Rating Rationale
May 31, 2023 | Mumbai
Amara Raja Electronics Limited
Long-term rating upgraded to 'CRISIL BB+/Stable'; Short-term rating reaffirmed
 
Rating Action
Total Bank Loan Facilities RatedRs.49.96 Crore
Long Term RatingCRISIL BB+/Stable (Upgraded from 'CRISIL BB/Stable')
Short Term RatingCRISIL A4+ (Reaffirmed)
Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings.
1 crore = 10 million
Refer to Annexure for Details of Instruments & Bank Facilities

Detailed Rationale

CRISIL Ratings has upgraded its rating on the long-term bank facilities of Amara Raja Electronics Limited (AREL) to ‘CRISIL BB+/Stable’ from ‘CRISIL BB/Stable’, and reaffirmed the short-term rating at ‘CRISIL A4+’.

 

The upgrade reflects the improvement in financial risk profile of AREL on account of better cash generation and reduction in debt levels which has resulted in improvement of gearing to 0.39 times from 0.53 times as on 31st March 2022 which had earlier benefited from equity infusion of Rs.16.5 crore made by parent RNGalla Family Pvt Ltd(RFPL)during fiscal 2022. Further Revenue has grown by 36% in fiscal 2023 supported by significant ramp up in Electronic Manufacturing Services (EMS) business & steady order flow from Home UPS business which has grown by 26% and 50% respectively on year basis which has lead to improved business stability for AREL. Though business was affected by pandemic and the company was operational for only ~10 months in fiscal 2022, AREL had surpassed the previous estimates and achieved a revenue growth of ~120% majorly due to transfer of HUPS business which has added Rs.86 crore and EMS business had growth by 26%

 

Operating Margins of AREL had improved significantly from 1.6% (FY 21) to 5.4% (FY 22) mainly on account of transfer of HUPS business which has relatively better margins during FY 22. However, margins have moderated to ~3% levels in FY 23, albeit higher than the pre-covid levels. Partial absorption of raw material price rise due to semiconductor unavailability citing heavy competitive pressure has impacted the profitability metrics in FY 23. Further anticipating supply chain disruption, company had made bulk purchases of components in FY 23 inorder to cater to client requirements without any interruptions. Stabilizing raw material cost, strong ramp-up in EMS division from current fiscal onwards, will eventually lead to higher fixed cost absorption and improvement in overall profitability metrics over the medium term. Business risk profile will sustain over the medium term on the back of new business opportunities across spectrum of industries like Defense & Aerospace, Power utilities, consumer electronics, health care & Information technology etc

 

The ratings continue to draw comfort from the operational support AREL receives from the promoters of the Amara Raja group, and their need-based financial support via loans or equity. Corporate guarantee of the promoter (RN Galla Family Pvt Ltd) for cash credit limit continues to support credit risk profile. These strengths are partially offset by the exposure to risks related to stiff competition in the printed circuit board (PCB) industry, global shortage of semiconductor chips, and exposure to volatile raw material prices and foreign exchange (forex) rates.

Analytical Approach

Team has considered the standalone business and financial risk profiles for arriving at the final rating. Team has not consolidated AREL with other companies in the Amara Raja group as the companies are in different line of businesses and have limited linkages among them. They do not have financial linkages as well. Post the formation of RFPL, promoter support is routed through this company.

Key Rating Drivers & Detailed Description

Strengths:

  • Established capabilities in the electronics manufacturing services (EMS) business and overall revenue growth: Though AREL has adequate capacity of 1-1.5 million units, it has undertaken an additional capex programme to set up surface mount technology to cater to rising demand which will increase manufacturing capacity by 150,000 components assembly per hour at a total cost of Rs 7.5 crore. Furthermore, the company can ramp up capacity in minimal time to cater to incremental demand. Capacity enhancement is expected to increase scale of operations and AREL is well positioned to benefit from economies of scale with higher volumes.

