Rating Rationale
February 12, 2020 | Mumbai
Amara Raja Batteries Limited
Ratings Reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.185 Crore
Long Term Rating CRISIL AA+/Stable (Reaffirmed)
Short Term Rating CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its ratings on the bank facilities of Amara Raja Batteries Limited (ARBL) at 'CRISIL AA+/Stable/CRISIL A1+'.
 
During the first nine months of fiscal 2020, revenues improved marginally driven by healthy volume growth in the replacement and export markets, despite the volume decline in four-wheeler original equipment manufacturers (OEM) and telecommunications (telecom) segments. During this period, operating profitability has improved to 16.3% from 13.6%; driven by better product mix into the replacement market, softer raw material prices (mainly lead) as well as improved internal operating efficiencies.
 
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 above factored rating strengths are partially offset negatively 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.

Analytical Approach

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

Key Rating Drivers & Detailed Description
Strengths:
* Healthy market presence in 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; between fiscals 2014 and 2019, ARBL's revenues registered a compounded annual growth rate (CAGR) of 15%.

* 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 & 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 0.02 times as on March 2019.
 
Weaknesses:
* Logistical disadvantages arising from geographical concentration in operations: ARBL currently operates from a single geographical location in Andhra Pradesh (Tirupati and Chittoor), while demand is spread across the country, thereby restricting distribution logistics. The single-location facility will 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 plant is 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. The company's cash and cash equivalents stood at Rs 72 crore as on March 31, 2019 and it has adequate working capital bank lines to the tune of Rs 185 crore, whose utilization has been moderate at about 70% over the twelve-month period ending December 2019. ARBL does not have term loans from banks and has only marginal obligations of Rs 5 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 in Chittoor. This is expected to be will fully funded by healthy annual accruals (Rs 660 crore in fiscal 2019) expected over the medium term. CRISIL believes that ARBL's surplus funds will also increase gradually with the expected increase in accruals.

Outlook: Stable

CRISIL 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
* Material improvement in its market share in the storage battery industry
* Sustained improvement in operating profitability above 17%
 
Downward factors
* Lower-than-expected revenue growth on sustained basis due to delays in ramping up utilization at its new production facilities
* Sustained decline in operating profitability below 11% due to changing regulations or the changing competitive landscape in the end market
* Higher-than-expected debt-funded capex or acquisition, adversely influencing its key credit metrics (gearing > 0.75)
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 December 31, 2019, RNGalla Family Private Limited (rated 'CRISIL A+/Stable/CRISIL A1') owns 28.06 per cent stake in the company while 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, 2019, ARBL's profit after tax (PAT) was Rs 524 crore on net sales of Rs 5,258 crore, against a PAT of Rs 364 crore on net sales of Rs 5,226 crore for the corresponding period of the previous fiscal.

Key Financial Indicators
Particulars Unit 2019 2018
Operating income Rs crore 6799 6063
Profit after tax (PAT) Rs crore 483 471
PAT margins % 7.1 7.8
Adjusted debt/Adjusted net worth Times 0.02 0.02
Interest coverage Times 142.77 186.31

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. 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. Cr)		 Rating Assigned
with Outlook
NA Bank Guarantee^ NA NA NA 115.0 CRISIL AA+/Stable
NA Cash Credit* NA NA NA 65.0 CRISIL AA+/Stable
NA Letter of Credit^ NA NA NA 5.0 CRISIL A1+
*Interchangeable with working capital demand loan and export credit.
^Fully interchangeable with LC and BG.
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund-based Bank Facilities  LT/ST  65.00  CRISIL AA+/Stable      08-04-19  CRISIL AA+/Stable/ CRISIL A1+  01-08-18  CRISIL AA+/Stable/ CRISIL A1+  14-11-17  CRISIL AA+/Stable/ CRISIL A1+  CRISIL AA+/Stable/ CRISIL A1+ 
            07-03-19  CRISIL AA+/Stable/ CRISIL A1+           
            01-03-19  CRISIL AA+/Stable/ CRISIL A1+           
Non Fund-based Bank Facilities  LT/ST  120.00  CRISIL AA+/Stable/ CRISIL A1+      08-04-19  CRISIL AA+/Stable/ CRISIL A1+  01-08-18  CRISIL AA+/Stable/ CRISIL A1+  14-11-17  CRISIL AA+/Stable/ CRISIL A1+  CRISIL AA+/Stable/ CRISIL A1+ 
            07-03-19  CRISIL AA+/Stable/ CRISIL A1+           
            01-03-19  CRISIL AA+/Stable/ CRISIL A1+           
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Bank Guarantee^ 115 CRISIL AA+/Stable Bank Guarantee^ 120 CRISIL AA+/Stable
Cash Credit* 65 CRISIL AA+/Stable Cash Credit* 25 CRISIL AA+/Stable
Letter of Credit^ 5 CRISIL A1+ Foreign Exchange Forward 5 CRISIL A1+
-- 0 -- Letter of Credit^ 5 CRISIL A1+
-- 0 -- Proposed Short Term Bank Loan Facility 30 CRISIL A1+
Total 185 -- Total 185 --
*Interchangeable with working capital demand loan and export credit.
^Fully interchangeable with LC and BG.
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
Rating Criteria for Auto Component Suppliers
CRISILs Bank Loan Ratings
CRISILs Criteria for rating short term debt
The Rating Process

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