Detailed Rationale

CRISIL Ratings has reaffirmed its 'CRISIL AA+/Stable/CRISIL A1+' ratings on the bank facilities of Amara Raja Energy & Mobility Limited (ARE&M; formerly known as Amara Raja Batteries Ltd)

 

The ratings continue to reflect the strong business risk profile of ARE&M supported by its established market position as the second largest lead acid battery manufacturer with its ‘Amaron’ brand, diverse product profile spread across automotive and industrial batteries segments, and robust distribution network both in India and overseas. The rating is also supported by ARE&M’s strong financial risk profile with negligible debt on its balance sheet. These strengths are partially offset by intense competition in the domestic battery segment and logistical challenges arising from geographically concentrated operations. Besides the company is also exposed to project related risk associated with proposed entry into lithium ion cells and battery packs, through its subsidiary, Amara Raja Advanced Cell Technology Private Limited (ARACT).

 

In July, 2023, the then second largest stakeholder in ARE&M, US-based PE firm Brookfield Asset Management (Brookfield) offloaded its entire stake of 14% in ARE&M held through Clarios ARBL, to mutual funds and other investors. The promoters – the Galla family, through their holding company, RNGalla Family Pvt Ltd (RNGFPL, rated ‘CRISIL A+/Stable/CRISIL A1’) remain the single largest owners with 28.06% stake, followed by foreign portfolio investors with 24.64% stake, Life Insurance Corporation 7.23% with the balance held by mutual funds, financial institutions and others as on Sep 30th 2023. In September 2023, the company’s management changed the name of the company to Amara Raja Energy & Mobility Ltd (ARE&M), from Amara Raja Batteries Ltd (ARBL).

 

In fiscal 2023, ARE&M registered strong revenue growth of 19% driven by healthy double digit volume growth in automotive and industrial battery divisions, which together contribute to more than 90% of ARE&M’s overall revenue. While automotive battery demand benefitted from new vehicles sales, as well as aftermarkets sales, telecom battery sales benefitted from steady rollout of 5G services and expansion of existing 4G coverage. Revenues registered a growth of ~7% during the first quarter of fiscal 2024 on Y-O-Y basis and over the medium term, ARE&M is expected to register a healthy revenue growth which is supported by steady growth in automotive and telecom segments, as well as strong traction witnessed in new energy business with increasing demand for EV chargers and battery packs.

 

Operating profitability improved to 13.6% in fiscal 2023, from 12.3% in fiscal 2022, and over the near to medium term, operating profitability will be supported by moderation in key raw material costs, sourcing of cheap power from captive solar plant, increase in export volumes in newer geographies. However, the profitability is expected to be constrained due to lower margins from trading in tubular batteries as against manufacturing due to fire accident in tubular battery plant in fiscal 2023, as well as due to relatively lower margins at ARACT (battery packs segment). Further 100% acquisition of Amara Raja Power Systems Ltd (ARPSL, rated CRISIL A+/Stable/CRISIL A1’) and on-going acquisition of plastic component division from group company, Mangal Industries Ltd (MIL, rated ‘CRISIL A/Stable/CRISIL A1’) where the NCLT order is expected in the current fiscal  is expected to result in synergies leading to reduced operational costs and better procurement policies for ARE&M.

 

ARE&M’s strong financial risk continues to be supported by sizeable net worth and low debt on its balance sheet. This along with healthy annual cash generation, ensures debt metrics remain at robust levels; gearing was 0.02 times at March 31, 2023. The company is expected to incur sizeable capex of over Rs.900-1200 crores annually for the next 2-3 years, for its own capex to debottleneck battery capacity, routine modernization, for phase-I of the lithium ion giga factory under ARACT as well as for a new lead recycling plant. Albeit prudent funding of capex and working capital requirements from estimated accruals of Rs.1100-1200 crore, and limited reliance on debt, will ensure debt metrics remain at robust levels over the medium term.

Analytical Approach

For arriving at the rating, CRISIL Ratings has considered ARE&M’s consolidated business and financial risk profiles which includes the wholly owned subsidiaries namely Amara Raja Power Systems Ltd (ARPSL), Amara Raja Batteries Middle East (FZE) UAE, Amara Raja Circular Solutions Private Limited ('ARCSPL') and ARACT, on account of financial and operational linkages between them. It may be noted that 100% acquisition of ARPSL was completed on September 29th, 2023. Besides, for arriving at the rating, plastic component division of MIL has been merged effective fiscal 2024.

