Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AAA/Stable/CRISIL A1+’ on bank facilities and debt of Hyundai Motor India Limited (HMIL).

 

The rating continues to reflect HMIL’s established position in the domestic and overseas passenger car market, and a robust financial risk profile with strong liquidity. The ratings also factor in linkages with the parent, Hyundai Motor Company (HMC, rated ‘BBB+/Stable’ by S&P Global Ratings). These strengths are partially offset by exposure to intense competition in the domestic passenger vehicle (PV) industry and susceptibility to fluctuations in foreign exchange (forex) rates.

 

Revenue of HMIL declined by ~5.9% in fiscal 2021 over the previous fiscal on account of the Covid-19 pandemic-induced lockdown and lower demand for passenger vehicles (PVs) across domestic and global markets. Lower discretionary spending due to slowing economic conditions, higher cost of PVs following pass on of increasing input prices, and supply chain related disruptions impacted domestic volumes of HMIL in the fiscal 2021; the company’s volumes contraction by 2.9%, in line with PV industry. Exports of HMIL also declined by 38.5%, in line with industry, as most export destinations grappled with the pandemic.

 

Over the medium term, HMIL’s performance is expected to benefit from the launch of new models and facelift variants, strong pent up demand, signs of rebound in economic activity and household income and increase in vehicular mobility due to easing of restrictions.

The financial risk profile remains robust, driven by negligible debt and strong liquidity with cash surplus of Rs 11,942 crore as on August 31, 2021. Any significant depletion of liquid surplus including due to large outgo to HMC through dividend payout, capital reduction or share buyback will be a key monitorable.

Analytical Approach

For arriving at the ratings, CRISIL Ratings has combined the business and financial risk profiles of HMIL and its wholly owned subsidiary and research and development arm, Hyundai Motor India Engineering Pvt Ltd (HMIE). CRISIL Ratings has also factored in technical and operational support from HMC. CRISIL Ratings has also applied its parent notch down criteria based on relatively moderate credit profile of the parent.

 

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:

• Established position in India’s PV industry and in the export segment

HMIL is India's second-largest manufacturer of PVs after Maruti Suzuki India Ltd (MSIL; 'CRISIL AAA/Stable/CRISIL A1+').

 

During FY21, the company sold 4,71,535 vehicles (4,85,309 during FY20), and accounted for 17.4% of the domestic PV market, compared with 48% held by MSIL. The volumes are lower because of the pandemic-induced lockdowns and weak demand for PVs in the domestic and markets. Despite the decline in H1 fiscal 2021, domestic volume growth is expected to register a double digit growth for the full year of fiscal 2022  due to pent up demand and improving sentiments with recovery in economic activity.

 

HMIL’s established presence in the domestic PV market is underpinned by the strong position of the Grand i10 Nios, Aura and the new i20 models in the compact car segment, Creta,Venue and Alcazar (launched in current year) in the SUV (sports utility vehicle) segment. In July 2019, it entered the electric vehicles segment by launching Kona Electric, India's first all-electric SUV.

 

HMIL’s status as a global sourcing hub for cars makes it a key subsidiary to HMC. It is the leading exporter of PVs from India, besides being HMC's global sourcing hub for small cars (Verna and Creta). Share of exports in total sales volumes, which declined from 26% in fiscal 2020 to 18% in FY21, improved to 21% during the year April-August 2021 period. Given the expectation of robust demand in H2 of fiscal 2022, the company is expected to focus more on the domestic market during the period. HMIL’s presence in both domestic and overseas markets cushions the impact of a slowdown in any particular market.

 

• Robust financial risk profile

The gearing and debt protection metrics were comfortable and liquidity remained strong. As on March 31, 2021, total debt was Rs 1,342 crore, out of which Rs 924 crore was in the form of interest-free sales tax loans. These loans have a nominal annual repayment schedule spread over long tenures, thereby providing additional financial flexibility. The gearing was low at 0.09 time as on March 31, 2021. Cash accrual was higher at Rs 3,854 crore in fiscal 2021 compared with Rs 1,233 crore in the previous fiscal due to special dividend of Rs 2,801 crore paid to HMC in August 2019. However, debt protection metrics remained strong, with interest coverage and net cash accrual to total debt ratios at 28.41 and 2.87 times, respectively, in fiscal 2021.

 

Cash surplus was close to Rs 11,942 crore on August 31, 2021. Sizeable reduction in cash surplus due to large dividend payout, share capital reduction or share buyback would remain a key monitorable.