 

 

  • Improved financial risk profile through fresh equity infusion: Equity infusion of Rs 16.50 crore by RN Galla Family Pvt Ltd in fiscal 2022 has been utilized for capex requirements. Gearing will continue to remain at comfortable levels of ~ 0.4 times despite additional debt planned to be availed for capex pertaining to enhancement of Surface Mount Technology (SMT) line. Although interest coverage ratio has reduced from FY 22 levels, the same is still at comfortable levels of 3.5 times for FY 23 and are estimated to improve further in medium term with expected improvement in operating profit and cash generation.

 

 

Weaknesses:

  • Modest market position and exposure to stiff competition: The PCB industry is intensely competitive with the presence of domestic manufacturers and subsidiaries of global players. This is compounded by cheaper imports from China, Japan and Taiwan. The small market position of the company will continue to limit bargaining power against stakeholders.

 

  • Vulnerability to volatility in raw material prices and forex rates: Business remains exposed to fluctuations in raw material prices, which can, however, be mitigated by price protection clauses with customers. Also, since AREL imports majority of its raw materials, any adverse movement in forex rates can further affect business risk profile.

 

  • Global shortage of semiconductor chips: Overall global semiconductor shortage which started during pandemic has been still persisting, although moderated to an extent. Since these are the key inputs for AREL, disruption in their supply can affect smooth production and will be a key monitorable.

Liquidity: Adequate

Estimated internal accruals of Rs.5-7 crore/annum over medium term is expected to be sufficient for meeting the term loan repayment obligations which are very  low at around Rs.0.70 crore/annum and  nominal capex requirements. Equity infusion of Rs 16.50 crore from RN Galla Family Pvt Ltd also supports liquidity. Further AREL has adequate cushion in the form of 45% utilized bank limits of   Rs.16.35 crore over last 6 months ended March 2023 which will also help in case of any working capital stretch going forward.

Outlook: Stable

The business risk profile of AREL will continue to benefit over the medium term from opportunities in the communication and general industry segments, leading to ramp-up in orders in the electronics products division and steady revenue from the recently transferred HUPS segment. Financial risk profile will remain stable on account of improving accrual and small debt, and timely funding support from the promoters.

Rating Sensitivity factors

Upward factors

  • Sustenance of operating profitability above 4%, resulting in higher-than-expected cash accrual leading to substantial improvement in financial risk profile.
  • Diversification of customer base leading to sustainable revenue growth of about 15-18%

 

Downward factors

  • Continued decline in revenue growth and operating profitability below 2.5% on a sustained basis
  • Large debt-funded capex & stretched working capital leading to moderation of financial risk profile and debt metrics.
  • Promoter's stance of support to company in case of exigencies will remain a key rating sensitivity factor

About the Company

AREL is a part of the Amara Raja group that has business interests in industrial and automotive batteries, power electronics, fasteners, sheet metal products and food processing. AREL was incorporated in 1999 and makes EMS products that include providing services from design and engineering, assembly, manufacturing, and testing for electronic components and PCB assemblies in the automotive, consumer, energy, healthcare, industrial, networking and railway industries. AREL manufactures electronics for the group as well as external customers.

 

The company got the HUPS business in the second-half of fiscal 2022 from group company, Amara Raja Power Systems Ltd. The restructuring was carried out to increase the scale of operations of AREL and strengthen its balance sheet. In the HUPS business, the company usually obtains components from group company, Mangal Industries Ltd (CRISIL A/Positive/CRISIL A1) and assembles and sells to Amara Raja Batteries Ltd. AREL has decided to focus on its core manufacturing segment and has already invested in acquiring the required management team and engineering talent. Its medium-term strategy will be to cover the fixed overheads and benefit from economies of scale.

 

RN Galla Family Pvt Ltd(RFPL) was set up in February 2017 as a partnership firm and reconstituted as a holding company on July 11, 2017. It is the holding company of the Amara Raja group and has 28% stake in Amara Raja Batteries Ltd and 100% in other group entities. RFPL is involved in managing investments in group companies and food division which produces tropical fruit pulps and concentrates to both corporate and export customers.

