Sector: Manufacturing
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Fundamental View
AS OF 20 Jan 2023- Reliance Industries Ltd. (RIL) is positioned as India’s largest company by revenues, profits and exports. It dominates a few of the country’s key sectors, such as crude oil refining, petrochemicals, telecom and retail.
- RIL’s diversified operations across the consumer business continue to help it wade through the COVID-19 economic downturn and keep its earnings buoyant.
- It has strengthened its balance sheet considerably, with the help of a flurry of global investments into its retail and telecom (Jio) businesses, as well as a mega rights issue, bringing in a total of INR 2.5 bn/ $33.6 bn.
Business Description
AS OF 20 Jan 2023- RIL is an Indian diversified conglomerate engaged in oil & gas refining, marketing, petrochemicals, organized retail, telecom and digital services, amongst others. It is the largest company in India by revenue, profits, exports and market capitalization (INR 14 tn).
- It is the second largest refiner in India and produces petroleum products such as petrol, high-speed diesel (HSD), aviation turbine fuel (ATF), LPG and lubricants.
- It is the largest petrochemicals producer in India, boasting production of ~38 mn tons in FY20. Through its integrated Jamnagar refinery complex, it produces Polymers/Plastics, Elastomers (synthetic rubber) and Polyester products.
- It is the largest retailer in India in terms of revenue. It operates 16.6k stores (as of September 2022) to sell products ranging from consumer electronics, fashion and lifestyle, grocery, petrol retail and telecom and digital services. It launched its online retail channel, 'JioMart', in December 2019.
- Reliance Jio is the largest mobile telecom operator by subscriber base (426 mn as of March 2021) in India and boasts the widest 4G wireless network in the country.
- In 2021, RIL announced investments to the tune of INR 750 bn/ $10 bn (for next 3 years) to build a renewable energy ecosystem which will include 4 giga factories. Set to be located in Gujarat, the factories will produce solar modules, hydrogen, fuel cells and battery grid to store electricity. Long-term goals also include building 100 GW of PV solar plants by 2030.
Risk & Catalysts
AS OF 20 Jan 2023- RIL’s O2C (oil-to chemicals) business margins have been under pressure owing to the squeeze in key downstream chemical product margins (i.e. an absolute decline in product prices vs. feedstock prices), which impacted polymer and aromatics margins.
- RIL’s foray into the renewables space will require heavy investments to the tune of ~INR 750 bn over the next 3 years, which will raise its capex requirements, and weigh on its free cash flow generation. It may require RIL to take on more debt too.
- Possible further ‘waves’ of COVID-19 infections and consequent social restrictions could hamper demand for transportation fuels and petrochemicals sold by RIL.
- The key-person risk stands out as rather pertinent in the case of RIL, as 65-year-old Mukesh Ambani has begun to hand over the reins of RIL’s different business divisions to his children.
CreditSights View
AS OF 20 Jan 2023We have a Market perform recommendation on RIL. RIL is positioned as India’s largest company by revenues, profits and exports. It dominates a few of the country’s key sectors, such as crude oil refining, petrochemicals and organized retail. RIL has diversified its operations across the consumer (telecom and organized retail) business, which helped its earnings remain resilient amid the COVID pandemic. A flurry of global investments into JPL and RRVL and a rights issue generated large cash proceeds and deleveraged its balance sheet significantly. Investments in the renewable energy space will de-risk its O&G business, and could provide the next leg of growth. However, it will also increase its capex needs, which is in turn likely to pressurize its leverage. Its bonds trade fairly to peers.
Recommendation Reviewed: January 20, 2023
Recommendation Changed: June 30, 2021
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Siam Commercial Bank
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Kasikornbank
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Search topics about wealth insights and investments.Honda Motor
- Sector: Manufacturing
- Sub Sector: Automotive
- Country: Japan
- Credit Rating (Moody’s/Standard & Poor’s/Fitch): M/P
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Fundamental View
AS OF 12 Dec 2022Honda is unique among its Automotive peers owing to its global leadership position within the motorcycle market, in which it maintains a 25% global market share and consistent low-double-digit operating margins. The larger automotive business – which accounts for roughly two-thirds of Honda’s consolidated revenue – has seen its profitability decline since 2017 and remains in turnaround mode. While the company’s Power Products segment provides it with added diversification, the segment has posted a profit only one year in the past decade.
