Detailed Rationale

CRISIL Ratings has downgraded its long term rating on the bank facilities of Piaggio Vehicles Private Limited (PVPL) to ‘CRISIL A/Negative’ from ‘CRISIL A+/Negative’. Short term rating have been reaffirmed at ‘CRISIL A1’.

 

The rating action takes into consideration sharp ~17% decline in the sales volumes (both goods and passenger segment) of PVPL for three wheeler (3W) segment during fiscal 2022, even as the industry grew, resulting in a loss of market share from 28% in fiscal 2021 to 16% in fiscal 2022. This, coupled with sharp rise in input costs led to operating margins declining from 9.4% in fiscal 2021, already impacted due to the pandemic, to 2.7% for the first 9 months of fiscal 2022. While the company has been able to regain some market share in April 2022, sustenance of the same coupled with improving operating margins would be crucial to support ratings. Lack of material recovery in market share with operating margins remaining below 8-9% may result in a rating downgrade. 

 

While the overall domestic 3W segment has grown by 24% during fiscal 2022, Piaggio’s decline was mainly led by sharp deterioration in demand for diesel segment, which is traditionally a strong segment for Piaggio (currently accounts for ~40% of total volumes). Volumes of 3W diesel vehicles have been severely impacted during fiscal 2022 owing to sharp increase in diesel prices, shift in preference towards CNG/Electric vehicles due to favourable cost economics and lower demand from rural areas which is a key demand driver for diesel vehicles owing to lack of CNG pumps/charging infrastructure. Further, the company also faces intense competition from 3W peers which have larger presence in CNG segment backed by financing arms who have capitalized on the CNG transition much faster than Piaggio. As a result, peers have outperformed Piaggio and gained market share during fiscal 2022.

 

PVPL has also been ramping up its CNG offerings and share of the same in overall 3W volumes has gone up to ~50% during 9M fiscal 2022 compared to 5-6% during fiscal 2018. Further, the company is also tying up with financial institutions to provide retail finance to boost sales in 3W passenger segment. Similarly, the company is looking to expand on its electric 3W offerings. With a slew of new entrants and rising competitive pressure, PVPL’s ability to regain market share amidst increasing shift to CNG/electric would remain a key monitorable.

 

During the first nine months of fiscal 2022 (April to December) the company reported a revenue of Rs. 1545 crore and operating profit of Rs.42 crore compared to Rs.1619 crore and Rs. 143 crore respectively during the corresponding period of the previous fiscal. For the full fiscal 2022, Piaggio is expected to register 9-10% decline in revenue compared to fiscal 2021 with operating margins at ~2.5-3%. Operating margins have been materially impacted due to commodity inflation and lower sales volumes. Share of Diesel 3W (which have better gross margins) has declined in the overall revenue mix resulting in overall lower gross margins for the company. The company is expected to gradually recover market share while improving its operating margin to 9-10%.

 

Financial risk profile although remains healthy, has also witnessed moderation on account of negative accruals estimated in fiscal 2022 after negative accruals of Rs. 20 crore in fiscal 2021. PVPL has paid out high dividend to parent (Rs.119 crore in fiscal 2022) which coupled with expected losses in fiscal 2022 would result in reduction of tangible net-worth to an estimated ~Rs.390 crore in fiscal 2022 (Rs.557 crore in fiscal 2021). However, despite the same, company has maintained cash surplus of about Rs 182 crore as on March 31, 2022 and dependence on external debt remains minimal. However going forward, dividend outgo to the parent is expected to be nil mainly on account of improvement in the credit profile of the parent, Piaggio & C. SPA (Piaggio, rating revised from ‘B+/Positive to ‘BB-/Stable by S&P Global Ratings) along with higher priority for utilization of internal accruals towards meeting its capex requirements.

