Rating Rationale

Key Rating Drivers & Detailed Description

Strengths:

Established market position of the group and healthy relationship with key suppliers in the auto dealership business: The Popular group has established longstanding relationship with its principal suppliers. It has been associated with Maruti Suzuki India Ltd (MSIL) for over 30 years, more than 10 years with Jaguar Land Rover India Ltd and Honda Cars India, and 20 years with Tata Motors Ltd (commercial vehicles). This has given them strong understanding of market dynamics helped establish healthy relationships with suppliers and customers. The group has set up several showrooms and workshops and established itself as a recognised auto dealer across South India. Operating income grew at a compound annual rate of over 15% over the three fiscals through 2023 and is expected to report healthy growth in current fiscal with addition of Daimler India Commercial Vehicles (Bharat Benz). The company has longstanding relations with its principals. Risk of the principals cancelling the dealerships or offering dealerships to other companies is low as the company has demonstrated a healthy growth record since inception. Benefits from the longstanding relationship with the principals will continue to benefit the business profile.

Moderate financial risk profile: Capital structure was leveraged, marked by gearing of 2.89 times and total outside liabilities to tangible networth (TOL/TNW) ratio of 3.65 times as on March 31, 2023. With infusion of Rs 250 crore in March 2024 and subsequent reduction in debt, gearing and TOL/TNW ratio may remain less than 1 time and 1.5 times, respectively, as on March 31, 2024. Debt protection metrics are likely to strengthen, with interest coverage ratio improving to 3.25 times in fiscal 2024 from 3.04 times in fiscal 2023 and net cash accrual to adjusted debt ratio to 0.24 time from 0.14 time.

Weaknesses:

Geographical concentration and exposure to intense competition: Since significant portion of the revenue is derived from Kerala and Tamil Nadu, the group is exposed to geographical concentration risks. Hence weakening in the regional economy or region-specific events may affect sale volumes. Furthermore, the auto sector comprises numerous players in the mini, compact, mid-size, executive, premium and luxury passenger car segments. The company faces intense competition from the unorganised used-car market and dealers of other car manufacturers. However, to offset the risk, the group is planning to expand to other geographies such as Maharashtra, Telangana and Andhra Pradesh in future.

Susceptibility to volatility in economic cycles and industry downturns: Auto sales are vulnerable to economic cycles. Downturns in economic activity, particularly, in the region in which the company operates, impacts the operating performance of the company.