Detailed Rationale

CRISIL Ratings has removed its ratings on the bank facilities of Hero Electric Vehicles Private Limited (HEVPL) from 'Rating Watch with Negative Implications' and has downgraded the ratings to ‘CRISIL D/CRISIL D’ from ‘CRISIL B/CRISIL A4’.

The rating action reflects a delay in servicing of debt obligations due to poor liquidity. There has been a sharp deterioration in the financial risk profile due to continued operating losses, stretch in liquidity due to buildup of subsidy receivables and lower than expected equity infusion from external investors.

CRISIL Ratings notes that there are ongoing investigations by relevant authorities against various industry players, including HEVPL. The company had received a notice from The Ministry of Heavy Industries for demand of subsidy availed by company of ~Rs 133 crore till date). This matter concerns the allegations against players of not meeting the eligibility norms for availing the FAME (Faster Adoption and Manufacturing of Electric Vehicles) 2 subsidy, such as required localisation of components. This led to a build-up of subsidy receivables, which increased to around Rs 516 crore as on March 31, 2023, from Rs 62 crore a year ago, constraining liquidity.

The ratings also factor in the weak operating performance owing to operating loss, stretched liquidity leading to reliance on external funding and high capital requirement for expansion plans. These weaknesses are offset by the established brand of HEVPL, backed by the extensive experience of its promoters and the high growth potential of the domestic electric two-wheeler (E2W) industry.

Key Rating Drivers & Detailed Description

Weaknesses:

Weak operating performance because of continued operating losses

HEVPL is yet to report operating profit despite healthy gross margin of 15-20% across products. Operating loss increased to over Rs 70 crore in fiscal 2023 from Rs 26 crore in the previous fiscal owing to high component costs (accounting for 50% of the raw material cost).

Poor liquidity leading to reliance on external funding

The halt in subsidies since April 2022 led to a build-up of subsidy receivables of around Rs 516 crore as on March 31, 2023, compared with Rs 62 crore a year ago. Financial risk profile had earlier been supported via infusion of Rs 90 crore (till June 2023) by investors and promoters. CRISIL Ratings expected that the remaining significant committed equity of over Rs 100 crore was expected to be received by the end of June 2023. Debt stood at Rs 170 crore as on 21st July 2023. Total cash and equivalents stood at Rs 21 crore, of which unencumbered liquid surplus was ~Rs 5 crore on the same date.

Strengths:

Established brand in the domestic E2W market and extensive experience of the promoters

HEVPL is one of the oldest players in the E2W market in India, backed by the extensive experience of its promoters, exclusive rights to the well-established brand, Hero, and a pan-India distribution network. HEVPL rolled out its first electric scooter in 2007, resulting in early mover advantage in this space. However, company only sold ~1800 units in the first quarter of fiscal 2024 since operations are constrained by lack of working capital. Ramp up of sales and ability to maintain established market position amid intensifying competition (from existing players and new entrants) will be closely monitored.

High growth potential for the E2W industry, despite being in early stages

While the E2W industry in India is still in its early stages, it has shown significant growth with ~4.5% volume penetration in the overall two-wheeler market in fiscal 2023 compared to ~2% in fiscal 2022.

The industry faces various headwinds, including high upfront cost, range anxiety, lack of retail financing, modest resale value and recent safety concerns. Volume penetration should rise sharply over the medium term, driven by increasing investments in the segment along with policy support such as production linked incentive and emerging technologies such as battery swapping.

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