Detailed Rationale

CRISIL Ratings has revised its outlook on the long term bank facilities of Piaggio Vehicles Private Limited (PVPL) to ‘Stable’ from ‘Negative’ while reaffirming the rating at ‘CRISIL A’. The short term rating has been reaffirmed at ‘CRISIL A1’.

 

The revision in outlook factors in sizeable volume recovery in 3-wheeler (3W) segment resulting in significant improvement in revenues expected to be sustained over the medium term and ensuring further improvement in operating profitability besides maintenance of healthy liquidity & strong financial risk profile. 

 

In fiscal 2023, PVPL’s revenue from operations have recovered substantially and estimated at Rs. 3,218 crore; about 49% increase over previous fiscal (fiscal 2022: Rs.2,159 Crore) owing to a strong 93% volume growth in 3W passenger segment and 12% volume growth in 3W commercial segment. The growth was more pronounced in the domestic market (96% growth) even as export segment remained muted (-ve 1% decline). The electric 3W segment saw the maximum growth with volumes over 14,800 in fiscal 2023 up from a low base of ~4,500 in previous fiscal and formed ~19% of total revenues.  PVPL is further ramping up its EV offerings and its share is expected to further improve over the medium term. Further, the company has also tied up with financial institutions to provide retail finance to boost sales in 3W passenger segment. PVPL’s ability to gain market share amidst increasing shift to CNG/electric would remain a key monitorable. On an overall basis, 3W segment contributed ~66% of total revenues.  The 2W segment, which formed ~17% of total revenues, experienced a volume de-growth of ~20% in fiscal 2023 owing to lower demand following strategic price hikes taken by the company to position its product in the premium category, which is in line with that of its parent company.

 
Operating margins are estimated to have improved to 4.35% in fiscal 2023, an improvement of ~285 bps from previous fiscal owing to better operating leverage. Margins are expected to gradually recover to 7-9% with improvement in gross margins due to moderations in raw material prices and ramp up in CNG/EV portfolio.

 

PVPL’s financial risk profile remained healthy supported by minimal dependence on debt and cash surplus of  Rs. 237 crores as on March 31, 2023. Net worth is estimated to have moderated to Rs. 300 crores as on 31st March 2023 (FY22: Rs.328 crore) owing to net loss in fiscal 2023. Debt of Rs. 232 crores as on March 31, 2023 pertains to vendor financing scheme. Gearing is estimated to be at 0.77 times as on 31st March 2023 as against 0.71 times as on 31st March 2022 on account of moderation in net worth. Adjusted interest coverage is estimated to be at 9.57 times for fiscal 2023. PVPL has had a history of paying high dividends to its parent, Piaggio & C. SPA (rated ‘BB-/Stable by S&P Global Ratings). However, owing to domestic capex plans and moderation in overall performance, dividend outgo was nil in fiscal 2023 and no dividend payout is expected over the medium term as well. Going forward, with nil dividend outgo and improvement in revenue, accruals are expected to improve to over Rs. 200 crore.

 

Capex intensity is likely to increase over the medium term to Rs.300-350 crore annually. The same is expected to be primarily funded through existing cash surplus and internal accruals with minimum reliance on external debt.

 

The ratings continue to reflect the company’s established market position in the three-wheeler segment  and healthy financial risk profile. These strengths are partially offset by susceptibility to cyclicality in demand, intense competition in the industry, weaker competitive position in CNG and weak operating profitability.

Analytical Approach

CRISIL Ratings has also applied its parent notch down criteria based on weaker credit profile of the parent. CRISIL Ratings has also treated trade payables under vendor financing as short-term debt as it is on account of bills discounted by the vendor through PVPL’s bankers with final recourse to PVPL.

Key Rating Drivers & Detailed Description

Strengths:

• Established market position in the three-wheeler segment with high market share in the electric 3W segment: PVPL is the second largest domestic three-wheeler goods carrier segment (after Bajaj Auto Ltd [BAL; rated, ‘CRISIL AAA/Stable/CRISIL A1+’]) with market share of 17.33% during the fiscal 2023. It is also the second largest player in the domestic passenger carrier segment (after Bajaj Auto) with market share of ~15% for domestic sales during the same period. PVPL has also been steadily increasing the scale of Electric vehicles in the 3W segment and currently has ~40% market share in it. Its business profile is further strengthened by improving revenue diversity with increasing contribution from exports and scooters. However its market position has weakened in the diesel 3W segment in which the company has been traditionally strong. Ability to gain more market share in the three-wheeler segment will remain a key rating monitorable.

 

• Healthy financial risk profile: PVPL’s financial risk profile is marked by a healthy capital structure with overall gearing of 0.77x times estimated in fiscal 2023. Although tangible net-worth has decreased over the past 4-5 years on account of high dividend payout and negative cash accruals, company’s stance on minimal dependence on external debt has helped maintain a prudent capital structure. Recovery in accruals and nil dividend payout going forward is expected to keep capital structure intact and debt protection metrics healthy. Gearing is expected to remain below 0.70x times over the medium term while interest coverage is expected to further improve from current levels of ~9.5x times in fiscal 2023.

