Detailed Rationale

CRISIL Ratings has reaffirmed its 'CRISIL AA+/Stable/CRISIL A1+' ratings on the bank facilities of Amara Raja Batteries Limited (ARBL).

 

CRISIL Ratings has noted the announcement by ARBL on January 31, 2023, regarding the fire on the night of January 30, 2023, at its tubular battery plant at Nungundapalli in Chittoor, Andhra Pradesh. The plant, which caters to the home inverter battery segment (revenue of ~Rs 700 crore in fiscal 2022) was completely gutted in the fire caused by a short circuit.

 

Revenue from tubular batteries will be impacted in fiscal 2023 and for a significant part of fiscal 2024, though the company will look to mitigate the impact through sale of finished goods inventory and by stepping up trading in tubular batteries. Nevertheless, revenue growth in other  automotive and industrial battery segments continues to be strong.

 

CRISIL Ratings believes the damage at the tubular battery plant will not have a major impact on the credit risk profile of ARBL, due to strong contribution from other segments and still healthy operating profitability, and cash generation. Besides, the company had taken a comprehensive insurance cover to cover the loss of assets, inventory including loss of profit.

 

With respect to the ongoing legal case pertaining to orders from the Andhra Pradesh Pollution Control Board (APPCB) for closure of the ccompany’s plants at Chittoor and Tirupati, the Hon’ble High Court of Andhra Pradesh, vide its latest order dated January 19, 2023, has extended the interim suspension of plant closure orders until further orders without mentioning any date.

 

ARBL has also incorporated a wholly owned subsidiary, Amara Raja Advanced Cell Technologies Pvt Ltd (ARACT) in November 2022 and has invested Rs.100 crores. Further, Board has approved in its meeting held on January 25, 2023 for sale and transfer of New Energy Business of the Company  comprising of the lithium Battery Pack Manufacturing facility, and a state of-the-art R&D pilot plant for prototyping, manufacturing Li-ion cells, etc., through a slump sale arrangement on a going concern basis to ARACT for a consideration of Rs 167.2 crore. The transfer shall be completed within four months from the date of the board approval subject to completion of conditions precedent and other necessary approvals.

 

ARBL has also invested Rs.50 crore in its greenfield recycling subsidiary, Amara Raja Circular Solutions Pvt Ltd (ARCSPL), incorporated in June 2022 for the business of collection, segregation, transportation, recycling and disposal of lead and all kinds of non-ferrous metals and plastics.

 

The company had announced a scheme of arrangement in September 2022 wherein the plastic component for the battery business is being demerged from Mangal Industries Ltd (MIL) into ARBL to strategically integrate with its core battery manufacturing business. The backward integration will enhance control over supply and inventory management, thereby reducing operational, logistics, supervisory and overhead/utilities costs as well as duplication of administrative efforts for ARBL. The company obtained a no-objection certificate for the scheme from lenders in October 2022 and from Stock exchanges in January 2023 and NCLT process is in progress.

 

The ratings continue to reflect the diverse revenue streams and product portfolio and well established distribution network of ARBL, and its healthy financial risk profile, driven by strong capital structure and debt protection metrics. These strengths are partially offset by exposure to intense competition in the domestic storage batteries segment and telecom segments and geographical concentration of its operations in Andhra Pradesh, even as consumers are spread across India.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of ARBL and its wholly owned subsidiaries Amara Raja Batteries Middle East(FZE), ARCSPL and ARACT.

Key Rating Drivers & Detailed Description

Strengths:

Healthy market presence in the domestic storage batteries segment: The business risk profile of ARBL is supported by its healthy presence in the domestic storage battery market. The company is the largest player in this segment after Exide Industries Ltd (Exide), and has a large distribution network comprising 30,000+ Amaron and PowerZone retailers across India. This, along with the strong equity of its Amaron brand, has strengthened its market position over the years. Steady capacity addition has supported revenue growth (compound annual growth of 11% over the 10 years through fiscal 2022) and market share in both the industrial and automotive markets.

 

Diverse revenue streams, supported by established relationship with clients: ARBL’s increasing market presence in the domestic battery segment is a result of its diversified presence across the automotive segments and industrial segments. In the automotive segment, the company has a diversified presence in four-wheelers, two-wheelers, Home UPS and other battery segment as well as exports, with limited dependence on any single customer for revenue. The diversified presence renders its business risk profile less vulnerable to downturns in the domestic automotive and industrial sectors, and also sub-segments within this sectors. For instance, the loss

 

Strong financial risk profile: The financial risk profile is supported by negligible debt and healthy profitability resulting in favourable debt protection indicators, healthy return on capital employed (RoCE), and comfortable net worth and gearing. Despite high capital expenditure (capex) intensity, ARBL continues to fund the same entirely through accrual and cash surplus (over Rs 300 crore as of September 2022), resulting in healthy gearing of 0.02 time as on September 20, 2022. Despite expected increase in debt for funding investments and capex in ARACT and ARCSL as well as capex in ARBL, debt protection metrics will remain comfortable, given the company’s strong balance sheet and sizeable networth of Rs 4,989 crore at September 30, 2022. The investments in ARACT, will be sizeable at over Rs.9500 crore to set up a lithium iron battery plant and battery storage facility, but will be well phased out and spread over a 10 year period.

