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 May 23, 2023, regarding the proposed acquisition of 100% stake in its associate company, Amara Raja Power Systems Ltd. (ARPSL rated ‘CRISIL A+/ Stable/ CRISIL A1’) for an equity value of Rs.133 crores from RNGalla Family Pvt Ltd (RNGFPL, rated ‘CRISIL A+/Stable/CRISIL A1’), (99.8%) and NRI friends of promoters (0.2%). The said transaction is expected to be completed by August 2023, subject to ARPSL complying to conditions precedents as per the as per the transaction/ binding agreements.

 

CRISIL Ratings believes the acquisition of APRSL, while not materially impacting the credit profile of ARBL, is aimed at bringing all energy management segments under one umbrella in-line with ARBL’s ‘New Energy’ strategy, involving electric mobility and storage applications.

 

In fiscal 2023, ARBL reported revenues of Rs.10480 crore (Rs.8775 crores in fiscal 2022) and operating profits of Rs.1444 crore (Rs. 1069 crore in fiscal 2022). Revenue growth in fiscal 2023 was supported by healthy double digit volume growth in industrial and automotive batteries, and higher realisations. Healthy operating profitability (~13%) and strong cash generation, with limited debt on its balance sheet as on March 31st 2023, has resulted in strong debt protection metrics.

 

With regards to the fire incident at ARBL’s tubular battery plant at Nungundapalli in Chittoor, Andhra Pradesh (AP) that had occurred in February 2023, ARBL has recognized a loss of Rs.438.56 crore, based on an evaluation of physical condition of property, plant, equipment and inventories. The insurance company has admitted the claim and so far, ARBL has received a payment of Rs.100 crore. 

 

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

 

In November 2022, ARBL incorporated a wholly owned subsidiary, Amara Raja Advanced Cell Technologies Pvt Ltd (ARACTPL).  Subsequently, in January 2023, ARBL’s Board of Directors  approved sale and transfer of New Energy Business of ARBL 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 ARACTPL for a consideration of Rs 167.2 crore The transaction is likely to be effective from June 1, 2023. ARBL has so far invested Rs.120 crores towards land development, and the pilot cell plant.

 

ARBL has also invested Rs.100 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. A 100,000 tonne per annum recycling facility is being set up close to its battery plant in AP.

 

The company had also earlier announced a scheme of arrangement in September 2022 wherein the plastic component for the battery business is being demerged from Mangal Industries Ltd (MIL, rated ‘CRISIL A/CRISIL A1/Rating Watch with Developing Implications’-) 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 (secured and unsecured) in October 2022, stock exchanges in January 2023 and from shareholders in April 2023. Final NCLT approval is expected by the third quarter of fiscal 2024.

 

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. Besides the company would be exposed to project related risk associated with proposed entry into lithium iron cells and battery packs, via ARACTPL.

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 ARACTPL. Besides, ARPSL will also be consolidated effective fiscal 2024, post it becoming a 100% subsidiary of ARBL. Besides, there will be adequate business linkages as well.

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

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 12% over the 10 years through fiscal 2023 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.

 

Strong financial risk profile: The financial risk profile is supported by modest debt, sizeable net worth (over Rs.5000 crores), and cash generating ability, translating into healthy return on capital employed (RoCE), and debt protection metrics. Despite high capital expenditure (capex) intensity, ARBL has funded the same entirely through accrual and cash surpluses, resulting in healthy gearing of 0.02 time as on March 31, 2023.

 

Overall expansion at ARACTPL is expected at Rs 9500 crore, to be undertaken in phases and over 10 years. ARBL proposes to invest Rs.300 crore in the lead recycling facility at ARCSPL, and upto Rs.1300 crores through ARACTPL over the next 2-3 years, while its annual capex is also expected to range between Rs.400-500 crores. While the company is expected to raise some debt at ARCSPL, the initial capex at ARACTPL will largely be funded from accruals generated by ARBL. Besides, ARBL may also raise some debt for its own capex needs. While debt levels will increase from current modest levels, debt metrics will remain at healthy levels, due to ARBL’s strong cash generating ability.

 

Weaknesses:

Logistical disadvantages arising from geographical concentration in operations: ARBL operates from two locations in AP (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.

 

Project risk, emanating from entry into lithium iron cell and battery pack business: Demand risk for the new capacity coming up at ARACTPL, is not expected to be material with steady offtake expected from larger OEMs as part of their green energy strategy despite operational challenges like inadequate charging infrastructure, reliance on imported components and parts, and currently high prices of EVs.

 

Although investments in ARACTPL will be sizeable at over Rs.9500 crore towards setting up a lithium iron battery plant and battery storage facility, the same will be well phased out and spread over a 10 year period. Also, initial investment may not entail much of debt funding, with support being provided by ARBL’s accruals which are healthy levels of Rs.1100-1200 crore per annum. Besides, ARBL also has implemented various large scale capex programmes in the past.

 

There has also been an increase in demand for electric vehicles (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, a European group, both of which are focused on battery technology for EVs. ARBL plans to employ high density cells which pack more energy per unit amount which are suitable for tropical climatic conditions. ARBL is also in discussion with few other EV technology players and will collaborate with them over medium term in line with their EV strategy. ARBL’s ability to bring in successful products and technology, and garner customers for these batteries, where technology is still evolving, will remain a monitorable.

Liquidity: Strong

ARBL has strong liquidity, driven by expected annual cash accrual of Rs. 1100-1200 crore over the medium term and liquid surplus of over Rs 270 crore as of March 31, 2023. Besides, the company’s working capital lines of Rs. 115 crore are also sparingly utilized. 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 of upto Rs.1300 crore (over next 2-2.5 years) is proposed to be largely funded from ARBL’s accruals. Debt obligations relating to debt raised for the recycling facility and ARBL’s own capex, are expected to be well spaced out.

Outlook: Stable

CRISIL Ratings believes ARBL will continue to benefit from its established position in the domestic industrial and automotive battery sectors, its healthy operating efficiencies, and strong cash generating ability. This, along with prudent working capital requirement, will keep the debt metrics strong over the medium term, not withstanding sizeable capex needs, which will involve part debt funding.

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, or material time and cost overruns in ongoing projects, 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, Tirupathi, AP. In 1998, Johnson Controls International (JCI) acquired 26% stake in the company, and in fiscal 2000, ARBL diversified into the manufacture of automotive batteries, and also set up a second plant at Chittoor, AP.

 

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%).

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  levels	Rating assigned with outlook
NA	Bank Guarantee*	NA	NA	NA	130	NA	CRISIL AA+/Stable
NA	Bank Guarantee^	NA	NA	NA	15	NA	CRISIL AA+/Stable
NA	Cash Credit	NA	NA	NA	25	NA	CRISIL AA+/Stable
NA	Cash Credit$	NA	NA	NA	40	NA	CRISIL AA+/Stable
NA	Foreign Letter of Credit	NA	NA	NA	88	NA	CRISIL AA+/Stable
NA	Letter of Credit	NA	NA	NA	5	NA	CRISIL A1+
NA	Overdraft Facility	NA	NA	NA	0.01	NA	CRISIL AA+/Stable
NA	Proposed Working Capital Facility	NA	NA	NA	46.99	NA	CRISIL AA+/Stable
NA	Working Capital Facility	NA	NA	NA	50	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