Rating

Key Rating Considerations

Credit Strengths
Leading market position in the domestic bicycle market with an estimated 34% share
As the oldest and largest bicycle manufacturer, Hero Cycles’ business profile is characterised by
strong brand equity, competitive cost structure and well entrenched dealership network
Financial profile remains strong as it benefits from the considerable portfolio of liquid investments
and free cash flow generation of bicycle business
Divestment of a relatively less profitable, Cold Rolled (CR) strips business could help improve
profitability indicators going forward and reduce working capital borrowings
HERO CYCLES LIMITED
Credit Challenges
Bicycle business is characterised by relatively low margins; competitive pressures from small
unorganised player and Chinese imports remain
Increasing support to weaker RATING
group companies given its role as a holding company for Hero
Motors and its affiliates ICRA has assigned a short-term rating of A1+ (pronounced A One Plus) to
the Rs. 200 million short-term debt programme of the Hero Cycles
Rating Rationale Limited † (Hero Cycles).
The rating takes into account Hero Cycles’ leadership position in the domestic bicycle market, its strong
financial profile supported by healthyKey
cashFinancial
flow generation, comfortable capital structure and strong liquidity
Indicators
position aided by a large portfolio of liquid investments. In addition to being the market leader,
2007-08Hero
2008-09
Cycles 2009-10*
is also the most cost competitive Net
andSales
profitable bicycle
1,285.0 company
1,490.2 1,701.8among the organized players. Its large
scale of operations, backward integration andIncome
Operating strong(OI)
brand identity
1,285.0 supports
1,490.5 its strong business position.
1,701.8
Besides, bicycles business, which OPBDIT
accounts 50.8
for over
111.655%
183.7
of its revenues, the company also generates
business from processing of Cold-Rolled
Profit After
(CR)Taxstrips
(PAT)and66.3
manufacturing
57.7 300.3 of auto components. Being the
oldest company of the Hero group, HeroNet Cash
CycleAccruals
was also82.5
positioned
74.3 317.5
as the investment holding company for
several entities of the group. However,
Total as
Debt
part253.8
of the241.5
family268.3
settlement, the company is in the process of
Tangiblecompanies
transferring its stake in most of the investee Net worth (except
599.3 674.0 952.9 and Hero Financial Services)
Hero Motors
OPBDIT/OI
in addition to the CR strips division to other 4.0% 7.5%
sections of 10.8%
the Munjal family. As a result of the divestment,
.
although the company’s investment PAT/OI
income is5.2%
likely
3.9%
to be17.6%
lower going forward, the hive -off of the relatively
low margin – CR Strips business would
PBIT/Average (TD+TNW+DTL)
aid in improvement 12.6% 14.9%
in the operating 34.6%
profitability of the company.
Total Gearing 0.42 0.36 0.28
OPBDIT/Interest
Hero Cycles has also been supporting some of the & Finance Charges of2.42
weaker entities 3.93which
group 9.79 have been in the
(GCF+
investment phase. These investments Interest)/Interest
are likely 2.39 forward
to continue going 2.78 6.21
given the capital expenditure and
NCA/Total Debt 33% 31% 118%
investment plans of the investee company.
Total Debt/OPBDITA 5.0 2.2 1.5
Debtor days
Scale, Diversification and Market Position: Hero 53 56 55
Cycles is the oldest company of the over Rs. 12,500 crore
Hero Group, which commenced cycle Inventory days 35 22as24its first commercial facility. Over the years, the
manufacturing
company has also provided start-up Creditor
capital todays 56 group
several 45 42 companies and as a result was positioned as
Note: Amounts
one of the holding companies for several in Rs. including
group entities Crore; OI: Operating
Hero Honda Income; OPBDIT:or Operating
Motors Limited HHML Profit
before
(rated LAAA, IrAAA & A1+ by ICRA), Depreciation,
Munjal Auto (ratedInterest and Tax;
LAA-/Stable & A1+PAT: Profit after
by ICRA), Tax;Auto
Majestic PBIT: Profit before
(rated
LA- & A1+ by ICRA), Hero Motors Interest and Tax;&DTL:
(LA/Stable Deferred
A1 by ICRA),Tax Liability;
Munjal GCF:
Showa andGross Cash Flows;
Highway NWC: Net
Industries
Working
among others. Traditionally, the company Capital business from three segments viz. manufacturing
has generated
* Provisional
of bicycles, cold-rolled (CR) strips and Numbers
auto components. In 2009-10, bicycles were the largest contributor
to the company’s turnover, at 58%, followed by CR strips (36%), and auto rims and componen ts (6%). In
terms of profitability, bicycles division has even larger contribution, with the CR strips business generally
being a low margin business for the company.