Key Financial Indicators

As on / for the period ended March 31   2022 2021
Revenue Rs Crores 205 93
Profit after tax (PAT) Rs Crores 3 -4.6
PAT margin % 1.5 -4.9
Adjusted debt/adjusted networth Times 0.53 1.75
Interest coverage Times 5.48 0.98

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL Ratings` complexity levels are assigned to various types of financial instruments and are included (where applicable) in the 'Annexure - Details of Instrument' in this Rating Rationale.

CRISIL Ratings will disclose complexity level for all securities - including those that are yet to be placed - based on available information. The complexity level for instruments may be updated, where required, in the rating rationale published subsequent to the issuance of the instrument when details on such features are available.

For more details on the CRISIL Ratings` complexity levels please visit www.crisilratings.com. Users may also call the Customer Service Helpdesk with queries on specific instruments.

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 0.3 NA CRISIL A4+
NA Bank Guarantee* NA NA NA 4.2 NA CRISIL A4+
NA Cash Credit NA NA NA 21.35 NA CRISIL BB+/Stable
NA Foreign Exchange Forward NA NA NA 0.4 NA CRISIL A4+
NA Letter of Credit NA NA NA 14.6 NA CRISIL A4+
NA Long Term Bank Facility NA NA Sep-24 1.35 NA CRISIL BB+/Stable
NA Long Term Bank Facility NA NA Sep-24 0.62 NA CRISIL BB+/Stable
NA Long Term Bank Facility NA NA Mar-29 4.7 NA CRISIL BB+/Stable
NA Proposed Letter of Credit NA NA NA 2.44 NA CRISIL A4+

*Bank guarantee and letter of credit are interchangeable.

Annexure - Rating History for last 3 Years
  Current 2023 (History) 2022  2021  2020  Start of 2020
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund Based Facilities LT/ST 28.42 CRISIL BB+/Stable / CRISIL A4+   -- 07-03-22 CRISIL BB/Stable / CRISIL A4+   -- 04-12-20 CRISIL BB-/Stable CRISIL BB-/Stable
      --   --   --   --   -- CRISIL BB-/Stable
Non-Fund Based Facilities ST 21.54 CRISIL A4+   -- 07-03-22 CRISIL A4+   -- 04-12-20 CRISIL A4+ CRISIL A4+
All amounts are in Rs.Cr.
Annexure - Details of Bank Lenders & Facilities
Facility Amount (Rs.Crore) Name of Lender Rating
Bank Guarantee 0.3 Indian Bank CRISIL A4+
Bank Guarantee& 4.2 State Bank of India CRISIL A4+
Cash Credit 5 State Bank of India CRISIL BB+/Stable
Cash Credit 16.35 Indian Bank CRISIL BB+/Stable
Foreign Exchange Forward 0.4 State Bank of India CRISIL A4+
Letter of Credit 14.6 State Bank of India CRISIL A4+
Long Term Bank Facility 1.35 State Bank of India CRISIL BB+/Stable
Long Term Bank Facility 0.62 Indian Bank CRISIL BB+/Stable
Long Term Bank Facility 4.7 State Bank of India CRISIL BB+/Stable
Proposed Letter of Credit 2.44 Not Applicable CRISIL A4+
This Annexure has been updated on 31-May-2023 in line with the lender-wise facility details as on 19-Oct-2021 received from the rated entity.
& - Bank guarantee and letter of credit are interchangeable
Criteria Details
Links to related criteria
CRISILs Approach to Financial Ratios
Rating criteria for manufaturing and service sector companies
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating Criteria for Engineering Sector
CRISILs Criteria for rating short term debt

Media Relations
Analytical Contacts
Customer Service Helpdesk

Aveek Datta
Media Relations
CRISIL Limited
M: +91 99204 93912
B: +91 22 3342 3000
AVEEK.DATTA@crisil.com

