Detailed Rationale

CRISIL Ratings has upgraded its rating on the bank facilities of Tata AutoComp GY Batteries Private Limited (TGY) to ‘CRISIL A/Stable’ from 'CRISIL A-/Positive'; while the short-term rating is reaffirmed at ‘CRISIL A2+’.

 

The upgrade in ratings follows similar action of JV partner Tata AutoComp Systems Ltd (TACO) whose rating has been upgraded to ‘CRISIL AA/Stable’ from ‘CRISIL AA-/Positive’. The ratings continue to reflect the need-based financial support from key JV partner and the strategic importance of TGY to TACO. Moreover, TGY will continue to be an integral part of the auto component business of TACO considering its diversified customer base and expansion plans. Further, the rating also factors in the undertaking from TACO articulating its need-based financial support to TGY.

 

TGY’s revenue grew by ~14% to Rs. 538 crores in fiscal 2022, while margins improved by 150bps to 4.8%.

 

The Company is expected to sustain improved operating performance over the medium term backed by growing industry volumes, and recurring revenue from existing customer base resulting in sustained revenue growth with operating margins remaining at around 5%.

 

Financial risk profile is expected to remain adequate backed by need-based support from TACO. TGY’s gross leverage i.e., total debt / OPBDIT stood at 6.1 times in fiscal 2022 (7.95 times in previous fiscal) and TOL/TNW at 2.6 times from 3.46 times during the same period. TGY is expected to undertake capex of over Rs. 150 crores between fiscal 2023 and fiscal 2025 towards increasing capacity for 2-wheeler batteries, ISS batteries for 4-wheeler, and research lab set-up for testing of in-house batteries. The capex is expected to be funded through equity infusion from parents, loan from TACO and partly by internal cash accruals with minimal reliance on external debt. This coupled with steady improvement in operating performance shall ensure steady improvement in financial risk profile over the medium term.

 

The ratings continue to reflect TGY’s improving business profile driven by sustained increase in operating profitability with growing share of original equipment manufacturer (OEM) business and enhanced distribution reach. The ratings also reflect adequate financial risk profile supported by improving cash accrual. These strengths are partially offset by the company's small scale of operations and exposure to intense competition, volatility in lead prices as well as to risks related to project implementation.

Analytical Approach

For arriving at the ratings, the team has applied parent notch up framework factoring in strong operational, financial, and managerial support from Tata AutoComp Systems Limited (TACO, rated CRISIL AA/Stable/CRISIL A1+), which is a JV partner of TGY.

Key Rating Drivers & Detailed Description

Strengths:

• Improving business profile with increasing share of OEM business in medium term and improving distribution reach

Significant increase in offtake from key customers HMSI and TVS has led to share of sales to OEM customers to rise from 30% in fiscal 2015 to 41% in fiscal 2022. Capacity expansion by 1.2 million batteries per annum for existing and new customers will lead to 15-25% growth in revenue annually over the medium term. Also, enhancing distribution reach for its aftermarket segment and tie-up with OEM customers is likely to support growth in this segment.

 

The growing share of OEM business, which offers better ability to pass on cost increase, and improving capacity are likely to support maintenance of operating margin in the medium term. Further, management’s efforts to upgrade technology (through the expander project) and improve efficiency (through EBITDA) will support margins.

 

• Strong financial and business support from TACO

TGY’s position in the automotive industry is underpinned by its collaboration with the promoters, TACO and GYIN. Association with TACO has ensured TGY to establish its position in the aftermarket segment under the Tata Green brand.

 

Strong linkages with parent entities will further enhance TGY’s technical edge and strengthen customer relationships, translating into revenue growth over the medium term. Both JV partners have supported TGY financially since commencement of business; between fiscals 2006 and 2012, the partners infused equity of Rs 138 crore to support the initial phase of activity. Further, the JV partners infused Rs 40 crore in April 2017 and Rs 30 crore in November 2020 and are expected to support the investment plans of the company by infusion of Rs ~135 crore over the medium term.

 

TACO also helps its JVs and subsidiaries in obtaining loans at attractive rates and provides support to TGY in the form of management talent. CRISIL Ratings believes that TGY remains strategically important to TACO. TGY receives technological and operational support from GYIN and had also secured business for supply of two-wheeler batteries using the global relationship of GYIN with OEMs.

 

Moreover, CRISIL Ratings has recently received a written articulation from TACO clearly stating its need-based financial support to TGY. This indicates that TGY will continue to be an integral part of the auto component business of TACO.

 

• Healthy financial risk profile

In the past, TGY's financial risk profile deteriorated on account of losses resulting in erosion of networth and debt-funded capex. With regular equity infusion, the latest being in November 2020, networth increased to Rs 75 crore as on March 31, 2021.

 

Debt protection metrics continue to remain elevated in fiscal 2022. Gross leverage and gearing stand at 6.1 times and 2.1 times respectively due slow recovery in business post lifting of COVID-19 pandemic restrictions. However, TGY have managed to keep its maintain healthy debt protection metrics in the past despite losses and debt-funded capex on account of consistent capital infusion from the parent in the past. TACO is expected to continue to provide support by further equity infusion of Rs. 50 crores to fund heavy capex requirements, thereby ensuring debt profile to remain intact. In addition, the key credit metrics are expected to improve in the medium term driven by growth in operating profitability.