 

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 ARE&M 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 1,00,000+ Points of sales, 1000 + Power zone retail stores, 2000+ Extensive service hubs and 23 branches 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 13% 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: ARE&M’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 of Rs.5233 crore as on 31st Mar 2023 and healthy cash generating ability, translating into healthy return on capital employed (RoCE, 20.5% in fiscal 2023), and robust debt protection metrics. Despite high capital expenditure (capex) intensity in the past, ARE&M has not relied much on debt, leading to low debt levels, and comfortable gearing of 0.02 times at March 31, 2023.

 

Overall expansion at ARACT is expected at Rs 9500 crore, to be undertaken in phases and over 10 years. ARE&M proposes to invest Rs.400 crore in Phase-I of lead recycling facility at ARCSPL, and upto Rs.1500 crores through ARACT over the next 2-2.5 years, while its routine annual capex is also expected to range between Rs.300-350 crores. With the company expected to fund both lithium ion giga factory (at ARACT) and lead recycling capex, largely from accruals generated by ARE&M, financial risk profile is expected to remain strong over the medium term. Marginal addition of debt is expected from fiscal 2024 which pertains to transfer of debt from MIL, as part of scheme of demerger of plastic component business. However, debt metrics will remain at robust levels, due to ARE&M’s strong cash generating ability.

 

Weaknesses:

• Logistical disadvantages arising from geographical concentration in operations: ARE&M 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, ARE&M’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.

 

The Andhra Pradesh Pollution Control Board (APPCB) issued closure orders in April 2021 for ARE&M’s lead acid battery plants at Tirupati and Chittoor, citing allegations relating to environmental regulations. However, the High Court of Andhra Pradesh, during the past two years, has continued to grant interim suspensions of APPCB closure orders. While there have been no significant production disruptions in the past two fiscals, any adverse ruling which could impact ARE&M’s production in both AP based plants, will remain a key monitorable. The concentration of both plants in the same state, thus also exposes ARE&M to possible legal risks.

 

• Exposure to intense competition: The telecom segment has been going through a  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, ARE&M 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 ARACT, is not expected to be material with steady offtake expected from larger original equipment manufacturers (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 electric vehicles (EVs).

 

Although investments in ARACT will be sizeable at over Rs.9500 crore towards setting up a lithium ion 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 ARE&M’s healthy accruals. ARACT has also commenced sale of EV chargers and EV battery packs, which will help absorb initial gestational losses from the lithium ion battery plant. Besides, ARE&M also has implemented various large scale capex programmes in the past.

 

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 internal combustion engine (ICE)-based vehicles, and hence, demand for traditional automotive batteries. ARE&M 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. ARE&M plans to employ high density cells which pack more energy per unit amount which are suitable for tropical climatic conditions. ARE&M is also in discussion with few other EV technology players and will collaborate with them over medium term in line with their EV strategy. ARE&M’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

ARE&M 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. 120 crore are also sparingly utilized. ARE&M 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 in a phased manner 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.1500 crore (over next 2-2.5 years) is proposed to be largely funded from ARE&M’s accruals

 

ESG Profile of ARE&M

CRISIL Ratings believes that Amara Raja Electric & Mobility Limited’s (ARE&M) Environment, Social, and Governance (ESG) profile supports its already strong credit risk profile.

 

The Battery Sector has a significant impact on the environment because of the high greenhouse gas (GHG) emissions of its core operations as well as products. The sector also has a significant social impact because of its large workforce across its own operations and value chain partners and focus on innovation and product development.