 

Weaknesses:

Logistical disadvantages arising from geographical concentration in operations: ARBL operates from two locations in Andhra Pradesh (Tirupati and Chittoor), while demand is spread across the country, thereby restricting distribution logistics. The concentration of operations in a single state exposes the company to risks relating to natural calamities. However, ARBL’s closely linked facilities offer benefits in the form of economies of scale. The plants are completely integrated with all critical components, including plastic battery cases which are sourced in-house.

 

Exposure to intense competition: The telecom segment has been going through a tough consolidation phase, wherein telecom operators/infrastructure players continue to exert pressure on vendors to reduce prices. Competition is also intensifying in the automotive aftermarket battery segment with small-to-mid-sized organised players (hitherto operating only in the industrial segment and now increasing focus on the automotive segment) offering products at competitive prices. During periods of subdued end-market demand, the increase in lead prices cannot be fully transferred to end customers, especially in the aftermarket segment. Still, ARBL has performed better than its peers, largely because of its diversified revenue streams and product quality.

 

There has also been an increase in demand for EVs, especially in the two-wheeler and passenger car segments, which will gradually impact demand for existing integrated circuit engine (ICE)-based vehicles, and hence, demand for traditional batteries. ARBL has invested in Log 9 Materials, a start-up, and InoBat Auto, an European group, both of which are focused on battery technology for EVs. While ARBL will continue to look for partners to gain foothold in EV batteries, its ability to bring in successful products and garner customers for these batteries, where technology is still evolving, will remain a key monitorable.

Liquidity: Strong

ARBL will maintain strong liquidity, driven by expected annual cash accrual of more than Rs 1,000 crore over the medium term and liquid surplus of over Rs 300 crore as of September 2022 against nil debt obligation. ARBL has signed a Memorandum of Understanding with the government of Telangana for setting up the state’s first lithium-ion battery making giga factory and proposes to invest Rs 9,500 crore over the next 10 years towards the same. The plant will have ultimate capacity up to 16 GWh and a battery pack assembly unit up to 5 GWh. Initial investment will be in a pilot plan, which is still being finalised. However, the company is expected to raise debt for the same, given it will also continue to undertake capex at ARBL as well.

Outlook: Stable

CRISIL Ratings believes ARBL will continue to benefit from the pickup in demand from both industrial and automotive sectors, supported by its established market position and capacity expansions. This, along with prudent funding of capex and working capital requirement, will keep the credit metrics strong over the medium term.

Rating Sensitivity Factors

Upward Factors

• Substantial improvement in market share in the storage battery industry leading to significant and sustained revenue growth
• Steady operating profitability of above 13-14%, benefitting cash generation
• Sustenance of strong financial risk profile and comfortable debt metrics

 

Downward Factors

• Lower-than-expected revenue growth due to delays in ramping-up capacity utilisation at new production facilities, and operating profitability below 9-10%
• Larger-than-expected, debt-funded capex or acquisition, affecting key debt  metrics (gearing over 0.8-1 time on sustained basis)
• Adverse legal ruling impacting operations materially

About the Company

ARBL, promoted by Mr Ramachandra Galla in 1985, initially manufactured standby valve-regulated lead acid (VRLA) batteries at its unit in Karakambadi, Andhra Pradesh. In 1998, Johnson Controls International (JCI) acquired 26% stake in the company, and in fiscal 2000, ARBL diversified into the manufacture of automotive batteries. Following divestment of stake by JCI to Brookefield, RN Galla Family Pvt Ltd (holding company for the group) increased its stake to 28.06% with Brookfield holding 24%. In May 2021, Brookfield divested 10% stake and now holds 14%. Other shareholders include financial institutions (32%), corporate bodies, the public, non-resident Indians and others (16%).

 

For the first nine months of fiscal 2023, ARBL reported profit after tax (PAT) of Rs 556 crore and revenue from operations of Rs 7,957 crore compared with PAT of Rs 413 crore and revenue from operations of Rs 6515 crore during the corresponding period of the previous fiscal.

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs.Crore)	Complexity level	Rating assigned with outlook
NA	Bank guarantee^	NA	NA	NA	15.0	NA	CRISIL AA+/Stable
NA	Bank guarantee*	NA	NA	NA	130.0	NA	CRISIL AA+/Stable
NA	Cash credit	NA	NA	NA	25.0	NA	CRISIL AA+/Stable
NA	Cash credit$	NA	NA	NA	40.0	NA	CRISIL AA+/Stable
NA	Letter of credit	NA	NA	NA	5.0	NA	CRISIL A1+
NA	Foreign letter of credit	NA	NA	NA	88.0	NA	CRISIL AA+/Stable
NA	Overdraft facility	NA	NA	NA	0.01	NA	CRISIL AA+/Stable
NA	Working capital facility	NA	NA	NA	50.0	NA	CRISIL AA+/Stable
NA	Proposed working capital facility	NA	NA	NA	46.99	NA	CRISIL AA+/Stable

*Interchangeable from fund-based to non-fund-based limits.

^100% interchangeability between bank guarantee and letter of credit limits

$100% interchangeability between cash credit/working capital demand loan/sight or usance letter of credit/bill discounting/ buyer’s credit, bank guarantee (Rs 0.01 crore) facilities