. Unutilised bank lines and cash accrual of over Rs 1200 crore per annum will be sufficient to fund capex of Rs 600-1,000 crore annually.

Outlook: Stable

CRISIL 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 Vadodara, 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 with capacity of 1.5 lakh units per annum. HMCL also has two R&D centres at Centre of Innovation and Technology in Jaipur and Hero Tech Center in Germany.
 
For the first quarter of fiscal 2021, the company reported Rs 2,969 crore of revenue (Rs 8,186 crore for the corresponding period of the previous fiscal) and Rs 116 crore of operating profit (Rs 1,173 crore).

Key Financial Indicators - (Consolidated)
As on / for the period ended March 31 Unit 2020 2019
Revenue Rs crore 28909 33551
PAT Rs crore 3659 3,466
PAT margin % 12.7 10.3
Adjusted debt/adjusted networth Times 0.19 0.02
Interest coverage Times 98.7 150.3

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.
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 242.1 NA CRISIL AAA/Stable
NA Proposed Fund-Based
Bank Limits*
NA NA NA 194.9 NA CRISIL AAA/Stable
NA Non-Fund Based Limit* NA NA NA 663 NA CRISIL A1+
NA Non Convertible Debentures@ NA NA NA 15 Simple CRISIL AAA/Stable
NA Commercial Paper NA NA 7-365 days 16 Simple CRISIL A1+
NA Fixed Deposits NA NA NA 0 Simple FAAA/Stable
*Funded facility interchangeable with non-funded lines
@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%
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  16.00  CRISIL A1+      30-09-19  CRISIL A1+  27-11-18  CRISIL A1+  28-11-17  CRISIL A1+  CRISIL A1+ 
Fixed Deposits  FD  0.00  FAAA/Stable      30-09-19  FAAA/Stable  27-11-18  FAAA/Stable  28-11-17  FAAA/Stable  FAAA/Stable 
Non Convertible Debentures  LT  0.00
26-08-20 
CRISIL AAA/Stable      30-09-19  CRISIL AAA/Stable  27-11-18  CRISIL AAA/Stable  28-11-17  CRISIL AAA/Stable  CRISIL AAA/Stable 
Fund-based Bank Facilities  LT/ST  437.00  CRISIL AAA/Stable      30-09-19  CRISIL AAA/Stable  27-11-18  CRISIL AAA/Stable  28-11-17  CRISIL AAA/Stable  CRISIL AAA/Stable 
Non Fund-based Bank Facilities  LT/ST  663.00  CRISIL A1+      30-09-19  CRISIL A1+  27-11-18  CRISIL A1+  28-11-17  CRISIL A1+  CRISIL A1+ 
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Fund-Based Facilities* 242.1 CRISIL AAA/Stable Fund-Based Facilities* 242.1 CRISIL AAA/Stable
Non-Fund Based Limit* 663 CRISIL A1+ Non-Fund Based Limit* 663 CRISIL A1+
Proposed Fund-Based Bank Limits* 194.9 CRISIL AAA/Stable Proposed Fund-Based Bank Limits* 194.9 CRISIL AAA/Stable
Total 1100 -- Total 1100 --
*Funded facility interchangeable with non-funded lines
Links to related criteria
CRISIL Governance and Value Creation Ratings
CRISILs Criteria for Consolidation
The Rating Process

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