 

Key ESG highlights:

• Company has reduced its Scope 1 and Scope 2 emissions by 8% in absolute and 23% in intensity during FY23. Renewable energy share stands at 12% of its energy mix with installed capacity of 59.1 MW RE and another 7.5 MW in commissioning. Company intends to reduce carbon intensity (scope 1 and 2 emissions) by 30% and absolute reduction by 10% with increase in renewable energy share to 25% by FY24.
• Company has reduced its freshwater consumption by 6% in absolute and 21% in intensity during FY23. All manufacturing plants are zero liquid discharge, and they don’t fall under ‘water stressed area’. Company plan to reduce specific freshwater consumption by 20% in absolute and water intensity by 30%.
• Company uses 70%+ of its key raw material (lead and lead alloys) from recycled sources. 95%+ of total manufacturing waste goes for recycling. Company plan to increase recycled RM in production to 80%+ (lead & lead alloys) & improve battery recycling collection rate to 50% as per BWMR, 2022.
• The Company is committed to provide a safe and positive work environment. Company has taken a goal to reduce LTIFR by 60% by FY24 over baseline of FY22.
• 50% of critical suppliers were assessed on environmental impacts in FY 22-23. Percentage of input material (inputs to total inputs by value) sourced from suppliers increased from 41% to 43%.
• The governance structure is characterized by 57% of its board comprising independent directors. It has a committee at the Board level to address investor grievances and also put out extensive disclosures. Company has established Sustainability committee lead by Executive Director.

There is growing importance of ESG among investors and lenders. ARE&M’s commitment to ESG principles will play a key role in enhancing stakeholder confidence, given its high share of shareholding by foreign investors/companies

Outlook: Stable

CRISIL Ratings believes that ARE&M will continue to benefit from its established market position in the automotive and industrial battery segment, its improving revenue and customer diversity, and adequate operating profitability. Strong annual cash generation, and  prudent funding of its sizeable capital expenditure (capex), which is well phased out, will ensure sustenance of robust debt  metrics over the medium term.

Rating Sensitivity factors

Upward factors

• Strong revenue growth, and sustenance of operating profitability at above 14-15% resulting in better than anticipated cash generation.
• Completion of phase 1 sizeable capex (lithium ion battery plant) without material time and cost overruns, and stabilization thereafter.
• 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 10-11%
• Higher than expected debt funded capex or acquisition or material time and cost overruns in ongoing projects adversely affecting key debt metrics on sustained basis.
• Adverse legal ruling impacting operations materially

About the Company

ARE&M, promoted by Mr Ramachandra Galla in 1985, initially manufactured standby valve-regulated lead acid (VRLA) batteries at its unit in Karakambadi, Tirupati, AP. In 1998, Johnson Controls International (JCI) acquired 26% stake in the company, and in fiscal 2000, ARE&M diversified into the manufacture of automotive batteries, and also set up a second plant at Chittoor, AP.

 

Following divestment of stake by JCI to Brookfield, RNGFPL (holding company of the Galla group) increased its stake in ARE&M marginally to 28.06% with Brookfield holding 24%. Brookfield reduced its stake in ARE&M to 14% in May 2021, and completely exited ARE&M in July 2023.

 

ARE&M reported net profit of Rs. 419 crore on operating income of Rs. 5755 crore in the first half of fiscal 2024, compared with net profit of Rs. 333 crore on operating income of Rs. 5321 crore in the corresponding period of fiscal 2023.

Key Financial Indicators

Particulars	Unit	2023	2022
Operating income	Rs crore	10,398	8,696
Profit after tax (PAT)	Rs crore	695	511
PAT margin	%	6.6	5.9
Adjusted debt/adjusted net worth	Times	0.02	0.01
Interest coverage	Times	65.4	393.77

 

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs 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	Bank Guarantee	NA	NA	NA	40.0	NA	CRISIL AA+/Stable
NA	Cash Credit	NA	NA	NA	80.0	NA	CRISIL AA+/Stable
NA	Cash Credit$	NA	NA	NA	40.0	NA	CRISIL AA+/Stable
NA	Letter of Credit	NA	NA	NA	58.0	NA	CRISIL A1+
NA	Proposed Letter of Credit	NA	NA	NA	37.0	NA	CRISIL A1+

*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

Annexure – List of entities consolidated

Names of Entities Consolidated	Extent of Consolidation	Rationale for Consolidation
Amara Raja Batteries Middle East (FZE),	Full	Subsidiary and business linkages
Amara Raja Circular Solutions Pvt Ltd	Full	Subsidiary and business linkages
Amara Raja Advanced Cell Technologies Pvt Ltd	Full	Subsidiary and business linkages
Amara Raja Power Systems Ltd	Full	Subsidiary and business linkages