Prakruti Jani
Media Relations
CRISIL Limited
M: +91 98678 68976
B: +91 22 3342 3000
PRAKRUTI.JANI@crisil.com

Rutuja Gaikwad 
Media Relations
CRISIL Limited
B: +91 22 3342 3000
Rutuja.Gaikwad@ext-crisil.com


Anuj Sethi
Senior Director
CRISIL Ratings Limited
B:+91 44 6656 3100
anuj.sethi@crisil.com

Poonam Upadhyay
Director
CRISIL Ratings Limited
B:+91 22 3342 3000
poonam.upadhyay@crisil.com

ARUN KUMAR
Manager
CRISIL Ratings Limited
B:+91 44 6656 3100
ARUN.KUMAR1@crisil.com		Timings: 10.00 am to 7.00 pm
Toll free Number:1800 267 1301

For a copy of Rationales / Rating Reports:
CRISILratingdesk@crisil.com
 
For Analytical queries:
ratingsinvestordesk@crisil.com

 

Note for Media:
This rating rationale is transmitted to you for the sole purpose of dissemination through your newspaper/magazine/agency. The rating rationale may be used by you in full or in part without changing the meaning or context thereof but with due credit to CRISIL Ratings. However, CRISIL Ratings alone has the sole right of distribution (whether directly or indirectly) of its rationales for consideration or otherwise through any media including websites and portals.


About CRISIL Ratings Limited (A subsidiary of CRISIL Limited, an S&P Global Company)

CRISIL Ratings pioneered the concept of credit rating in India in 1987. With a tradition of independence, analytical rigour and innovation, we set the standards in the credit rating business. We rate the entire range of debt instruments, such as bank loans, certificates of deposit, commercial paper, non-convertible/convertible/partially convertible bonds and debentures, perpetual bonds, bank hybrid capital instruments, asset-backed and mortgage-backed securities, partial guarantees and other structured debt instruments. We have rated over 33,000 large and mid-scale corporates and financial institutions. We have also instituted several innovations in India in the rating business, including ratings for municipal bonds, partially guaranteed instruments and infrastructure investment trusts (InvITs).
 
CRISIL Ratings Limited ('CRISIL Ratings') is a wholly-owned subsidiary of CRISIL Limited ('CRISIL'). CRISIL Ratings Limited is registered in India as a credit rating agency with the Securities and Exchange Board of India ("SEBI").
 
For more information, visit www.crisilratings.com 
 



About CRISIL Limited

CRISIL is a leading, agile and innovative global analytics company driven by its mission of making markets function better. 

It is India’s foremost provider of ratings, data, research, analytics and solutions with a strong track record of growth, culture of innovation, and global footprint.

It has delivered independent opinions, actionable insights, and efficient solutions to over 100,000 customers through businesses that operate from India, the US, the UK, Argentina, Poland, China, Hong Kong and Singapore.

It is majority owned by S&P Global Inc, a leading provider of transparent and independent ratings, benchmarks, analytics and data to the capital and commodity markets worldwide.

For more information, visit www.crisil.com

Connect with us: TWITTER | LINKEDIN | YOUTUBE | FACEBOOK

CRISIL PRIVACY NOTICE
 
CRISIL respects your privacy. We may use your contact information, such as your name, address and email id to fulfil your request and service your account and to provide you with additional information from CRISIL. For further information on CRISIL's privacy policy please visit www.crisil.com.



DISCLAIMER

This disclaimer is part of and applies to each credit rating report and/or credit rating rationale ('report') that is provided by CRISIL Ratings Limited ('CRISIL Ratings'). To avoid doubt, the term 'report' includes the information, ratings and other content forming part of the report. The report is intended for the jurisdiction of India only. This report does not constitute an offer of services. Without limiting the generality of the foregoing, nothing in the report is to be construed as CRISIL Ratings providing or intending to provide any services in jurisdictions where CRISIL Ratings does not have the necessary licenses and/or registration to carry out its business activities referred to above. Access or use of this report does not create a client relationship between CRISIL Ratings and the user.