 

Weaknesses:

• Small albeit improving scale of operations and intense competition in the industry

Despite recovery in the automotive sector post lifting of COVID-19 pandemic restrictions, TGY’s top-line growth was marginal; its revenue stood at Rs 538 crore (~3.5% market share) in fiscal 2022 in the automotive batteries industry of Rs 14,000 crore indicating its small scale of operations and thereby low pricing power. The market leaders, Exide Industries Ltd and Amara Raja Batteries Ltd (ARBL; 'CRISIL AA+/Stable/CRISIL A1+'), have a combined market share of more than 75% in the automotive and storage batteries segment. TGY's business is limited to automotive batteries vis a vis diversified revenue profile of other large players leading to limited scope of growth. In the aftermarket segment, TGY has been susceptible to price moves of market leaders however, the company has taken initiatives to increase its OEM business, which will benefit the scale over the medium term.

 

• Susceptibility to volatility in lead prices

The margins of TGY remain susceptible to volatility in lead prices and foreign exchange rates. Margins have been at negative 0.5% and 5.5% over the last 5 years. The Company, a small player in the industry, is forced to follow the market leader for its pricing policy leading to absorption of increase in input costs in the aftermarket segment. The segment contributes about 60% to revenues exposing the company to the volatility in lead prices.

 

• Exposure to risks related to project implementation

TGY is undertaking a large capex of Rs ~185 crore over the medium term, funded through equity infusion, marginal debt and internal accrual.

 

Around Rs 120 crore will be used for capacity expansion of two-wheeler batteries from 4.1 million units at the end of fiscal 2022 to 7-8 million units over the coming years. The in-house research lab will entail a capex of Rs 15 crore, while the remaining will be for ISS batteries for the four-wheeler segment. The funding risk is expected to be moderate with the capex being funded through equity and some marginal debt. The demand risk is moderate as the company has tied-up the expanded capacity with its existing customers. The capacity expansion is being undertaken as the present capacity for two-wheeler batteries is near full utilization.

 

Although the capex is in the existing line of business, such large projects are susceptible to the risk of time and cost overruns. Financial closure, timely commissioning as well as ramp-up of operations as envisaged will remain key rating monitorable.

Liquidity: Adequate

The expected net cash accrual of Rs 18 crore along with cash and equivalents of Rs 7 crores as on March 31, 2022 and working capital inflow for this fiscal will comfortably cover repayments of Rs 33 crore. Fund-based limit of Rs 38 crore remained utilized at an average of 30% over the 12 months ended November 2021. Capex of Rs ~185 crore over the medium term is expected to be funded through a mix of equity infusion, internal accrual and marginal debt.

Outlook: Stable

CRISIL Ratings believes that TGY's business risk profile will continue to improve with the expected ramp-up in scale of operations and sustenance of improved profitability. Support from TACO is also likely to continue thereby enhancing the overall credit profile of the company. The ratings also factor in the operational, financial, and managerial support extended by JV partner TACO to the company.

Rating Sensitivity factors

Upward factors:

• Sustained increase in scale and healthy net cash accrual (above Rs 30 crore)
• Improvement in financial risk profile due to higher cash generation or equity infusion, such as Debt/EBIDTA remains at 2.0-2.5 times

 

Downward factors:

• Weakening of financial risk profile due to weaker operating performance, with net cash accrual below Rs 10 crore
• Elongation of working capital cycle or more-than-expected debt-funded capex leading to deterioration in debt protection metrics such as Debt/EBIDTA remaining above 4.5 times.
• Deterioration in credit risk profile of TACO

About the Company

TGY was established in October 2005 as an equal JV between TACO and GYIN. The company marked the TACO group's entry in the automotive components retail business. TGY manufactures lead-acid storage batteries for inverters, tractors, and four- and three-wheeler automobiles under the Tata Green brand. The company mainly supplies to the replacement market (around 61% of sales in fiscal 2021). In the OEM segment, the company has a supply relationship mainly with Tata Motors Ltd (TML; rated 'CRISIL AA-/Stable/CRISIL A1+'), HMSI, Piaggio Vehicles Pvt Ltd (rated 'CRISIL A+/Negative/CRISIL A1'), Yamaha Motor Pvt Ltd, and Kirloskar Oil Engines Ltd (rated 'CRISIL AA/Stable/CRISIL A1+'); the company also supplies batteries to Maruti Suzuki India Ltd (rated 'CRISIL AAA/Stable/CRISIL A1+').

Key Financial Indicators

As on March 31	Unit	2022	2021	2020
Revenue	Rs crore	538	471	517
Profit after tax (PAT)	Rs crore	0.2	(5)	8
PAT margin	%	0.04	(1.0)	1.6
TOL/Networth	Times	3.71	3.46	4.57
Adjusted interest coverage	Times	1.88	1.63	2.94

 

Any other information: Not applicab

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	Cash Credit	NA	NA	NA	25	NA	CRISIL A/Stable
NA	Proposed Long Term Bank Loan Facility	NA	NA	NA	16.53	NA	CRISIL A/Stable
NA	Overdraft Facility	NA	NA	NA	2	NA	CRISIL A/Stable
NA	Term Loan	NA	NA	Nov-24	40.96	NA	CRISIL A/Stable
NA	Term Loan	NA	NA	Jan-24	23.51	NA	CRISIL A/Stable
NA	Term Loan	NA	NA	Jan-25	30.00	NA	CRISIL A/Stable
NA	Short Term Loan	NA	NA	NA	20	NA	CRISIL A2+
NA	Working Capital Facility	NA	NA	NA	22	NA	CRISIL A/Stable