 

Capex intensity is likely to increase over the medium term to Rs.250-400 crore annually as the company plans to ramp up its capacity for production of EV and CNG vehicles. 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 improving scale of the scooter 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 and improving scale of the scooter 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 32% during the fiscal 2022. It is also the second largest player in the domestic passenger carrier segment (after Bajaj Auto) with market share of 10% for domestic sales during the same period. PVPL has also been steadily increasing the scale of the scooter segment due to expansion of its dealer network. Its business profile is further strengthened by improving revenue diversity with increasing contribution from exports and scooters. However its market position has weakened during fiscal 2022 with sharp slowdown in the diesel 3W segment in which the company has been traditionally strong. Recovery of market share in its in three-wheeler segment and successful scale up of scooter segment will remain key rating monitorable.

 

• Healthy financial risk profile: PVPL’s financial risk profile is marked by a healthy capital structure with overall gearing of 0.62x times estimated in fiscal 2022. 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 along with healthy cash surplus of Rs.182 crore as on March 31, 2022 albeit the same has witnessed moderation over the years. 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. Over the medium term, interest coverage ratio is expected to improve from 3.87x times estimated in fiscal 2022 to around 15x-18x times in the medium term. Net Cash accruals to adjusted debt is also estimated to improve to around 0.75x to 0.95x times.

 

CRISIL Ratings expects PVPL to generate cash accrual of over Rs 150-270 crore per annum over the next 3 years, along with liquid surplus which will be sufficient for proposed annual capex in the coming years. This is expected to ensure minimal dependence on debt. Nevertheless, sustainability of improvement in 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. In fiscal 2022, active CNG pumps and number of cities have increased by ~50%. 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. BAL had increased its market share in the three-wheeler segment in the last fiscal. Ability of PVPL to regain its share with focussed 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.

 

• Weak operating profitability: The operating profitability has witnessed sharp deterioration in fiscal 2022, owing to low operating efficiency and low asset utilisation rates for its three-wheeler segment. Operating margin declined over the last three fiscals, mainly led by steady increase in raw material cost, lower share of diesel segment (which is typically high margin in nature) lower capacity utilization and declining sales volumes. Pick-up in demand resulting in better operating leverage coupled with softening of raw material prices is expected to aid gradual recovery in operating margins in the medium term.

Liquidity: Strong

PVPL has comfortable liquidity with cash and cash equivalent of Rs 182 crore as on date. The company has no long-term debt. Company also has access to working capital lines of Rs. 395 crore which remains moderately utilized. CRISIL Ratings believes the company will generate sufficient accrual and maintain satisfactory surpluses to meet its annual capex requirement of Rs 250-400 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: Negative

CRISIL Ratings believes shift in preference towards CNG powered 3W from diesel in goods carrier segment along with high competitive intensity has resulted in decline in market position of Piaggio and this could continue to weigh on the company.

Rating Sensitivity factors

Upward factors

• Material recovery in 3W market share while maintaining operating margins at above 9-10%
• Sustenance of strong financial risk profile with healthy liquidity and improvement in gearing levels; Maintenance of adequate cash surplus on sustained basis

 

Downward factors

• Lack of substantial recovery in 3W market share and revenue with operating margins remaining below 8-9% 
• Moderation in the financial risk profile due to weaker cash generation or large, debt-funded capex, acquisitions or high outflow to the parent
• Sustained, high dividend outflow, leading to reduction in substantial liquid surplus

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, 2022.

 

For the nine months ended December 31, 2021, PVPL reported net loss of Rs 65 crore on net sales of Rs 1,545 crore.

Key Financial Indicators

As on / for the period ended March 31*		2021	2020
Operating income	Rs crore	2410	3458
Adjusted profit after tax (PAT)	Rs crore	61	316
PAT margin	%	2.5	9.1
Adjusted debt/adjusted networth	Times	0.6	0.3
Interest coverage	Times	13.3	25.7

*CRISIL Ratings 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 level	Rating Assigned with Outlook
NA	Bill Discounting	NA	NA	NA	625	NA	CRISIL A1
NA	Letter of credit & Bank Guarantee	NA	NA	NA	130	NA	CRISIL A1
NA	Overdraft Facility	NA	NA	NA	25	NA	CRISIL A/Negative
NA	Proposed Bill Discounting Facility	NA	NA	NA	11.46	NA	CRISIL A1