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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
HERO CYCLES LIMITED
unorganised player and Chinese imports remain
profitability indicators going forward and reduce working capital borrowings
Bicycle business is characterised by relatively low margins; competitive pressures from small 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 Limited † (Hero Cycles). The rating takes into account Hero Cycles’ leadership position in the domestic bicycle market, its strong financial profile supported by healthyKey Financial Indicators cash flow generation, comfortable capital structure and strong liquidity position aided by a large portfolio of liquid investments. In addition to being the market leader, Hero Cycles 2009-10* 2007-08 2008-09 is also the most cost competitive Net Sales 1,285.0 1,490.2 1,701.8 and profitable bicycle company among the organized players. Its large scale of operations, backward integration and strong(OI) 1,285.0 1,490.5 1,701.8 strong business position. Operating Income brand identity supports its Besides, bicycles business, which OPBDIT 50.8 over 55% of its revenues, the company also generates accounts for 111.6 183.7 business from processing of Cold-Rolled (CR) strips and manufacturing of auto components. Being the Profit After Tax (PAT) 66.3 57.7 300.3 oldest company of the Hero group, HeroCash Accruals 82.5 74.3 317.5 investment holding company for Net Cycle was also positioned as the several entities of the group. However, as part253.8 241.5 268.3 Total Debt of the family settlement, the company is in the process of Tangible Net worth 599.3 Hero 952.9 transferring its stake in most of the investee companies (except 674.0 Motors and Hero Financial Services) OPBDIT/OI sections of the Munjal family. As a result of the divestment, in addition to the CR strips division to other 4.0% 7.5% 10.8% . although the company’s investment PAT/OI is likely to be17.6% going forward, the hive income 5.2% 3.9% lower -off of the relatively PBIT/Average (TD+TNW+DTL) 12.6% profitability of low margin – CR Strips business would aid in improvement in the operating 14.9% 34.6% the company. Total Gearing 0.42 0.36 0.28 OPBDIT/Interest & weaker Charges 2.42 3.93 9.79 Hero Cycles has also been supporting some of the Finance entities of group which have been in the (GCF+ Interest)/Interest 2.39 2.78 6.21 investment phase. These investments are likely to continue going forward 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 Hero Cycles is Scale, Diversification and Market Position: days 53 56 55the oldest company of the over Rs. 12,500 crore Inventory days 35 22 its Hero Group, which commenced cycle manufacturing as24 first commercial facility. Over the years, the company has also provided start-up Creditor days 56 group companies and as a result was positioned as capital to several 45 42 Note: group entities Crore; OI: Operating Motors OPBDIT: HHML one of the holding companies for severalAmounts in Rs. including Hero Honda Income; Limited or Operating Profit before Depreciation, Interest and & A1+ by Profit Majestic Auto (rated (rated LAAA, IrAAA & A1+ by ICRA), Munjal Auto (rated LAA-/StableTax; PAT: ICRA), after Tax; PBIT: Profit before Interest and Tax; DTL: Deferred Tax Liability; GCF: Gross Cash Industries LA- & A1+ by ICRA), Hero Motors (LA/Stable & A1 by ICRA), Munjal Showa and Highway Flows; NWC: Net Working Capital among others. Traditionally, the company has generated business from three segments viz. manufacturing * auto components. In of bicycles, cold-rolled (CR) strips and Provisional Numbers 2009-10, bicycles were the largest contributor to the company’s turnover, at 58%, followed by CR strips (36%), and auto rims and componen 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 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 nt profile has ts (6%). In
the Rs. 200 million short-term debt programme of the Hero Cycles
the company was closely held with shareholding equally divided among the four families of the first Page 3 . The company’s market leader in the domestic bicycle market with a market share of around 34% 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). However. which provides cushion to the company from the point of view of meeting investment requirements. and moderate utilization of bank lines. Capital Structure & Financial Policies: The company’s credit profile has been strong characterised by low leverage and comfortable coverage indicators.P. The company’s shareholding now vests with Mr. Also as part of the settlement. Hero Motors and subsidiaries/JVs of Hero Motors with Munjal Kiriu being the major one. Hero Cycles will be positioned as pure bicycle manufacturer and holding stake in two group companies Services Limited. stable cash flow generation. Revenue Growth & Profitability Indicators: In terms of performance of core operations. since 2005-06. Hero Cycles is likely to continue supporting these entities given the capital expenditure and investments plans of the investee companies. providing both fund and non-fund support (inform of guarantees etc) to meet their gro wth plans.ICRA Rating Feature Hero Cycles Limited exercise. the CR strips business is also being transferred to Mr. 560 crore as on June 10). Over the years. As the oldest and the largest manufacturers of bicycles in the country. Till the recent restructuring of the businesses amongst the four tranches of the Munjal family. 20-25 crore annually can also be funded comfortably from cash flow from operations.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. Hero Cycles is in the process of hiving-off its relatively low-margin CR Strips business to other family member. O. as a result of the family settlement. which also mirrored the trend in volume sales in 2006-07 and 2007-08. However. Post restructuring. Thus Hero Cycles’ portfolio now comprises of investments in some of weaker group/subsidiary companies. has improved substantially in the last two years owing to improvement in realisations and softening of input prices. The liquidity profile also remains comfortable marked by a large portfolio of liquid investments. its credit profile is unlikely to deteriorate substantially given its large investment portfolio (~Rs. the company’s – Hero Financial bicycle sales after remaining stagnant in 2007-08 and 2008-09 grew by 13. B. Hero Cycles is positioned as the . 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. That said. Hero Cycles Limited (Hero Cycles) is the oldest company of the Hero Group of companies. The operating profitability. The induction of established JV partners in most the businesses of Hero Motors (Hero Cycles’ key holding now) is also a positive. which are currently incurring losses/marginally profitable. The company’s capital expenditure requirements estimated at Rs. Munjal and his family members who have operationally been managing the company along with Hero Motors (and its subsidiaries). the company has been concentrating on the comparatively higher margin and fast growing specials segment by re-orienting its marketing and product development efforts. the company’s stake in HHML has been transferred to the other sections of the Munjal Family besides other investments. Hero Cycles has been a clear leader in the standard segment. Munjal & family. strong brand name and wide distribution network. W ithin the bicycle industry. Improvement in margins has also been supporting by increasing share of special segment bicycles. Hero Cycles has mainly been supporting some of weak entities of group.M. 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). Company Profile Incorporated in 1966. with ~50% bicycle sales in that segment. which according to the management account for now 35-40% of the volumes. It has regularly launched new products across categories and age groups in this segment. Nevertheless.
Hero Cycles’ main business activities include manufacturing of bicycles.P Munjal & family own 100% stake in the company.000T CR mill. 1. with facilities located in Ludhiana and Mangli in Punjab. Post the family settlement.8 crore compared to Rs.3 crore on a turnover of Rs. respectively. Mr. The company also has 135. 1. and an auto-component manufacturing facility located at the same facility in Ludhiana. August 2010 .490.707. cold rolled (CR) strips and auto components with bicycles contributing over 58% of its revenues. 57. For 2009-10. Hero Cycles has a manufacturing capacity of 55 lac bicycles annually. 300.ICRA Rating Feature Hero Cycles Limited generation of Munjals.5 crore. the company reported a net profit of Rs. O.7 crore and Rs.
0 .Hero Cycles Limited Annexure I: Rating History Instrument Amount Amount In Crore Short-Term Debt Programme 20.A1+ Outstandin g In Crore As on August 10 Rating .
Hero Cycles Limited .