We are not aware that any user intends to rely on the report or of the manner in which a user intends to use the report. In preparing our report we have not taken into consideration the objectives or particular needs of any particular user. It is made abundantly clear that the report is not intended to and does not constitute an investment advice. The report is not an offer to sell or an offer to purchase or subscribe for any investment in any securities, instruments, facilities or solicitation of any kind to enter into any deal or transaction with the entity to which the report pertains. The report should not be the sole or primary basis for any investment decision within the meaning of any law or regulation (including the laws and regulations applicable in the US).

Ratings from CRISIL Ratings are statements of opinion as of the date they are expressed and not statements of fact or recommendations to purchase, hold or sell any securities/instruments or to make any investment decisions. Any opinions expressed here are in good faith, are subject to change without notice, and are only current as of the stated date of their issue. CRISIL Ratings assumes no obligation to update its opinions following publication in any form or format although CRISIL Ratings may disseminate its opinions and analysis. The rating contained in the report is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment or other business decisions. The recipients of the report should rely on their own judgment and take their own professional advice before acting on the report in any way. CRISIL Ratings or its associates may have other commercial transactions with the entity to which the report pertains.

Neither CRISIL Ratings nor its affiliates, third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively, 'CRISIL Ratings Parties') guarantee the accuracy, completeness or adequacy of the report, and no CRISIL Ratings Party shall have any liability for any errors, omissions or interruptions therein, regardless of the cause, or for the results obtained from the use of any part of the report. EACH CRISIL RATINGS PARTY DISCLAIMS ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING BUT NOT LIMITED TO ANY WARRANTIES OF MERCHANTABILITY, SUITABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE. In no event shall any CRISIL Ratings Party be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees or losses (including, without limitation, lost income or lost profits and opportunity costs) in connection with any use of any part of the report even if advised of the possibility of such damages.

CRISIL Ratings may receive compensation for its ratings and certain credit-related analyses, normally from issuers or underwriters of the instruments, facilities, securities or from obligors. Public ratings and analysis by CRISIL Ratings, as are required to be disclosed under the regulations of the Securities and Exchange Board of India (and other applicable regulations, if any), are made available on its website, www.crisilratings.com (free of charge). Reports with more detail and additional information may be available for subscription at a fee - more details about ratings by CRISIL Ratings are available here: www.crisilratings.com.

CRISIL Ratings and its affiliates do not act as a fiduciary. While CRISIL Ratings has obtained information from sources it believes to be reliable, CRISIL Ratings does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives and/or relies on in its reports. CRISIL Ratings has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process. CRISIL Ratings has in place a ratings code of conduct and policies for managing conflict of interest. For details please refer to: https://www.crisil.com/en/home/our-businesses/ratings/regulatory-disclosures/highlighted-policies.html.

Rating criteria by CRISIL Ratings are generally available without charge to the public on the CRISIL Ratings public website, www.crisilratings.com. For latest rating information on any instrument of any company rated by CRISIL Ratings, you may contact the CRISIL Ratings desk at crisilratingdesk@crisil.com, or at (0091) 1800 267 1301.

This report should not be reproduced or redistributed to any other person or in any form without prior written consent from CRISIL Ratings.

All rights reserved @ CRISIL Ratings Limited. CRISIL Ratings is a wholly owned subsidiary of CRISIL Limited.
 

 

CRISIL Ratings uses the prefix 'PP-MLD' for the ratings of principal-protected market-linked debentures (PPMLD) with effect from November 1, 2011, to comply with the SEBI circular, "Guidelines for Issue and Listing of Structured Products/Market Linked Debentures". The revision in rating symbols for PPMLDs should not be construed as a change in the rating of the subject instrument. For details on CRISIL Ratings' use of 'PP-MLD' please refer to the notes to Rating scale for Debt Instruments and Structured Finance Instruments at the following link: https://www.crisil.com/en/home/our-businesses/ratings/credit-ratings-scale.html