After the family restructuring which has recently been concluded, Hero Cycles’ investme nt profile has
undergone a change. As part of the family settlement, the company has transferred stake in most of group
companies including investments in listed entities such as HHML at book value to the other three sections
of the Munjal family, which have been managing those business. Additionally, as part of the restructuring

ICRA Rating Services Page 2

ICRA Rating Feature Hero Cycles Limited

exercise, the CR strips business is also being transferred to Mr. B.M. Munjal & family. The company’s
shareholding now vests with Mr. O.P. Munjal and his family members who have operationally been
managing the company along with Hero Motors (and its subsidiaries). Post restructuring, Hero Cycles will
be positioned as pure bicycle manufacturer and holding stake in two group companies – Hero Financial
Services Limited, Hero Motors and subsidiaries/JVs of Hero Motors with Munjal Kiriu being the major one.

As the oldest and the largest manufacturers of bicycles in the country, Hero Cycles is positioned as the
market leader in the domestic bicycle market with a market share of around 34% . The company’s
leadership in the bicycles market (estimated at ~1.5 crore bicycles per annum) stems from its large size (51
lacs cycles sold in 2009-10), strong brand name and wide distribution network. W ithin the bicycle industry,
Hero Cycles has been a clear leader in the standard segment, with ~50% bicycle sales in that segment.
However, since 2005-06, the company has been concentrating on the comparatively higher margin and fast
growing specials segment by re-orienting its marketing and product development efforts. It has regularly
launched new products across categories and age groups in this segment.

Revenue Growth & Profitability Indicators: In terms of performance of core operations, the company’s
bicycle sales after remaining stagnant in 2007-08 and 2008-09 grew by 13.6% in 2009-10 driven by
increasing thrust on specials segment and higher orders from State Governments to meet requirements of
various initiatives such as the Surv Siksha Abhiyaan. The operating profitability, which also mirrored the
trend in volume sales in 2006-07 and 2007-08, has improved substantially in the last two years owing to
improvement in realisations and softening of input prices. Improvement in margins has also been
supporting by increasing share of special segment bicycles, which according to the management account
for now 35-40% of the volumes.

Also as part of the settlement, Hero Cycles is in the process of hiving-off its relatively low-margin CR Strips
business to other family member. The impact of the same is expected to be positive both from the
perspective improvement in RoCE (%) and reduction in debt levels (largely short-term associated with
higher working capital requirement in that business).

Capital Structure & Financial Policies: The company’s credit profile has been strong characterised by low
leverage and comfortable coverage indicators. Over the years, Hero Cycles has mainly been supporting
some of weak entities of group, providing both fund and non-fund support (inform of guarantees etc) to
meet their gro wth plans. However, as a result of the family settlement, the company’s stake in HHML has
been transferred to the other sections of the Munjal Family besides other investments. Thus Hero Cycles’
portfolio now comprises of investments in some of weaker group/subsidiary companies, which are currently
incurring losses/marginally profitable. These entities are likely to see improvement in business profile in the
medium term given the pick-up in business from existing customers and new business opportunities. The
induction of established JV partners in most the businesses of Hero Motors (Hero Cycles’ key holding now)
is also a positive. Nevertheless, Hero Cycles is likely to continue supporting these entities given the capital
expenditure and investments plans of the investee companies.

That said, its credit profile is unlikely to deteriorate substantially given its large investment portfolio (~Rs.
560 crore as on June 10), which provides cushion to the company from the point of view of meeting
investment requirements. The liquidity profile also remains comfortable marked by a large portfolio of liquid
investments, stable cash flow generation, and moderate utilization of bank lines. The company’s capital
expenditure requirements estimated at Rs. 20-25 crore annually can also be funded comfortably from cash
flow from operations.

Company Profile
Incorporated in 1966, Hero Cycles Limited (Hero Cycles) is the oldest company of the Hero Group of
companies. Till the recent restructuring of the businesses amongst the four tranches of the Munjal family,
the company was closely held with shareholding equally divided among the four families of the first

Page 3
ICRA Rating Feature Hero Cycles Limited

generation of Munjals. Hero Cycles’ main business activities include manufacturing of bicycles, cold rolled
(CR) strips and auto components with bicycles contributing over 58% of its revenues.

Hero Cycles has a manufacturing capacity of 55 lac bicycles annually, with facilities located in Ludhiana
and Mangli in Punjab. The company also has 135,000T CR mill, and an auto-component manufacturing
facility located at the same facility in Ludhiana. Post the family settlement, Mr. O.P Munjal & family own
100% stake in the company. For 2009-10, the company reported a net profit of Rs. 300.3 crore on a
turnover of Rs. 1,707.8 crore compared to Rs. 57.7 crore and Rs. 1,490.5 crore, respectively.

August 2010
 Hero Cycles Limited

Annexure I: Rating History

Instrument Amount Amount Rating

Outstandin
g
In In As on
Crore Crore August 10
Short-Term Debt Programme 20.0 - A1+
Hero Cycles Limited