| Hero E-Cycles Private Limited | ||||||
| Ratings removed from ‘Watch Negative’; Ratings Reaffirmed | ||||||
| Rating Action | ||||||
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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 removed its rating on the bank facilities of Hero E-Cycles Pvt Ltd (HECPL) from 'Rating Watch with Negative Implications' and reaffirmed the ratings at ‘CRISIL A/CRISIL A1' while assigning a 'Negative' outlook to the long-term rating
The revision in outlook the weak operating performance of the cycle business of HCL on account of slower-than-expected ramp up in subsidiaries. Consolidated revenue for fiscal 2023 is estimated at ~Rs 2,100 crore (similar to that in fiscal 2022). Though there has been improvement in the consolidated operating profit from the overall cycle business in the first quarter of fiscal 2024 driven by turnaround in HNF GMBH, it remains lower than expected. Furthermore, continued marginal operating losses for subsidiaries has led to continued pressure on the overall cycle business. Ramp-up in subsidiaries and turnaround in their operating profitability in fiscal 2024 will be key monitorables.
Consolidated net debt for HCL estimated at ~Rs 580 crore as on March 31, 2023 increased from ~Rs 420 crore as on March 31, 2022. This is mainly because of larger working capital requirement given pile-up of inventory amid subdued demand. However, liquidation of excess inventory in the near term should reduce net debt in fiscal 2024. Profits of the Indian joint ventures (JVs) will continue to accrue in HCL. Given the strong operating performance of the JVs, healthy expected dividend income is expected over Rs 70 crore in fiscal 2024 will aid accrual and liquidity. HCL has already received Rs 23 crore of dividend in July 2023.
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 support from HCL, extensive experience of the management and significant exports opportunity. These strengths are partially offset by the modest scale of trading operations leading to subdued debt protection metrics. |
Analytical Approach CRISIL Ratings has applied its parent notch-up framework to factor in the strong operational, financial and managerial linkages HECPL shares with HCL.
For arriving at the ratings of HCL, CRISIL Ratings has combined its business and financial risk profiles with that of its subsidiaries, JVs and associates because all these entities are under a common management and have strong business and financial linkages. |
Key Rating Drivers & Detailed Description Strengths: Strong support from the parent: HECPL is a wholly owned subsidiary of HCL and receives robust operational, financial and managerial support from HCL. The company houses a new manufacturing unit that is central to the growth plans of the parent and is, therefore, strategically important to the latter. All sales of HECPL will be routed to various entities in HCL, which has an established distribution network across India and the global markets, including Europe.
HCL has complete management control over HECPL. A common team oversees the treasury operations. HCL has already invested over Rs 150 crore in the form of equity shares, preference shares and temporary intercorporate deposits towards the capital expenditure and working capital requirement of HECPL. The company will continue to receive strong and timely support from its parent during the initial phase of operations.
Experienced management and strong export opportunity: HECPL has the same experienced management as HCL, which is the largest bicycle player in the domestic market. The promoters have decades of experience in the cycle segment. HECPL is targeting sales of premium bicycles and e-cycles in the domestic market as well as the more lucrative overseas markets such as Europe. The Europe market is witnessing healthy demand growth for e-bicycles, which have relatively lower price sensitivity and higher margin. The management’s ability to capture share in the competitive international market will be a key monitorable.
Weakness: Modest scale of operations leading to weak debt protection metrics: Operations commenced in the second half of fiscal 2022, with sales estimated at Rs 150 crore against moderate operating losses in fiscal 2023. Against negative cash accrual, external debt is estimated at Rs 225 crore at the end of fiscal 2023, leading to weak debt protection metrics. HCL will likely provide need-based financial support to HECPL for timely debt servicing. Ability of the company to ramp-up operations and turn profitable in fiscal 2024 will remain a key rating sensitivity factor. |
Liquidity: Strong HECPL has strong financial linkages with HCL, which is expected to provide need-based support for timely debt servicing. The company had cash and liquid investments of around Rs 5 crore as on March 31, 2023. HECPL also has healthy financial flexibility from being a part of HCL. |
Outlook: Negative The outlook reflects the outlook of CRISIL Ratings on the credit quality of HCL. |
Rating Sensitivity factors Upward factors * Upgrade in the ratings of HCL by one or more notches * Significant increase in revenue leading to sustained healthy operating profitability
Downward factors * Downgrade in the rating of HCL by one or more notches * Weakening of linkages between HCL and HECPL |
About the Company HECPL, incorporated in January 2020, is a wholly owned subsidiary of HCL. It houses the new manufacturing unit at Hero Industrial Park in Ludhiana, Punjab (cycle valley project), for manufacturing cycles and e-cycles for the domestic and overseas markets. The unit has installed capacity of 20 lakh cycles on a two-shift basis, with 1 lakh units for high-end e-cycles. Sales would be via the distribution network of HCL. |
About the Parent Incorporated in 1956, HCL is the largest bicycles manufacturer in the world. The company has capacity of 65 lakh bicycle per year, with units in Ludhiana, Bihta (Bihar) and Ghaziabad (Uttar Pradesh). It also manufactures auto rims and components. Operations are managed by Mr Pankaj Munjal and his family.
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 currently 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 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 a consideration of Rs 438 crore. Also, the company acquired the HNF brand in Germany in fiscal 2019 to become a full-range supplier in the European market. |
Key Financial Indicators for HCL (pre-demerger of the auto components business)
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Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
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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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