 

• Strong linkages with HMC

HMIL has access to HMC's superior technology and expertise in the passenger car segment, and receives product development, operational and technological support from the parent. HMC has helped the company launch several models from its product portfolio in the Indian market. HMIL is an integral part of the parent's global supply chain. The company also receives strong managerial support from the parent; HMC elects the board of directors and appoints key management personnel. The company will continue to receive support from HMC, especially on the operational and technology fronts, given the strategic importance of the Indian market for the Hyundai group. Moreover, HMIL accounted for around 7% of HMC's global volume in CY 2020.

 

Weaknesses:

• Intense competition in the domestic PV industry

Competition in the Indian PV market has intensified with players launching new models regularly, especially in the compact and mid-size segments. The number of players more than doubled to 19 in fiscal 2021, from 7 in fiscal 2008. With more players and models vying for a share of the growing pie, price competition may intensify and realisations may decline. HMIL’s position and operating profitability will depend on its ability to launch successful variants and models in the domestic market. The demand for PVs in India is expected to register a double digit growth in fiscal 2022 driven by to strong pent up demand, pick-up in economic activity, improving demand sentiments coupled with model launches.

 

• Susceptibility to fluctuations in forex rates

Imports are sizeable (~20% of raw materials in value terms in fiscal 2021) and royalty payments (Rs 1,023 crore in fiscal 2021). Although exports (19% of revenue from operations in fiscal 2021) offer a natural hedge, the company faces forex-related risks. Discounting of export usance bills reduces the time gap in realisation of bills.

Liquidity: Superior

The liquid surplus was large at Rs 11,942 crore as on August 31, 2021. Average utilisation of the fund-based limit of Rs 3,800 crore was utilized around 2-3% during the last 12 months ending August 2021. Expected cash accrual of more than Rs.4,000 crore will cover capital expenditure (capex) of Rs 2,500 crore in fiscal 2022 (higher due to more model launches) and ~Rs 2,000-2,200 crore per fiscal thereafter. Moreover, abundant liquid surplus will obviate the need to contract more debt.

Outlook: Stable

CRISIL Ratings believes despite the challenging market conditions, HMIL will maintain its market position in the domestic PV segment, supported by a wide product portfolio, new launches, expanding distribution network, and access to HMC's technology. The company is also likely to maintain its robust financial risk profile and liquidity.

Rating Sensitivity factors

Downward factors:

• A sharp decline in market share and a weak operating performance, impacting operating profitability (to below 5-6%)
• Significant reduction in liquid surplus to under Rs 2,500-3,000 crore
• Larger-than-anticipated debt-funded capex or acquisition, leading to sustained moderation in debt protection metrics

About the Company

Incorporated in 1996 as a 100% subsidiary of HMC, HMIL is the second-largest player in the Indian passenger car industry and the largest exporter of PVs. The company has access to HMC’s technology and large product portfolio, and pays royalty to the parent on both domestic and overseas sales. The plant in Tamil Nadu is HMC’s first fully integrated production facility, and second-largest facility, outside South Korea. HMIL currently has Aura, i20, Grand i10 Nios, Santro and Xcent in the compact segment; Verna in the mid-size segment; Elantra in the executive segment; and Creta, Venue, Kona and Tucson in the SUV segment. The company can manufacture 7,40,000 cars annually.

About the Group

HMC, the largest automobile manufacturer in South Korea, was incorporated in December 1967. The company and its subsidiaries manufacture and distribute motor vehicles and parts and manufacture trains.

 

The company’s shares have been listed on the Korea Exchange since June 1974, and the global depositary receipts issued by it are listed on the London Stock Exchange and Luxembourg Stock Exchange.

Key Financial Indicators

CRISIL adjusted numbers

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs crore)	Complexity levels	Rating assigned with outlook
NA	Packing Credit*	NA	NA	NA	687.35	NA	CRISIL AAA/Stable
NA	Packing Credit*#	NA	NA	NA	2224.45	NA	CRISIL AAA/Stable
NA	Proposed Short Term Bank Loan Facility	NA	NA	NA	778.2	NA	CRISIL A1+
NA	Short Term Debt	NA	NA	7-365 days	100	NA	CRISIL A1+

*Interchangeable with Letter of Credit, Buyers Credit, Short Term Loan, Intra Day Overdraft, Bill Discounting, WCDL and Bank Guarantee

#Fungible facilities with non-fund based limits

Exchange rate of INR 74.3 has been used for conversion of USD facilities to INR.

Annexure – List of entities consolidated

Name of the entity	Extent of consolidation	Rationale for Consolidation
Hyundai Motor India Engineering Pvt Ltd	Full consolidation	Wholly owned subsidiary