Detailed Rationale

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

 

CRISIL's ratings on ARBL continue to reflect the diverse revenue streams and product portfolio and well established distribution network. The ratings also factor in healthy financial risk profile, marked by strong capital structure and debt protection metrics. These strengths are partially offset by exposure to intense competition in the domestic storage batteries segment; especially in the automotive and telecom battery sub-segments and further due to logistical disadvantages as entire operations are consolidated in Andhra Pradesh whiles the consumers are spread across India.

 

On April 30th 2021, The Andhra Pradesh Pollution Control Board (APPCB) ordered the closure of ARBL’s manufacturing plants in Chittoor and Tirupati following its inspection. The notice was issued alleging non-compliance with industry standards and pollution control norms. On May 6th 2021, the High Court of Andhra Pradesh has directed interim suspension of closure orders till July 5th or until further orders, whichever is earlier. While the company had sufficient inventory and did not suffer major revenue loss due to the temporary closure, any potential or prolonged disruption in operations will remain key rating monitorable.

Analytical Approach

For arriving at its rating, CRISIL Ratings has considered the standalone business risk and financial risk profiles of ARBL.

Key Rating Drivers & Detailed Description

Strengths

* Healthy market presence in the domestic storage batteries segment: Business risk profile is supported by its healthy presence in the domestic storage battery market; ARBL is the largest player in this segment after Exide Industries Ltd (Exide). The company has a large distribution network comprising of 30000+ Amaron and PowerZone retailers across India. This, along with the strong equity of its Amaron brand has strengthened its market position over the years. The steady capacity additions supported the company’s revenue growth and increase in market share in both industrial and automotive markets; ARBL’s revenues registered a compounded annual growth rate (CAGR) of 17% over the last ten years to fiscal 2020.

During the first nine months of fiscal 2021, revenues declined marginally by 4% due to sharp decline in volumes from automotive original equipment manufacturers (OEM) segment on account of nationwide lockdown; this was partially offset by healthy volume growth in the automotive replacement and industrial markets. During this period, operating profitability declined marginally to 15.8% from 16.3% partially offset by better product mix into the replacement market, softer raw material prices (mainly lead) as well as improved internal operating efficiencies.

 

While the second covid wave will also impact revenues in the first quarter of fiscal 2022, with reduced production by OEMs, demand from other segments is also likely to be largely muted. However, ARBL’s revenues are expected to be materially higher in fiscal 2022, with automotive OEM and industrial demand expected to be better, compared with fiscal 2021.

* Diverse revenue streams, supported by established relationship with clients: ARBL’s increasing market presence in the domestic battery segment is also a result of its diversified presence across the automotive segments and industrial segments. Within automotive segment, it has well diversified presence in four wheeler segment, two wheeler segment, HUPS & other battery segment and into exports. Further dependence on single customer for revenue within these segments is limited. The company’s diversified presence thus renders its business risk profile less vulnerable to downturns in the domestic auto OEM and industrial sectors.  

* Strong financial risk profile: ARBL’s financial risk profile is healthy with negligible debt and healthy profitability resulting in favorable debt protection indicators, healthy return on capital employed (RoCE), and comfortable net worth and gearing. Despite high capex intensity with annual capex of about Rs 500-600 crore per annum, ARBL continues to fund the same entirely through accruals and cash surplus, resulting in gearing of about 0.01 times as on March 2020. Debt metrics continued to remain strong in fiscal 2021 as well, in the absence of significant debt. Similar trends are likely to continue over the medium term.

 

Weaknesses:

* Logistical disadvantages arising from geographical concentration in operations: ARBL currently operates from 2 locations within Andhra Pradesh (Tirupati and Chittoor), while demand is spread across the country, thereby restricting distribution logistics. The single-state-location facilities expose the company to risks relating to geographical concentration of operations, like natural calamities and others. However, ARBL’s closely linked facilities does offer benefits in the form of economies of scale because of its large size. The plants are completely integrated with all critical components, including plastics battery cases which are sourced in-house.

 

* Exposure to intense competition: The telecom segment has been going through a tough consolidation phase, wherein the telecom operators/ infrastructure players continue to exert pressure on vendors to reduce prices. Competition is also intensifying in the auto aftermarket battery segment and small-to-mid sized organized players (hitherto operating only in the industrial segment and now increasing focus on the auto 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 after-market segment. Nevertheless, ARBL has performed better than its peers, largely because of its diversified revenue streams and product quality.

Liquidity: Strong

ARBL has strong liquidity, supported by healthy cash accruals, cash and cash equivalents of Rs 130 crore and liquid funds of about Rs 500 as on September 30, 2020.It has adequate working capital bank lines to the tune of Rs 185 crore, which has been sparsely utilized over the twelve-month period ending March 2021. ARBL does not have term loans from banks and has only marginal obligation of Rs 10 crore per annum relating to interest-free sales tax loans. However, ARBL will continue to undertake capex of around Rs. 500-600 crore per annum over the medium term towards the ongoing capacity expansion in two wheeler and four wheeler batteries as well as establishment of lead smelter capacity in Chittoor. This is expected to be fully funded by healthy annual accruals of over Rs 800 crore per annum expected over the medium term. CRISIL Ratings believes that ARBL’s surplus funds will also increase gradually with the expected increase in accruals.

Outlook: Stable

CRISIL Ratings believes that ARBL will continue to benefit from its established market position, its improving revenue, customer diversity, and capacity expansions in the automotive segment. This, coupled with prudent funding of its capital expenditure (capex), will aid sustenance of strong credit metrics over the medium term.

Rating Sensitivity factors

Upward factors

*Substantial improvement in its market share in the storage battery industry leading to better than expected cash accruals over the medium term

*Sustained steady revenue growth and operating profitability above 17%

 

Downward factors

* Lower-than-expected revenue growth due to delays in ramping up utilization at its new production facilities, and operating profitability dipping below 11-12%

* Higher-than-expected debt-funded capex or acquisition, adversely influencing its key credit metrics (gearing over 0.75-0.90 times)

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 per cent in the company and, in 1999-2000 (refers to financial year, April 1 to March 31), ARBL diversified into the manufacture of automotive batteries. As of March 31, 2021, RNGalla Family Private Limited (rated ‘CRISIL A+/Stable/CRISIL A1’) owns 28.06 per cent stake in the company while Clarios ARBL Holdings L.P. (erstwhile Panther ARBL Holdings L.P.), subsidiary of Brookfield Business Partners L.P., holds 24 per cent following divestment of JCI’s stake in fiscal 2019. Other shareholders include financial institutions (32 per cent), corporate bodies, the public, non-resident Indians and others (16 per cent). 

 

For the nine months ended December 31, 2020, ARBL's profit after tax (PAT) was Rs 457 crore on net sales of Rs 5047 crore, against a PAT of Rs 524 crore on net sales of Rs 5258 crore for the corresponding period of the previous fiscal.

Key Financial Indicators

Particulars	Unit	2020	2019
Operating income	Rs crore	6844	6799
Profit after tax (PAT)	Rs crore	661	483
PAT margins	%	9.7	7.1
Adjusted debt/Adjusted networth	Times	0.01	0.02
Interest coverage	Times	94.26	142.77

 

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of Instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue Size (Rs. Cr)	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

*Interchangeability from Fund based to Non fund based limits.

^100% Interchangeability between BG and LC limits

$100% interchangeability between Cash credit/WCDL/Sight or Usance Letter of Credit/Bill Discounting/ Buyers Credit, Guarantee (Rs 0.01 Cr) facilities