 

CRISIL Ratings expects PVPL to generate cash accrual of over Rs 200 crore per annum over the next 3 years, which along with liquid surplus of Rs. 237 crore as on March 31, 2023, will be sufficient for annual capex plans of Rs. 300-350 crore going forward. This is expected to ensure minimal dependence on debt. Nevertheless, sustainability of key credit ratios and dividend payout policy to the parent will remain a key monitorable.

 

Weaknesses:

• Weaker competition position in CNG, which is witnessing increasing adoption: Piaggio has been traditionally enjoying a strong competitive position in diesel 3W. However, share of diesel 3W (especially in goods segment) has declined over the years given the high operating cost on the backdrop of rising diesel prices, lower efficiency vis-à-vis CNG and slowdown in rural economy which traditionally drove the demand for these vehicles. The rollout of the CNG network continues to proceed strongly supported by government initiatives due to it being environmental friendly compared to other alternatives. Further, increasing penetration of EV 3W and new model launches is also expected to reduce competitiveness of diesel 3W over the medium to long term. While Piaggio is investing to increase its competitiveness in CNG and EV variants, the same would be a monitorable.

 

• Susceptibility to cyclicality in demand and intense competition: The company is susceptible to inherent cyclicality in the domestic auto industry. The demand patterns in this industry have displayed cyclicality in the past, in line with industrial growth and consumer sentiments. Exposure to cyclicality inherent in the auto businesses is likely to persist over the medium term.

 

The Indian three-wheeler market is highly competitive, with the presence of five players, including Bajaj Auto Limited, Mahindra & Mahindra Ltd (‘CRISIL AAA/Stable/CRISIL A1+’), Atul Auto and TVS Motor Company. Furthermore, the players regularly launch new models. Ability of PVPL to regain its share with focused marketing strategy, revamped product portfolio on the back of new products and refreshers and enhancing its dealership network will remain monitorable. The company will continue to focus on in-house research and development (R&D) to launch new models with in-house technology. Launch of new models and continuous investment in R&D will be crucial for sustaining the leadership position in the Indian three-wheeler goods carrier market.

Liquidity: Strong

PVPL has comfortable liquidity with cash and cash equivalent of Rs 237 crore as on 31st March 2023. Bank limits remain utilized at an average of 53% for the last thirteen months ending June 2023. The company has no long-term debt. CRISIL Ratings believes the company will generate sufficient accrual and maintain satisfactory surpluses to meet its annual capex requirement of Rs 300-350 crore, as well as fund its incremental working capital needs, if any. Any further dividend payout to the parent will be a key monitorable.

Outlook: Stable

CRISIL Ratings believes PVPL will maintain its credit risk profile over the medium term on the back of established market position in the three-wheeler segment in India and gradual scale-up of operations in 3-wheeler electric segment. The financial risk profile is also expected to remain strong in the absence of any debt funded capex plans and prudent management of working capital needs.

Rating Sensitivity factors

Upward factors:

• Sizeable gain in market share in the three-wheeler segment while maintaining operating margins at above 10%
• Sustenance of strong financial risk profile with healthy liquidity and improvement in gearing levels; Maintenance of adequate cash surplus on sustained basis

 

Downward factors:

• Deterioration in sales volumes, resulting in lower scale with operating margins sustaining below 5%, materially impacting cash generation
• Moderation in the financial risk profile due to weaker cash generation or large, debt-funded capex or acquisitions
• Sustained, high dividend outflow to parent impacting liquidity position

About the Company

PVPL was incorporated in 1998 as a joint venture (JV) of Greaves Ltd (Greaves) and P&C. P&C manufactures scooters, motorcycles and light transportation vehicles. Its brands include Vespa, Aprilia, Scarabeo, Moto Guzzi, Gilera and Derbi, besides Piaggio. The JV began manufacturing three wheelers by taking over the automotive division of Greaves in Baramati, Maharashtra. In 2001, P&C acquired the entire shareholding in the JV, and PVPL became a wholly owned subsidiary of P&C. PVPL manufactures and sells three-wheeler goods and passenger carriers, two-wheeler scooters and four-wheeler light commercial vehicles. It commissioned an engine manufacturing facility in 2010 from which it supplies engines to its parent. This facility also caters to the two-wheeler manufacturing plant that commenced production in April 2012. The company launched the Vespa brand of two-wheeler scooters in the domestic market. Besides, this facility also manufactures engines for three-wheelers (non-diesel) and four-wheelers (1,000cc diesel) made by the company.

 

PVPL’s plant in Baramati has capacity to manufacture 331,200 units of three wheelers and 180,000 two wheelers per annum as on March 31, 2023.

Key Financial Indicators

As on / for the period ended March 31*		2022	2021
Operating income	Rs crore	2159	2410
Adjusted profit after tax (PAT)	Rs crore	-102	61
PAT margin	%	-4.72	2.5
Adjusted debt/adjusted networth	Times	0.73	0.61
Interest coverage	Times	2.18	13.3

*CRISIL Ratings adjusted numbers

Any other information: Not applicable