| Amara Raja Infra Private Limited | ||||||
| Ratings reaffirmed at 'CRISIL BBB+ / Stable / CRISIL A2 '; rated amount enhanced for Bank Debt | ||||||
| Rating Action | ||||||
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| 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 reaffirmed its ratings on the bank facilities of Amara Raja Infra Pvt Ltd (ARIPL), part of the Amara Raja group, at 'CRISIL BBB+/Stable/CRISIL A2.
The ratings factor in the movement of the engineering procurement and construction (EPC)/projects business (comprising assets, liabilities, properties, titles, rights, duties, obligations) from Amara Raja Power Systems Ltd (ARPSL, CRISIL BBB+/Stable/A2) as a going concern to ARIPL as part of the ongoing scheme of arrangement (SOA). With ARIPL already having significant expertise in the construction space, the Amara Raja group expects that the above scheme will enable grouping business with similar strategies, consolidate its market position along with synergy benefits expected from streamlining of assets leading to operational rationalisation, and optimum utilisation of resources. The SOA has been applicable effective April 1, 2022, and ARIPL has obtained the approval from the National Company Law Tribunal vide order dated November 21, 2022
With transfer of EPC/projects business, overall scale may improve to more than Rs 1400 crore over the medium term, driven by healthy orders book of above Rs 2800 crore as of February 2023. Accordingly, the scheme is expected to improve the ability of ARIPL to bid for larger projects by fulfilling the revenue/networth criteria. Although profitability may decline to 4-5% from fiscal 2023 onwards due to transfer of the lower-margin EPC segment, however it is expected to improve gradually on account of synergy benefits of the scheme and higher operating leverage. As ARIPL has sufficient expertise in civil construction work, it will carry out civil-related works in the EPC contracts, which were earlier being outsourced to sub-contractors, which will save additional overheads, thereby improving profitability and also aid in timely delivery of projects.
Despite addition of debt from ARPSL pertaining to the EPC business, gearing and other debt protection metrics of ARIPL is set to improve over the medium term, aided by healthy accretion to reserves and improved cash accruals.
The ratings continue to reflect steady improvement in the consolidated order book of ARIPL, with increasing share of external customers and steady orders from companies in the Amara Raja group, and healthy financial risk profile. These strengths are partially offset by limited- though-improving customer and geographical diversity in the revenue profile, and exposure to cyclicality and intense competition in the civil construction sector |
Analytical Approach CRISIL Ratings has considered the standalone business and financial risk profiles of ARIPL. |
Key Rating Drivers & Detailed Description Strengths: Healthy order book from external customers, supported by orders from group companies While ARIPL has healthy order flow from the Amara Raja group companies, there has been a considerable increase in orders from external customers over the past two years. The increasing share of external orders improves revenue diversity and reduces dependence on group companies. ARIPL also bids for large corporate projects, which on materialising, will further boost the order book over the medium term.
Healthy financial risk profile Financial risk profile remains supported by healthy capital structure and adequate debt protection metrics. The construction services business is working capital intensive. However, ARIPL prudently manages its working capital cycle with timely receivables collection procedures. Also, customer advances of 10-15% for each order strengthened cash flow, thereby minimising dependence on debt. Accordingly, gearing improved to 0.15 time as on March 31, 2022, from 0.22 time a year ago. However, gearing may increase to 0.48 time as on March 31, 2023, with transfer of majority of debts pertaining to the EPC business from ARPSL (as part of the SOA).
Weaknesses Limited, though improving, customer and geographic diversity ARIPL derived about 70% of its revenue from projects executed for the Amara Raja group companies in fiscal 2022. Hence, it was susceptible to the risk of any drop in order flow from the group companies. Track record of executing projects outside the group, though limited, has been improving consistently. ARIPL has been leveraging the group’s experience to win large contracts from external customers and bag repeat orders. As the share of orders from external customers (especially large corporate orders) is expected to increase over the medium term, ability of ARIPL to maintain healthy profitability and efficient working capital management remains critical and will be a key rating sensitivity factor.
Exposure to cyclicality and intense competition in the industry The construction industry is cyclical and susceptible to economic downturns. It is also highly fragmented owing to low entry barriers such as modest capital intensity. Intense competition may continue to constrain pricing power, scalability, and profitability of small players such as ARIPL. |
Liquidity: Adequate ARIPL utilised its bank lines at 48% (on average) during the six months through December 2022. Cash accrual is projected at more than Rs 30-40 crore per annum, sufficient to fund the yearly debt obligation of Rs 13-15 crore along with nominal capital expenditure (capex) and working capital requirements over the medium term. The promoters are also likely to extend timely, need-based funds during exigencies. |
Outlook Stable ARIPL will continue to benefit from steady order flow in the construction segment and higher contribution from the newly added EPC/projects, thereby improving cash accrual. |
Rating Sensitivity factors Upward factors
Downward factors
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About the Company ARIPL, a part of the Amara Raja group, was incorporated in 2008. The company provides civil, mechanical and electrical construction services to the industrial segment. Since its inception, ARIPL has been catering to the construction requirement for the expansion plans of other Amara Raja group companies. The company started executing projects for external customers since 2015. ARIPL executes medium-scale residential projects for external customers in Tirupati (Andhra Pradesh) from fiscal 2018. As part of latest scheme of arrangement, EPC business was transferred from ARPSL to ARIPL which will be effective from April 1st 2022 onwards. |
About the Group The Amara Raja group, established in 1985, is promoted by Mr Ramachandra Galla and his family members, who own the entire equity capital in ARIPL. The group comprises eight companies, including the flagship -- Amara Raja Batteries Ltd, the second largest player in the storage batteries segment in India. All the group companies are established and operate from Tirupati. |
Key Financial Indicators
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Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
^100% interchangeability between letter of credit and bank guarantee |
| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Criteria Details
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