Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AAA/Stable/CRISIL A1+’ on bank facilities and short term 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 company also benefits from strong technical and managerial support provided by its 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.

 

HMIL’s revenues improved by 11% in fiscal 2022, supported by improved demand from its products (volume increase of 2%), especially sport utility vehicles (SUVs), and higher exports (volume increase of 24%), besides price hikes taken to offset increase in input and other costs. Domestic volumes could have grown higher but for semiconductor shortages, which plagued the entire domestic passenger vehicle sector in fiscal 2022. Earlier in fiscal 2021, the company’s revenues declined by ~6.5% on year, 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 fiscal 2021; the company’s volumes contraction by 2.9%, in line with PV industry. Exports of HMIL also declined by 38.5% in fiscal 2021, in line with the sector, as most export destinations grappled with the pandemic.

 

In fiscal 2023, HMIL’s performance is expected to benefit from the launch of new models and facelift variants, strong pent up demand, better availability of semiconductors, signs of rebound in economic activity and household income, besides increase in vehicular mobility. HMIL is expected to cross its all time high peak of 550,000 units in domestic sale volumes this fiscal, which along with price hikes taken, and increasing share of SUVs, will ensure healthy revenue growth. Steady growth in revenues is expected over the medium term.

 

Operating profitability, which improved to 11.5% in fiscal 2022 from ~10% in fiscal 2021, is expected to remain range bound, due to better operating leverage, and price hikes taken on vehicles, to offset inflationary trends in input prices, and volatile forex movements.

 

The financial risk profile remains robust, driven by negligible debt and strong liquidity with cash surpluses of ~Rs 14,000 crore as on March 31, 2022. Capex spend is expected to be largely met out of available surpluses and annual cash generation. 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 the first half of fiscal 2023, HMIL had a market share of 14.7% in domestic PV sales (15.8% in fiscal 2022) and domestic sale volumes increased by 17.5% (285,005 units) over corresponding period of fiscal 2022. Its market share in both domestic passenger cars and domestic SUV segments were also similar at ~15-16% in first half of fiscal 2023. Earlier, in fiscal 2022, the company sold 610,760 units (575877 units in fiscal 2021) including 481,500 units in the domestic market (471,535 in fiscal 2021) with the balance exported. Domestic sale volumes increased by 2% while exports increased by 23% on year in fiscal 2022, leading to overall volume growth of 6%.. With improved semiconductor activity, new launches including facelifts of existing models, and a material order backlog, HMIL is well positioned to consolidate its market position in the domestic market and register healthy double digit growth in revenues in fiscal 2023, though competition, especially in the SUV segment, is intensifying, with a number of players with material product offerings. The mid-size segment where HMIL has limited presence is however, seeing some demand sluggishness, which is impacting other players as well.

 

HMIL’s established presence in the domestic PV market is underpinned by the strong position of the Grand i10 Nios, Aura, and i20 in the compact car segment, and Creta, Venue, Alcazar and Tucson in the SUV 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 fiscal 2021, improved to 21% in fiscal 2022, and were sustained at similar levels in first half of fiscal 2023. Given the expectation of robust demand in the second half of fiscal 2023, 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.

 

• 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.

 

• Robust financial risk profile: HMIL continues to maintain a robust financial profile, supported by strong annual cash generation, low debt and sizeable net worth. Capex spend has ranged between Rs.1000-3000 crores annually, and has been funded largely from accruals, resulting in strong debt protection metrics – interest cover was over 45 times, while gearing was low at 0.06 times at March 31, 2022. As on March 31, 2022, total debt was Rs 1022 crore, bulk of which comprised interest-free sales tax loans. These loans have a nominal annual repayment schedule spread over long tenures, thereby providing additional financial flexibility. Cash accrual was over Rs.3000 crore in fiscal 2022, despite dividend payout of Rs.1359 crore. With strong cash generation to continue, and capex spending expected at ~Rs.2500 crores per annum, debt protection metrics will continue to remain strong.

 

Cash surplus was close to Rs 14,000 crore at March 31, 2022. Sizeable reduction in cash surplus due to large dividend payout, share capital reduction or share buyback would remain a key monitorable.

 

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 has intensified and semiconductor shortages also plagued HMIL, resulting in a loss of overall market share in the past 18 months. HMIL’s position and operating profitability will depend on its ability to launch successful variants and models in the domestic market. The domestic demand for PVs in India registered 13% growth in fiscal 2022 driven by to strong pent up demand, pick-up in economic activity, improving demand sentiments coupled with model launches. Domestic PV demand is expected to register 16-18% growth in fiscal 2023, though growth has been higher in the first half of fiscal 2023, relative to first half of fiscal 2022, which was impacted by second covid wave.

 

• Susceptibility to fluctuations in forex rates: Imports are sizeable (~20% of raw materials in value terms) and royalty payments (over Rs 1,000 crore annually). Although exports (~20% 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 sizeable at Rs 14000 crore as on March 31, 2022. Average utilisation of the fund-based limit of Rs 3,700 crore was negligible in the past 12 months. Debt repayments pertaining to interest free sales tax loan are modest at ~Rs.100 crore annually. Expected cash accrual of more than Rs.3,500 crore annually will cover capex of Rs 2,500 crore expected besides meeting incremental working capital needs, leading to continued superior liquidity position.

Outlook: Stable

HMIL’s credit profile is expected to remain stable over the medium term, backed by its healthy and established market position in domestic and export markets PV markets, good demand for PVs, especially SUVs, good operating efficiencies. Its financial risk profile is also expected to remain robust, supported by healthy cash flow generating ability and solid liquidity position.

Rating Sensitivity factors

Downward Factors

• Sluggish business performance, resulting in material decline, and considerable reduction in operating profitability (to below 5-6%), impacting cash generation
• Larger-than-anticipated debt-funded capex or acquisition, leading to sustained moderation in debt protection metrics
• Significant reduction in liquid surplus due to buyback or capital reduction of material dividend payout, or by way of support provided to group companies.

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 Sri Perambudur in Tamil Nadu is HMC’s first fully integrated production facility, and second-largest facility, outside South Korea. HMIL’s models include Aura, i20, Grand i10 Nios, Santro and Xcent in the compact segment; Verna in the mid-size segment; and Creta, Venue, Alcazar, 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

As on / for the period ended March 31		2022	2021
Operating income	Rs crore	47,043	42,410
Profit after tax (PAT)	Rs crore	2,862	1,847
PAT margin	%	6.1	4.4
Adjusted debt / Adjusted networth	Times	0.06	0.08
Interest coverage	Times	45.42	27.95

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	3606.75	NA	CRISIL AAA/Stable
NA	Proposed Short Term Bank Loan Facility	NA	NA	NA	93.25	NA	CRISIL A1+
NA	Short Term Debt	NA	NA	7-365 days	100	Simple	CRISIL A1+

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

Exchange rate of INR 75.75 has been used for conversion of USD facilities to INR.