Business Description
AS OF 12 Dec 2022- Honda Motor Co., Ltd. engages in the manufacture and sale of automobiles, motorcycles, and power products. It operates through the following segments: Automobile, Motorcycle, Financial Services, and Power Product and Other Businesses. The Automobile segment manufactures and sells automobiles and related accessories. The Motorcycle segment handles all-terrain vehicles, motorcycle business, and related parts. The Financial Services segment provides financial and insurance services. The Power Product and Other Businesses segment offers power products and relevant parts. The company was founded by Soichiro Honda on September 24, 1948 and is headquartered in Tokyo, Japan.
- American Honda Finance Corporation (AHFC) is a wholly-owned subsidiary of American Honda Motor Co., Inc. (AHM or the Parent). Honda Canada Finance Inc. (HCFI) is a majority-owned subsidiary of AHFC. Noncontrolling interest in HCFI is held by Honda Canada Inc. (HCI), an affiliate of AHFC. AHM is a wholly-owned subsidiary and HCI is an indirect wholly-owned subsidiary of Honda Motor Co., Ltd. (HMC). Honda Motor Co. (HMC) maintains Keep Well (support) agreements with its North American finance subsidiaries, AHFC and HCFI. Under the Keep Well agreements, HMC agrees to (1) maintain at least 80% ownership in AHFC and HCFI, (2) ensure AHFC and HCFI maintain a positive net worth, and (3) ensure both AHFC and HCFI have sufficient liquidity to meet their debt payment obligations.
Risk & Catalysts
AS OF 12 Dec 2022Honda’s Non-Financial Services credit metrics are strong with cash and cash equivalents more than 3x its debt balance. While we believe its credit rating has upside potential to mid-A over time – its longtime rating prior to the pandemic that would enable it to access the Tier 1 CP market – we do not expect positive rating momentum until the automotive supply chain normalizes and Honda improves the performance of its automotive segment.
While we believe all automakers are susceptible to deteriorating vehicle sales in the event of a recession, Honda’s motorcycle segment sales and profitability have remained resilient in previous recessions including the 2008-09 financial crisis and could lead to modest outperformance versus its peers in a recessionary environment.
Management trimmed its expected FY23 unit wholesale growth for Motorcycles and Automobiles by 1% and 2%, respectively, with lower Automobile wholesales tied to semiconductor availability in North America. Higher operating profit guidance is related to strength in its Motorcycle segment and favorable currency effects.
Key Metrics
AS OF 28 Feb 2023| ¥ bn | FY19 | FY20 | FY21 | FY22 | LTM 3Q22 |
|---|---|---|---|---|---|
| Revenue | 13,523 | 12,344 | 10,908 | 11,967 | 12,963 |
| EBIT | 719 | 578 | 576 | 741 | 751 |
| EBIT Margin | 5% | 5% | 5% | 6% | 6% |
| EBITDA | 1,403 | 1,216 | 1,175 | 1,334 | 1,365 |
| EBITDA Margin | 10% | 10% | 11% | 11% | 11% |
| Total Liquidity | 3,520 | 3,611 | 3,717 | 4,612 | 4,772 |
| Net Debt | (1,944) | (1,931) | (2,048) | (2,481) | (2,561) |
| Total Debt | 438 | 532 | 480 | 837 | 946 |
| Gross Leverage | 0.3x | 0.4x | 0.4x | 0.6x | 0.7x |
| Net Leverage | -1.4x | -1.6x | -1.7x | -1.9x | -1.9x |
CreditSights View
AS OF 12 Dec 2022Our Underperform recommendation on Honda Motor and American Honda Finance notes is based primarily on relative value as we expect relatively tight trading levels to offer limited opportunity for outperformance. Honda Motor has struggled with supply chain challenges more than some of its automotive peers such as Toyota and Hyundai, which has contributed to constrained production and lower wholesale and retail light vehicle sales. We expect Honda’s automotive business performance to improve in 2023 as volumes improve, while its motorcycle unit continues to drive the majority of the company’s industrial operating profit.
Recommendation Reviewed: February 28, 2023
Recommendation Changed: January 13, 2023
Who We Recommend
Siam Commercial Bank
Bangkok Bank
Kasikornbank