| Hero Cycles Limited | ||||||
| Ratings removed from ‘Watch Negative’; Ratings Reaffirmed; CP Withdrawn | ||||||
| Rating Action | ||||||
| ||||||
| ||||||
| 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 removed its ratings on the bank facilities and debt instruments of Hero Cycles Limited (HCL; part of the Hero Cycles group) from 'Rating Watch with Negative Implications', reaffirmed the ratings at ‘CRISIL A+/CRISIL A1’ and assigned a ‘Negative’ outlook to the long-term rating. The rating on the commercial paper worth Rs 250 crore has been withdrawn at the request of the client. This is in line with the policy of CRISIL Ratings on withdrawal of ratings.
The ratings have been removed from watch because HCL has discarded its plans for the demerger of its cycle business into Hero Cycles Group Pvt Ltd. which would have been owned directly by the promoters of HCL. The company’s management will withdraw the demerger application from the National Company Law Tribunal (NCLT) soon.
The management has also indicated measures to enhance liquidity, including monetisation of non-core assets in the next two fiscals. Timely execution of these liquidity events, leading to reduction in debt, will remain a rating sensitivity factor.
The ratings reflect the strong position in the domestic bicycles market and its expansion plans in the overseas markets, and financial flexibility backed by healthy liquidity and asset monetisation plans. These strengths are partially offset by subdued profitability in the cycle business and modest debt protection metrics. |
Analytical Approach CRISIL Ratings has combined the business and financial risk profiles of HCL and its subsidiaries, JVs and associates. This is because all the entities, together referred to as the Hero Cycles group, are under a common management and have strong business and financial linkages.
Please refer Annexure - List of entities consolidated, which highlights entities considered and their analytical treatment of consolidation. |
Key Rating Drivers & Detailed Description Strengths: Strong position in the domestic bicycles industry and expansion plans in overseas markets: The group is the biggest player in the domestic bicycles market, backed by its large manufacturing capacity, strong brand and pan-India distribution network. HCL has the largest manufacturing capacity of ~65 lakh bicycles per annum. While it remained the market leader, volume dipped on-year with around 35 lakh bicycles sold in fiscal 2023 against 43 lakh in fiscal 2022, in line with the industry. Domestic volume is expected to show healthy growth in fiscal 2024, driven by increased government orders owing to elections. A new unit was set up under the wholly owned subsidiary, HECPL, with installed capacity of 20 lakh units on a two-shift basis. HECPL has capability to manufacture high-end e-bicycles to meet the requirement for premium bicycles as well as e-cycles from both the domestic and the more lucrative foreign markets.
Moreover, acquisition of BSH Ventures Pvt Ltd (BSH), InSync and HNF GMBH provides presence in premium foreign markets such as the UK and Germany.
Growth of the domestic bicycles market is expected to be muted over the medium term. Hence, ramp-up of sales in foreign subsidiaries and HECPL, leading to improvement in operating performance over the medium term, will remain a monitorable.
Healthy liquidity and high financial flexibility: Liquidity is estimated at ~Rs 174 crore as on June 30, 2023. Furthermore, the group monetised real estate investment worth Rs 80 crore in April, which has further boosted liquidity. Other non-core assets such as the land parcel in Cycle Valley in Ludhiana and commercial property in an associate company enhance financial flexibility. Also, healthy share of profits from Indian JVs, estimated over Rs 45 crore for fiscal 2023, supports profitability. Moreover, the established Hero brand enables the group to contract debt from the capital markets and banks. Adjusted consolidated networth was over Rs 1,350 crore as on March 31, 2022, while gearing has been below 1 time historically. Therefore, despite weak profitability leading to modest debt protection metrics, healthy liquidity and high financial flexibility will continue to support the financial risk profile.
Weaknesses: Subdued profitability in the cycle business: Consolidated operating margin in the cycle business has been weak due to marginal operating losses in fiscals 2023 and 2022. While consolidated profitability improved in the first quarter of fiscal 2024, it remains weak overall. This is due to slower-than-expected ramp-up in loss-making subsidiaries and subdued industry demand. HCL had acquired three businesses − Firefox Bikes Pvt Ltd (Firefox), Insync and BSH − for Rs 135 crore in fiscal 2016; HNF GMBH in fiscal 2019; and infused over Rs 150 crore in HECPL for setting up a manufacturing unit for expansion in the cycle business. Significant investments to scale up the subsidiaries, including financial support during their initial ramp-up, led to muted return on capital employed. Turnaround in the operating performance of the subsidiaries, thereby improving consolidated operating profit in fiscal 2024, will be a key rating sensitivity factor.
Modest debt protection metrics: Though scale of operations is large, modest profitability has kept cash accrual relatively subdued. As a result, net cash accrual to total debt ratio and adjusted interest coverage for HCL were muted, estimated at 0.2 time and below 3 times, respectively, in fiscal 2022. Consolidated net debt for the cycles business is estimated at ~Rs 580 crore as on March 31, 2023, up from ~Rs 420 crore a year earlier because of higher working capital requirement driven by pile-up of inventory amid subdued demand and loss funding for subsidiaries. The management is taking steps to liquidate excess inventory. Also, liquidity events, including asset monetisation in the next two fiscals, should lead to reduction in net debt. Reduction in debt and improvement in debt protection metrics, in line with expected improvement in operating performance, will remain a key rating sensitivity factor.
Liquidity: Strong Consolidated cash and liquid investments were healthy, estimated at ~Rs 175 crore as on June 30, 2023. Liquidity also benefitted from Rs 80 crore of real estate monetisation in April 2023. Healthy expected cash accrual of over ~Rs 70 crore should comfortably cover debt obligation of ~Rs 17 crore in fiscal 2024. Capex is expected to be moderate at Rs 10 crore per annum over the medium term and will be largely met through internal accrual. |
Outlook: Negative CRISIL Ratings believes that the operating profitability may remain subdued in the near term if there is a slower than expected ramp up in the subsidiaries. Healthy liquidity, high financial flexibility and a healthy capital structure should support financial risk profile over the medium term. |
Rating Sensitivity Factors Upward Factors
Downward Factors
|
About the Group
In fiscal 2016, the group completed three acquisitions: Firefox, Insync and BSH. Firefox is a leading player in the premium bicycles segment in India and sells over 100 different models. Insync is one of the top three distributors of bicycles, e-bikes, bicycle parts and accessories, with presence across Europe. BSH is a bicycle manufacturer based in Sri Lanka, with a state-of-the-art manufacturing plant that will supplement sales of HCL in southern India and Europe.
HCL had entered the commercial real estate business through Munjal Hospitality Pvt Ltd (MHPL) and acquired an under-construction hotel property in Gurugram in fiscal 2012. In 2019, the company diluted 60% stake in MHPL for Rs 438 crore.
HCL acquired the HNF brand in Germany in fiscal 2019 to become a full-range supplier in the European market. |
Key Financial Indicators (pre-demerger of the auto components business)
|
Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
*Two-way interchangeability between fund-based and non-fund-based #Two-way interchangeability between fund-based and non-fund-based including standby letter of credit |
Annexure - List of Entities Consolidated
|
| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||||||||||||||||||||||||||||
|
*Two-way interchangeability between fund-based and non-fund-based
#Two-way interchangeability between fund-based and non-fund-based including standby letter of credit
Criteria Details
|